PERU'S TEXTILE EXPORTS INCREASE 13 PERCENT IN Q1

UNCLAS SECTION 01 OF 03 LIMA 002523

SIPDIS

SENSITIVE

DEPT FOR WHA/AND, WHA/EPSC, EB/TPP/ABT
TREASURY FOR OASIA/INL
COMMERCE FOR 4331/MAC/WH/MCAMERON
USDA FOR FAS/ITP/GRUNENDFELDER

E.O. 12958: N/A
TAGS: KTEX ETRD ECON PGOV PREL PE
SUBJECT: PERU'S TEXTILE EXPORTS INCREASE 13 PERCENT IN Q1
2005

REF: A) Lima 68 B) Lima 2235


1. (U) Summary. Peru's textile industry witnessed a 13
percent increase in exports during the first quarter of 2005
year-on-year, despite local fears that the end of the Multi-
Fiber Agreement (MFA) would limit the Peruvian textile
industry's ability to compete internationally. The GOP,
noting the overall success of the textile industry, refused
to renew temporary safeguards on 20 sensitive textile
products, which expired on May 1. Bowing to political
pressure, the GOP established new customs regulations on 36
different items, including 13 of the sensitive textile
products. Exporters and industry representatives continue
to pressure the GOP to re-implement safeguards, arguing that
a flood of Chinese exports would cause a 30 percent drop in
Peruvian textile prices over the next year. End Summary.

Solid Growth in Textile Exports
--------------


2. (U) Since the implementation of ATPDEA in 2002, which
granted increased access to the U.S. market, Peru's textile
and apparel sector has grown over 25 percent. This growth
is primarily seen in the external sector, as domestic market
sales have increased by less than 5 percent since 2002.
Textile and apparel products now account for approximately
10 percent of exports, the majority of which are sold to the
United States. Under ATPDEA, Peruvian textile exports to
the United States increased from $532 million in 2002 to
$887 million in 2004 - a 60 percent increase. The benefits
of ATPDEA for the textile industry are proven; without
access to U.S. markets, analysts confirm that Peruvian
textile exports would not have increased at such a quick
pace.


3. (U) In 2004, Peru exported approximately $1.1 billion
in textiles and apparel products, increasing from $900
million in 2003. Peru has over 30,000 national companies
involved in the textile sector. Only 62 companies, however,
account for 94 percent of textile exports. Peruvian textile
companies produce a wide range of products, from high-end
pima cotton shirts to lower-quality t-shirts. The
manufacturers that account for the majority of exports focus
primarily on high-end niche products, for which there is a
high demand worldwide. Nevertheless, the industry feared
that the elimination of the Multi-Fiber Agreement, which
allowed China to export its inexpensive textile products,
would cause Peru to lose international market share (ref A).

-------------- --------------
Peruvian Textile Exports, 2003-2005*
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USD, millions Percent Share
2003 2004 2005* 2003 2004 2005*
-------------- --------------
Textiles 165.0 170.0 242.2 2.1 1.7 1.3
Apparel 654.0 709.3 48.1 8.5 7.0 6.5
Txtl/Appl 819.0 883.3 290.3 10.6 8.7 7.8
Total Expts 8965.6 10064.7 3706.7 100.0 100.0 100.0
-------------- --------------
Source: INEI (Statistics Bureau),Central Bank
*Through First Quarter 2005


4. (U) These fears appear unwarranted: the Peruvian textile
industry exported $290.3 million during the first quarter
2005 - 13 percent higher than the $252.1 million exported
during the same period last year. Textile exports to the
United States also increased from $103.3 million in first
quarter 2004 to $121.5 million in 2005, an increase of 17.6
percent. Overall prices of Peruvian textiles exported to
the U.S. rose by 12.9 percent, which reflects the higher
value of Peru's high-end textile products. Peruvian textile
firms also import from the United States approximately 50
percent of pima cotton used in producing high-end products,
which further aids Peru's competitiveness in up-market
product sales.


