Textile Industry Fears End of MultiFiber Agreement

UNCLAS SECTION 01 OF 03 LIMA 000068

SIPDIS

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

SENSITIVE

E.O. 12958: N/A
TAGS: KTEX ETRD ECON PGOV PREL PE
SUBJECT: Textile Industry Fears End of MultiFiber Agreement

REF: A) 04 Lima 5816 B) 04 Lima 5445


1. (SBU) Summary. The Peruvian Government fears that the
termination of the World Trade Organization's MultiFiber
Agreement (MFA) on January 1 will limit the Peruvian textile
industry's ability to compete on both the domestic and
international markets. The textile industry accounted for
approximately 10 percent of exports in 2004 and its leaders
are politically well connected. The GOP in October
implemented temporary textile safeguards on 20 specific
products in an effort to protect its domestic market. The
real challenge to Peru, however, is not in protecting the
domestic market but rather in ensuring Peru's international
competitiveness, as Chinese garment exports may threaten
Peru's textile trade. End Summary.

Peruvian Textile Industry
--------------


2. (U) Peru has a vibrant textile and apparel sector, which
has grown almost 25 percent since the implementation of
ATPDEA in 2002. According to Ministry of Trade and Tourism
(Mincetur) estimates, over 150,000 individuals are gainfully
employed in the Peruvian textile sector. The industry
manufactures many types of clothing, including high-end pima
cotton shirts and pants as well as standard quality apparel.
The textile industry uses both imported and locally produced
cotton and wool in its products. Local textile officials
argue that by using first-rate Peruvian grown cotton and
wool, they produce higher-quality apparel than other
countries, giving them a unique niche in the international
textile market.


3. (U) Textile and apparel products account for
approximately 10 percent of Peru's exports. Through January
- October 2004, Peru exported $883.3 million in textiles and
apparel, Peru's fourth-largest export. According to
Mincetur, 63 percent ($516 million) of Peruvian textile
exports in 2003 went to the United States (which only
accounted for two percent of U.S. textile imports). The
export of textiles to the United States has increased in
recent years, due primarily to ATPDEA benefits. Exports
grew 21 percent from 2002-2003.

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Peruvian Textile Exports, 2002-2004*
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USD, millions Percent Share
2002 2003 2004 2002 2003 2004*
-------------- --------------
Textiles 144.5 165.0 170.0 1.9 2.1 1.7
Apparel 532.1 654.0 709.3 6.9 8.5 7.0
Txtl/Appl 676.7 819.0 883.3 8.8 10.6 8.7
Total Expts 7722.9 8965.6 10064.7 100.0 100.0 100.0
-------------- --------------
Source: INEI (Statistics Bureau),Central Bank
*Through October 2004

Protecting the Domestic Market
--------------


4. (U) GOP officials fear that the January 1, 2005
termination of the MultiFiber Agreement (MFA) will threaten
the ability of its textile industry to compete both
domestically and internationally. Peru has already faced
increasing competition from China in its domestic market;
textile imports from China tripled from $6.0 million in 1997
to $17.6 million in 2003. The Ministry of Labor estimates
the industry has lost approximately 40,000 jobs since 2000.


5. (SBU) In an effort to protect the domestic market from a
potential flood of Chinese products, the GOP in October
imposed temporary safeguards on 20 sensitive products,
including shirts, pants, sweaters, coats and jackets, t-
shirts, and sheets. (Note: These safeguards are an
extension of the safeguards implemented in November 2003 on
106 Chinese products. End note.) These items, which
represented 48 percent of Peru's total textile imports from
China in 2003, will be subject to a tax of 12-28 percent,
depending on the item, upon entry. Peru is, to date, the
only country in the world to impose textile safeguard
measures against China. The GOP, however, has yet to
enforce the new safeguards. GOP officials have also
mentioned the possibility of negotiating a bilateral accord
with China on preferential tariffs when Vice President Zeng
Qinghong visits Lima in late January.

Fear the Dragon: China
Threatens Peruvian Exports
--------------


6. (SBU) Several local consulting firms conducted impact
analysis on the apparel safeguards and concluded that there
is no clear evidence that Chinese products will damage the
local industry. They did, however, indicate that Chinese
exports to the United States and the European Union could
displace Peruvian textile exports. According to
Macroconsult, the textile industry could lose as much as 30
percent of sales to the United States in 2005 and as many as
50,000 jobs over the next three years. Although the textile
industry produces high-quality products, the overall cost of
Peruvian textiles is 40-50 percent higher than Chinese
costs.


7. (SBU) Guillermo Arbe, Chief Global Analyst at Apoyo
Consultants, told us December 15 that he believes Peru will
have zero growth in textile exports in 2005. The damage, he
said, will occur in several ways. First, China, with 50
percent lower production costs, will increase production and
sell its lower-priced basic apparel products on the world
market. Even though 45 percent of Peruvian textile
production is basic apparel, the industry's higher prices
will likely make it unable to compete effectively against
Chinese products. Second, other textile producing countries
displaced by China may shift their production to higher-
quality products, threatening Peru's niche market. Thus,
competition will come from not only China, but from other
textile producing countries.

Some Government Officials Confident
--------------


8. (SBU) Although the textile industry fears the worst, GOP
officials have gone on record, confidently stating that Peru
should not feel threatened by Chinese competition. Ministry
of Production officials argue that Peruvian production of
high-quality goods (made from pima and tanguis cotton and
alpaca wool) place Peruvian textiles in a different class
than lower-quality Chinese products. Ministry of Production
officials argue that the textile industry should focus on
exporting higher-quality products to stave off Chinese
competition.


9. (U) GOP officials emphasize that Chinese-imposed export
duties on 148 specific items of clothing and textiles show
serious effort on the part of the Chinese government to
limit the competitive threat to other textile-producing
economies. Officials are also confident that other
countries, including the U.S. and the EU, may impose their
own safeguards, thus guaranteeing market access for Peruvian
products.

Need for Improved Efficiency, Competitiveness
-------------- -


10. (SBU) Mincetur officials explain that in order to
compete with China in the long term, Peru needs to improve
its competitiveness. Julio Chan, APEC Director at Mincetur,
informed us December 27 that the textile industry must
develop more efficient techniques, update machinery, and
focus on producing higher-quality products. The industry,
he complained, wants government protection so that it does
not have to implement any necessary and costly changes.
Unfortunately, without industry-led change, he continued,
the textile industry may die a quick death.


11. (SBU) Chan also indicated that, to improve Peru's
overall competitiveness, the GOP must undertake a broad
effort to improve the quality of its seaports, which have
some of the highest rates in the Western Hemisphere, and
reduce the high average costs of labor (currently $1.68 an
hour compared to $.69/hour in China).

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


12. (SBU) Peru is the only country to date that has placed
safeguards on Chinese products. Although protecting the
domestic industry is important, in the post-MFA world the
GOP must now focus on ways to improve the competitiveness of
Peruvian textiles on the international market. Without key
improvements, it is likely the textile industry could lose
up to a third of its export sales.

STRUBLE