Identifier
Created
Classification
Origin
06SANSALVADOR2419
2006-10-10 21:19:00
UNCLASSIFIED
Embassy San Salvador
Cable title:  

TEXTILES AND APPAREL SECTOR UPDATE FOR EL SALVADOR

Tags:  ECON ETRD KTEX ES 
pdf how-to read a cable
VZCZCXRO4962
RR RUEHLMC
DE RUEHSN #2419/01 2832119
ZNR UUUUU ZZH
R 102119Z OCT 06
FM AMEMBASSY SAN SALVADOR
TO RUEHC/SECSTATE WASHDC 3963
INFO RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC
UNCLAS SECTION 01 OF 02 SAN SALVADOR 002419 

SIPDIS

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

SIPDIS

E.O. 12958: N/A
TAGS: ECON ETRD KTEX ES
SUBJECT: TEXTILES AND APPAREL SECTOR UPDATE FOR EL SALVADOR

REF: STATE 138090

UNCLAS SECTION 01 OF 02 SAN SALVADOR 002419

SIPDIS

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

SIPDIS

E.O. 12958: N/A
TAGS: ECON ETRD KTEX ES
SUBJECT: TEXTILES AND APPAREL SECTOR UPDATE FOR EL SALVADOR

REF: STATE 138090


1. (SBU) SUMMARY: This is in response to reftel. El Salvador
continues to have a strong apparel sector that generates most of the
country's export revenue, but faces challenges in the future.
Rising labor and energy costs are reducing margins in the sector,
and the possible phase-out of export incentives is affecting the
investment environment. The staggered entry into force of CAFTA-DR
in El Salvador vis a vis other Central American countries meant a
temporary drop in exports to the U.S., but export figures have
recovered and the free trade agreement has increased investment
interest. END SUMMARY.

Sector Employment and Production


2. (SBU) El Salvador's apparel industry was hurt by competition
from Asia beginning in 2004-2005, and has not recovered those
losses. According to Anamaria Rivas, Manager of Export Salva Free
Trade Zone, CAFTA-DR is good, but came too late to save those jobs.
As of September 2006 the textile and apparel industry accounted for
approximately 61,000 jobs according to CAMTEX, the apparel and
textile association. However, the Salvadoran Institute for Social
Security (ISSS) showed 59,000 jobs in the sector. The latest
figures for the overall manufacturing sector were from 2004, and
showed 423,000 people employed in the sector.


3. (SBU) El Salvador's total industrial production was $3.693
billion for 2005 and $1.93 billion in the first half of 2006.
Textile and apparel production accounted for $1.92 billion in 2005
and $979 million for the first half of 2006. In 2005, El Salvador's
apparel sector exported $1.65 billion in merchandise to the United
States, and $777 million in the first six months of 2006. Last
year apparel and textile production accounted for 53.7 percent of
exports, and 46 percent for the first six months of 2006. The total
import share was 20.7 percent in 2005, and 16.9 percent for the
first six months of 2006. These figures dropped due to the
staggered implementation of CAFTA-DR, which entered into force for
El Salvador on March 1, 2006, ahead of other countries. CAFTA-DR
rules of origin requirements temporarily lowered imports and exports
until other countries entered into force. Import and export figures

have since rebounded to the averages of prior years.

Salvadoran Market Faces Rising Costs and WTO regulations



4. (SBU) Apparel manufacturers in El Salvador face competition not
only within the Central American market, but from China in
particular and Asia in general. El Salvador has a good workforce
with higher productivity than other countries in the region, but
also has higher costs. Anamaria Rivas said companies that have
production in El Salvador and other Central American countries can
see the difference in productivity and place a value on Salvadoran
labor. Companies with no point of comparison only look at labor
costs, and she has seen some of these companies move elsewhere to
save on labor costs. El Salvador recently raised its minimum wage
10%, but only gave a 4% raise to textile and apparel sector workers,
who now have a minimum wage of $157.26 per month. Roberto Bonilla,
president of CAMTEX said that only workers in the first month or so
of a job earn the minimum wage, and then start to receive higher
wages through incentives. However, as the minimum wage figures are
used to calculate other rates of pay, the increase does affect
overall costs in the sector.


