DOMINICAN REPUBLIC: TEXTILE AND APPAREL SECTOR

UNCLAS SECTION 01 OF 03 SANTO DOMINGO 004479

SIPDIS

STATE/EB/TPP/ABT EDWARD HEARTNEY, STATE/WHA/CAR DAVID
SEARBY, COMMERCE/ITA/OTEXA MARIA D'ANDREA, USTR ABIOLA
HEYLIGER AND DAVID NAGOSKI

E.O. 12958: N/A
TAGS: KTEX ECON ETRD DR
SUBJECT: DOMINICAN REPUBLIC: TEXTILE AND APPAREL SECTOR
UPDATE

REF: STATE 146213


1. Summary: Textile and apparel production represents an
important part of the Dominican Republic's economy. Half of
all companies in the Dominican Free Trade Zones (FTZs) are
textile and apparel related companies and 98% of all
Dominican textile and apparel companies are from the FTZs.
In 2004 these companies generated more than USD 2 billion in
revenue. The Dominican Republic is one of the largest
consumers of U.S. textile inputs in Central America and the
Caribbean region. The January 1, 2005 phase-out of textile
and apparel quotas, the strong peso, and the unstable energy
situation in the country have diminished the strength of the
sector. The recent approval by both the United States and
the Dominican Republic of the Central American and Dominican
Republic Free Trade Agreement (CAFTA-DR) should improve the
situation, but it is only the first step to secure
revitalization of the sector. End Summary

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Facts and Figures for the Year 2004
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-FTZ's share of the total textiles and apparel exports: 98 %
-Total production value of the FTZs: USD 4,416 billion
-Total textile and apparel production value: USD 2,076 billion
-Textile/apparel's share of total FTZ exports: 47 %
-Total employment in the FTZs: 189,853
-Total textile and apparel employment: 131,978

(Source: Dominican Association of Free Trade Zones (ADOZONA)
and the National Council for Free Trade Zone Exportation
(CNZFE).)

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Textile and Apparel Sector Review
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2. Garment manufacturing has been one of the Dominican
Republic,s major export products since the introduction of
Dominican Free Trade Zones (FTZs) in 1969. Nearly all of the
Dominican Republic,s exports of apparel come from the more
than 40 FTZs.


3. Textile activities in the FTZs are mostly labor-intensive
cut, make, and trim operations. Large companies such as
Grupo M and Inter Americana, as well as some medium-sized
companies design, knit, and finish garments. Several
companies knit their own fabric, but most import fabrics.
Approximately 85 percent of Dominican textile inputs come
from the United States. The country also imports fabrics and
yarns from a number of countries including Taiwan, China,
Mexico, and South Korea.


4. Major Dominican FTZ garment manufactures are contractors
for some of the most successful apparel companies in the
world. They produce brand-name items in fashion wear,
lingerie, sportswear and casual wear. Some of these
companies include Fruit of the Loom, Victoria's Secret,
Oshkosh B'Gosh, Eddie Bauer, Maidenform, Kasper, Hanes, Gap,
Jones of New York, Liz Claiborne, Wrangler, and Levi's, among
others.

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Problems Within the Sector
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5. While the 2005 removal of world textile and apparel
quotas has affected the sector, the true villains robbing it
of its competitiveness are the strong peso and high energy
prices. In 2003 the peso reached an all-time low of RD$55 to
USD$1. However, the peso recovered under the new
administration of President Leonel Fernandez and currently
averages around RD$30 to USD$1. The strong peso has made
Dominican products relatively more expensive than those made
elsewhere in the region. In dollar terms Dominican labor has
become more expensive than that available in other countries
in the region.


6. Executive Secretary of the Dominican Association of Free
Trade Zones (ADOZONA) Jose Torres told EmbOff this September
that more than the removal of quotas, the strong peso is what
is currently damaging the textile and apparel sector. He
said that the full effect of the removal of quotas has not
hit the Dominican Republic, thanks to safeguards against
cheap Chinese exports put in place by the United States.
However, he acknowledged that there is some pressure to
reduce prices to meet heightened international competition.
Torres added that he thought the safeguards have shifted some
orders to Asian countries such as India that have been buying
cheap Chinese textiles.

