TEXTILE SECTOR GROWING AT DIMINISHED RATE

UNCLAS SECTION 01 OF 02 LIMA 001825

SIPDIS

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 PE
SUBJECT: TEXTILE SECTOR GROWING AT DIMINISHED RATE

REF: 05 Lima 2523


1. (SBU) Summary. Peru's textile and apparel industry
witnessed a 2.6 percent increase in exports during the first
quarter of 2006 year-on-year, substantially less than the 13
percent growth witnessed during the same period in 2005.
Government officials attribute this slow down in growth to
concerns about the status of the U.S.-Peru free trade
agreement and the upcoming expiration of ATPDEA benefits.
Ministry of Production officials also claim that textile
production has matured and the sector needs new investment.
GOP officials believe that the sector will pick up again
after the June 4 Presidential elections, when the future
path of Peru will be more clearly defined. Chinese apparel
imports have risen dramatically in 2006, prompting the GOP
to review the need for safeguards. End Summary.

Slow but Steady Export Growth
--------------


2. (U) Since the implementation of ATPDEA in 2002, which
granted duty-free access to the U.S. market for more than
6,500 Peruvian products, Peru's textile and apparel sector
has grown by more than 30 percent. This growth is primarily
seen in the export sector, as domestic market sales have
increased by approximately 3 percent since 2002. In 2005,
textile and apparel products now accounted for slightly less
than 10 percent of Peru's exports, the majority of which are
destined for the United States.


3. (U) In 2005, Peru exported approximately $1.7 billion
in textiles and apparel products, up from the $1.2 billion
exported in 2004. While Peru has more than 15,000 companies
registered in the apparel sectors, 25 companies account for
72 percent of total apparel exports.

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Peruvian Textile Exports, 2003-2006*
-------------- --------------
USD, millions Export Share %
2004 2005 2006* 2004 2005 2006*
-------------- --------------
Textiles 204.7 211.3 51.4 1.7 1.2 1.2
Apparel 887.3 1062.4 246.8 7.2 6.2 5.6
Txtl/Appl 1092.2 1273.7 298.1 8.8 7.5 6.7
Total Expts 12370.1 17000.6 4435.8 100.0 100.0 100.0
-------------- --------------
Source: INEI (Statistics Bureau),Central Bank, National
Society of Industry
*Through First Quarter 2006


4. (U) While Peru's textile and apparel sector grew 13
percent in 2005, first quarter 2006 statistics are not as
promising. The textile and apparel sector exported $298.1
million during the first quarter 2006 - only a 2.6 percent
higher than the $290.3 million exported during the same
period last year. Overall textile and apparel exports to
the United States actually decreased by 3.2 percent, from
$192.3 million in first quarter 2005 to $186.1 million
during the same period in 2006.

Accounting for the Slow Down:
The Importance of the FTA
--------------


4. (SBU) Officials from the Ministry of Trade (Mincetur)
and the Ministry of Production informed us that the slow
down in the textile sector is due to several reasons,
including the uncertainty in the political sector,
maturation of investment in the textile sector, and concerns
about the status of the Andean Trade Promotion and Drug
Eradication Act (ATPDEA) and the pending free trade
agreement. Carlos Ferraro, Director of Industry at the
Ministry of Production, noted that, under ATPDEA, the

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textile and apparel sectors quickly expanded; manufacturers
have reached their output capacity. The sector, in order to
grow and meet increasing demand, will need to attract new
investment.


5. (SBU) Vice Minister of Industry Antonio Castillo
confirmed that orders for apparel products have decreased
during 2006 -- a phenomenon he linked to the imminent
expiration of ATPDEA benefits in December 2006 and the
uncertainty surrounding the U.S.-Peru free trade agreement.
The FTA, he declared, is vital to the health of Peru's
textile and apparel sector. Without duty free access to the
U.S. market, Peruvian textiles would be subject to a 20
percent tariff rate, making them uncompetitive with cheaper
products from China, India and even the Central American
countries. According to the Peruvian Statistical Institute,
close to 500,000 indirect and direct textile jobs are
dependent on the textile export sector. Without a free
trade accord, Castillo and Ferraro opined, many of these
jobs may be eliminated in the coming years.


6. (SBU) Ferraro echoed comments made by Mincetur
officials to the press: that the economic uncertainty in
Peru should level out after the second round of Presidential
elections on June 4. Once the new President is elected and
his economic plans become more clearly defined, Ferraro
asserted (assuming the President supports a pro-trade
agenda) that orders for apparel products would increase.
The Ministry of Trade predicts that overall growth in the
textile and apparel sector should reach 10 percent by the
end of 2006.

Threat of Chinese Imports
--------------


7. (SBU) Castillo noted that imports of textile and apparel
products have increased from $109.8 million in first quarter
2005 to $124 billion in the same period of 2006, a 12.8
percent increase. Products from China, totaling $22.9
million, account for almost 20 percent of these imports.
Ferraro explained that Chinese textile and apparel imports
have increased by 264 percent during the first quarter 2006,
which has led many in Congress to call for the reapplication
of safeguards. Minister of Production David Lemor has gone
on record, denouncing the need for safeguards on Chinese
apparel products, but the Ministry of Production will study
the issue and make its recommendation to the Peruvian
Congress.


8. (SBU) Castillo informed us that Minster Lemor believes
that the solution to increasing Chinese imports is not the
application of safeguards, but rather a bilateral agreement
between Peru and China to limit imports. According to the
Chinese Embassy in Peru, the GOP has not yet discussed this
option with the Chinese.

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


9. (SBU) The United States continues to be the most
important market for Peruvian apparel products. With the
free trade accord and duty-free access to U.S. markets,
Peru's textile and apparel industry will become more
competitive. Officials in the textile and apparel sector,
as well as within the GOP, clearly recognize the importance
of maintaining duty-free access to the United States. The
political uncertainty surrounding the Peruvian Presidential
elections, the imminent expiration of ATPDEA, and the
pending status of the FTA continue to deter needed
investment in these sectors. It is evident that the U.S.-
Peruvian trade accord is key to the continued expansion of
the Peruvian textile and apparel industries.

STRUBLE