CORRECTED VERSION TEXTILES AND APPAREL SECTOR:

UNCLAS SECTION 01 OF 02 SAN SALVADOR 002583

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: CORRECTED VERSION TEXTILES AND APPAREL SECTOR:
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. Textile imports as a percentage of
total imports went from 22% in 2004 to 20.9% in the first
semester of 2005, 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.


3. There are no reports from the Salvadoran Garment
Association (ASIC) that local companies are receiving lower
prices for their orders, but they 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 5 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
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 investment
promotion tour of eight U.S. cities over the next year, a
first focus of which will be the apparel industry in South
Carolina. No new construction has started as companies wait
for CAFTA implementation and to find out what sorts of
incentives the GOES 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
--------------

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 value added services
represent only 20.77% of total maquila 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 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 establish
interagency coordination regarding enforcement of the
Industrial Free Trade Zone Law. This agreement requires the
Inspector General of Labor and the Directorate of Commerce
and Investment to exchange periodically information and keep
a shared database of the free trade industries that are not
fulfilling labor standards.


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. 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 a niche in providing higher
value full package production and just in time delivery of
product; banks must support the large investments necessary
to expand capacity; the government must provide an
attractive environment for new investment; private business
must leverage every competitive advantage (qualified labor,
geographic proximity, adequate infrastructure); and small
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. Possible investors seem still to be waiting to
see the affects of CAFTA and what incentives the GOES will
provide to take advantage of it. End Comment.

Barclay