TEXTILES AND APPAREL SECTOR: UPDATED STATISTICS AND

UNCLAS SECTION 01 OF 02 SAN SALVADOR 002572

SIPDIS

DEPT FOR EB/TPP/ABT EDWARD HEARTNEY
COMMERCE FOR ITA/OTEXA MARIA D'ANDREA
USTR FOR ABIOLA HEYLIGER

E.O. 12958: N/A
TAGS: ECON ETRD KTEX ES CAFTA
SUBJECT: TEXTILES AND APPAREL SECTOR: UPDATED STATISTICS AND
PROJECTION OF FUTURE COMPETITIVENESS WAITING FOR CAFTA

REF: STATE 146213


1. SUMMARY: This is in response to reftel. El Salvador's
economy continues to be highly dependent on the textile and
apparel industry, which represents a substantial portion of
total industrial production, exports and employment. The
sector, which has been crucial to the government's
development plans in the past, is suffering the effects of
the post quota era, and investment and employment levels
have begun to drop. CAFTA could help reverse this situation
and reinvigorate the sector by increasing the attractiveness
of investing in El Salvador, but to date investors have not
committed to significant new investments. END SUMMARY.


2. El Salvador's total industrial production was $3.61
billion for 2004 and $951 million in the first quarter of

2005. Of that amount, textile and apparel production
accounted for $469 million in 2004 and $123 million in the
first quarter of 2005. Textiles imports as a percentage of
total imports went from 22% in 2004 to 20.9% in the first
semester of 2005, whereas and exports of textiles and
apparel went from 55.2% of the total in 2004 to 50.8% in the
first semester of 2005. The total number of industrial jobs
was 423,418 in 2004, . As of May 2005 the textile and
apparel industry accounted for approximately 70,000 jobs. at
year-end(?).


3. There are no reports from the Salvadoran Garment
Association (ASIC) that local companies are receiving lower
prices for their orders, but thatthey do report that
companies are receiving fewer total orders. This situation
has accounted for the closure of 6 companies in 2004 (6,000
direct jobs lost) and, 7 in the first quarter of 2005 (5,000
direct jobs lost). An additional and 5 more maquilas have
temporarily suspended operations while they wait for new
orders. Comment: Original projections of conditions in El
Salvador's textile/apparel sector in the post-quota world
(reftel) were harsh. Government officials told Emboffs on
September 13 that they may have been overly pessimistic,
claiming that the sector has stabilized and that maquila
exports had actually increased by 1% as of August over the
same period last year. End comment.


4. The Ministry of Economy has made keeping textile and
apparel activity going in El Salvador a key element of its
large part of its economic strategy for the near term. For
its part, PROESA, the government's investment promotion
office, has been working hard, with limited resources, to
attract new investment to the sector. El Salvador's Vice
President, who is the titular head of PROESA, will lead an
iIt is sponsoring an investment promotion tour of eight U.S.
cities over the next year, the United States, thea first
focus of which will be the apparel industry in South
Carolina. No new construction has started , however, as the
companies wait for CAFTA's implementation and to find out
what sorts of incentives the GOES can will provide. The GOES
wants to support the training and energy needs of targeted
businesses, but resources are so limited that they can only
effectively offer these incentives to half a dozen
companies.

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CAFTA
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5. The GOES and the textile sector have great expectations
that CAFTA and the possible textile agreement between the US
and China will be the key to reverse the current downward
trend. Such a reversal will only come if it prompts US
customers to look to Salvadoran factories to provide full-
package services with locally sourced fabric that require
more value added service (currently the value added services
represents only 20.77% of total maquilas exports). If
textile mills decide to invest in El Salvador, the sector
could gain a competitive advantage and send a positive sign
for other companies to expand operations, enhancing the
opportunities provided by CAFTA..

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Labor Commitments Under CAFTA
--------------

6. As a result of the commitments taken by the GOES in the
framework of required by CAFTA, in March 2005, the Minister
of Labor Jose Roberto Espinal Escobar and Acting Minister of
Economy Blanca Imelda Jaco de Magaa signed an Agreement of
Understanding to eEstablish iInteragency Ccoordination
rRegarding the Eenforcement pProcedure of the Industrial
Free Trade Zone Law. This agreement requires that the
Inspector General of Labor and the Directorate of Commerce
and Investment will to exchange periodically periodically
information and will keep a shared database of the free
trade industries that are not fulfilling labor standards,
according to article 31 of the Free Trade Zone law. .

7. Comment. CAFTA will increase the attractiveness of
investing in Central America, but it will not guarantee that
the investment comes specifically to El Salvador. in
particular. For El Salvador to make the most out of CAFTA
and compete in the post quota era, it must have more than
geographic proximity to the U.S., and a number of factors
must come together at the same time. The industry must learn
more about regional production capabilities and find its a
niche, probably in providing higher value full package
production and just in time delivery of product;. banks must
support the large investments necessary to expand capacity;
and the government must provide an attractive environment
for new investment.; Pprivate business must leverage every
competitive advantage (qualified labor, geographic
proximity, adequate infrastructure);. and Ssmall and medium
sized companies must have access to technology to allow them
to change production lines quickly to meet market demands.
Post believes that the GOES has invested too much in the
industry to see it fail, however they have not revealed a
broad package of incentives to promote the industry. At
this time current operators and possibPossible investors
seem are still to be waiting to see the affects of CAFTA and
what incentives the GOES will provide to take advantage of
it., so the industry will not see any improvement in the
short term. End Comment.

Barclay