5. (U) Although overall exports increased, a study on
Peru's textile competitiveness conducted by Indecopi
(government agency responsible for intellectual property and
competitiveness issues) demonstrated that the majority of
small and micro enterprises (SMEs) have not yet witnessed an
increase in exports in 2005. In fact, the Indecopi report
pointed out that the top 50 exporters witnessed an increase
in exports, but that several SMEs experienced a drop in
export levels. Other private sector studies highlighted
that small domestic producers, particularly those who
produce lower-end textile products, are, in fact, facing
intense competition from China. Luis Vega, President of
ADEX, (an export association) explained that larger
companies are better equipped to make necessary production
changes to minimize the damage caused by Chinese exports,
but that SMEs do not have the financial ability to shift
into the production of high-end goods.

A Need for Safeguards?
--------------


6. (U) Peru was one of the few countries that imposed
safeguards on Chinese textiles before the elimination of the
MFA (ref A). In October 2004, the GOP established temporary
safeguards on 20 sensitive textile products; these
protections expired on May 1. After conducting a review of
the textile industry from October 2004 - March 2005, the GOP
decided not to extend these safeguards. To appease the
opponents, the GOP on the same day passed new customs
regulations calling for "special attention" on 36 different
imported items, including 13 sensitive textile products,
stating that if not monitored, these products could harm
local industry. The new regulations also gave Customs the
power to place additional tariffs on these 36 products if it
detects that importers are engaging in fraudulent behavior,
such as dumping.


7. (U) Despite new regulations, local industry and several
export societies continue to demand that the GOP reinstate
textile safeguards. The National Manufacturer's Society's
(SNI) study of the textile industry claims that without
safeguards, Peruvian imports of Chinese textiles would
increase by 300 percent in 2005. Adex argues that textile
prices will drop by 30 percent in order to be able to
compete with the cheaper Chinese products. On May 24, over
3,000 textile manufacturers demonstrated in Lima, demanding
higher tariffs on Chinese products (ref B).


8. (U) While the Executive continues to cite the lack of a
need for safeguards, the Ministry of Production, working
with Indecopi, plans to conduct another survey of the
textile industry, which should be completed by the end of
June. Vice Minister of Production Antonio Castillo
attempted to appease textile demonstrators last week, noting
that safeguards could only be imposed after the new survey
is completed, assuming that the survey shows negative
developments in the textile sector.

Say No to Used Clothing
--------------


9. (U) In keeping with the protectionist trend, the GOP in
early May approved a new law that indefinitely prohibits the
importation of used clothing and shoes (donations are
exempted). In justifying the law, Minister of Production
David Lemor explained that used clothing imports would
displace Peru's low-end products, affecting thousands who
work directly and indirectly in the textile sector. This
law, he noted, is a measure to save local jobs.


10. (SBU) Comment: This law extended Peru's temporary ban
on used clothing and shoes, and will have implications for
our current FTA negotiations. Several Peruvian Congressmen,
in passing this law, noted that it provides guidelines for
the Peruvian negotiators, comparing it to the U.S. Congress'
guidelines for USTR found in the Trade Promotion Authority
(TPA). Unfortunately, while the new law does provide some
guidelines for the negotiators, instead of enabling them to
fully negotiate a beneficial agreement, it limits their
ability to make deals. End Comment.

Comment
--------------

11. (SBU) Although the textile industry experienced a
strong surge in exports in early 2005, it remains to be seen
whether the sector will maintain this level of growth. The
United States continues to be the most important market for
Peruvian textile products. With American safeguards on
Chinese products and self-imposed Chinese export tariffs,
and the fact that Peruvian textile manufacturers produce for
a higher end niche market, Peruvian textiles should continue
to be competitive on the world market. However, an in-flood
of Chinese textiles will affect local textile prices and
therefore the profitability of the industry. The GOP will
likely bow to political pressure and reinstate safeguards.
After all, it is easier to impose safeguards than undertake
the serious reforms necessary, including the development of
more efficient techniques and procuring updated machinery,
to make the industry, particularly the SMEs, more
competitive.

STRUBLE