5. (SBU) In addition to labor costs, El Salvador has seen an
increase in electrical rates, particularly damaging to high users of
electricity such as the apparel sector. Electrical rates increased
between 25 percent and 30 percent for industrial users, depending on
the level of use. The increase in rates is due to the dependence on
electricity generated using petroleum products, and the high costs
of petroleum. There are no short term solutions on the table for
this problem. While it is unlikely that there will be a significant
increase in prices in December when rates are recalculated, this is
a problem confronting the industry unless alternatives to petroleum
generation are found. These increased costs, coupled with buyers
requests for lower pricing, leave very little profit margin in the
business in El Salvador.


6. (SBU) Looming on the horizon is the required phase out under WTO
regulations of incentives for free trade zones - where most apparel
and textile companies operate - beginning in 2008. Companies now
receive duty free importation of capital goods, unrestricted
remittance of net profits, exemptions up to 15 years from income
taxes and up to 10 years from the municipal taxes. The GOES will
attempt to negotiate a 10 year extension in the expiration date for
the current benefits, bringing it in line with phase outs for other
countries in the region. The GOES is also working on a Service Law
that would offer alternative incentives for companies inside free
zones that the GOES believes could be accepted by the WTO. Textile
and apparel industry representatives have stated that without the

SAN SALVAD 00002419 002 OF 002


fiscal benefits offered by the free zones, they would not be able to
compete with other countries such as Honduras and Nicaragua, where
incentives are not scheduled to phase out for years. They said the
impact would be as bad as if there was no CAFTA-DR. While we do not
know of any companies have decided against investing due to this
issue. Still, there are concerns that it will begin to impede
investment.

CAFTA-DR Implementation


7. (SBU) El Salvador was the first country in Central America to
enter into force with CAFTA-DR, and while it showed the level of
interest and hard work of the GOES to make the agreement work,
staggered implementation had effects within the apparel industry.
El Salvador could not use inputs such as fabric and thread produced
in non CAFTA-DR countries to manufacture apparel and import it duty
free into the United States. This, along with customs delays at
ports in the United States during the initial implementation phase
dropped apparel export figures for El Salvador, in some product
lines by 25 percent. According to the Salvadoran Central Bank,
export figures in the sector from January - August 2006 dropped 10.7
percent compared with figures for the similar period in 2005. The
export figures have since rebounded, with June and July 2006 U.S.
import figures for apparel from El Salvador, as reported by the
Department of Commerce, reaching average monthly levels from 2005.


8. (U) The GOES has done an excellent job promoting the country as a
manufacturing center, and has done much to make El Salvador
attractive to investors. El Salvador has an excellent road
infrastructure, and a number of projects are underway that will
further improve logistics. The port of Acajutla has expanded its
container storage facilities, and traffic increased 30 percent in
the first half of this year. Construction of a new container port
at La Union continues, and it is expected to open in 2008. The
Millennium Challenge Corporation is in the last stages of
negotiating a compact with El Salvador, the basis of which is a
third East - West highway that will improve traffic flow and
commerce in the country. Continued efforts at customs integration
have seen improvements in transit times for goods transiting the
region, which is important for El Salvador as it must export via
Honduras or Guatemala to access U.S. east or gulf coast markets.
PROESA, the GOES investment agency, is actively seeking investment
in El Salvador with an eye for taking advantage of CAFTA-DR. An
example of such investment is LaCoste, which opened a plant to
export under CAFTA-DR to access the U.S. market.

Comment



9. (SBU) El Salvador is in a good position to compete in the apparel
market with CAFTA-DR, but competition within the region and from
Asia is strong. El Salvador faces significant challenges in the
sector, namely rising labor and energy costs, as well as an
uncertain future of export incentives. It must continue to work to
diversify its industry and take advantage of its relative proximity
to the United States and a proficient labor force. According to
Roberto Bonilla, companies are interested in managing risk through
diversification, and investing in El Salvador is one way to
counterbalance Asian investment. El Salvador's stable political
environment and active attraction of investment are helping the
sector, but it will have to work hard to maintain and increase
market share.

Barclay