7. Approximately 40 textile factories, mostly
Dominican-owned, have recently closed in the Dominican
Republic. Since November 2004, 30,000 employees
(representing almost 15 percent of the FTZ labor pool) have
been laid off. In addition to these jobs, many others have
been lost in the formal sectors that depend on the FTZs, such
as utilities, transportation, and other services. There has
also been significant job loss in the informal sectors that
employees of apparel firms support, such as child care and
street vendors.


8. Also affecting the Dominican textile and apparel sector
is the current energy crisis. After labor, electricity is
the second-biggest cost in garment production in the
Dominican Republic. High energy theft coupled with low bill
collections has left distribution companies financially
stressed and has led to regular blackouts across the country.
The power crisis has raised the electricity prices from the
national power grid even further, making them among the
world's highest. Recurring blackouts have increased
dependence on expensive back-up generators. FTZ companies
frequently use their generators, as most FTZ businesses are
24-hour operations.

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Sector Solutions: CAFTA-DR and More
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9. A November 2004 USAID study on textiles estimated that
CAFTA-DR would prevent the loss of 24,000 jobs in the
Dominican textile industry. Given the Dominican government's
ratification of CAFTA-DR this September, the Mission expects
the Dominican Republic,s textile and apparel industry to
benefit from permanent duty-free access to the U.S. market
and accompanying unlimited duty-free use of local and
regional fabric and yarns. CAFTA-DR also permits limited
access to woven-fabrics constructed in NAFTA countries,
including Canada and Mexico, permits unlimited use of
extra-regional trims and buttons, and for a few products,
permits unlimited use of third-country fabrics.


10. CAFTA-DR,s rules of origin offer advantages over those
of the Caribbean Basin Trade Partnership Act (CBPTA),which
was signed in 2000. The CBTPA rules of origin require
apparel to be constructed of U.S. fabrics and yarns and limit
the use of non-regional trims and buttons. CBTPA is also
subject to change or withdrawal at any time because it is not
a negotiated trade agreement between countries, and there is
no requirement that it be renewed when it expires in
September 2008. CAFTA-DR has flexible rules of origin and
once implemented does not need to be renewed. Therefore,
CAFTA-DR gives the Dominican Republic a competitive boost
over other Caribbean countries.


11. Apart from CAFTA-DR, there has been some government and
private industry action to increase the Dominican Republic,s
competitiveness in the area of textile and apparel. The
Dominican government promised to find cheaper energy for FTZ
businesses, according to ADOZONA, but thus far has not been
successful. The government is also trying to attract
investment in fabric production by informing companies of the
benefits of CAFTA-DR.


12. The Dominican Government is modernizing its ports and
increasing its efficiency. A private port, the Port of
Caucedo is vying for certification under the Container
Security Initiative (CSI) of the Department of Homeland
Security. With CSI, Caucedo, already the largest and most
modern Dominican ports, will be able to ship items to the
United States as "pre-cleared,8 thus decreasing shipment
time and costs.


13. Dominican contacts seem optimistic about the future for
textile and apparel in the country, but they do realize the
dangers they face when the full force of the removal of
quotas hits the country. On September 28, the President of
ADOZONA announced the establishment of two new textile
companies, a USD 200 million-dollar investment. It is
estimated that these new companies, one Canadian and the
other American, will generate between 6000 and 8000 new jobs.


14. Some textile and apparel firms are diversifying their
production and markets. In this, producers are moving from
products that had a high margin of preference under the quota
system, into items for which the United States has high duty
levels. Likewise, a few textile and apparel companies are
beginning to fill short-order requests for U.S. companies.
In this instance, the Dominican Republic can use its
proximity as an advantage and fill such requests expediently.
There are other areas for improvement. An AID report noted
that Dominican textile and apparel firms should concentrate
on non-traditional products, such as footwear.


15. Comment: The Embassy agrees that there is a future for
the textile and apparel sector in the Dominican Republic.
The Dominican Republic,s proximity to the United States is a
major advantage for exports. Additionally, CAFTA-DR makes
permanent many benefits under CBTPA and thereby gives the
Dominican Republic a boost over other Caribbean nations.
However, further job loss in the textile and apparel sector
is likely. If the strong peso and the energy crisis
continue, the increased international competition following
removal of the textile and apparel quotas may further damage
the sector. Textile and apparel producers must enhance their
competitiveness by focusing on diversification of exports,
and more rapid production and delivery. Additionally, the
Dominican Government needs to improve infrastructure,
including tackling the energy crisis.
Hertell