SALVADORAN NONMAQUILA EXPORTS BOOM UNDER CAFTA-DR

UNCLAS SECTION 01 OF 02 SAN SALVADOR 002543

SIPDIS

STATE PASS USAID/LAC
STATE ALSO PASS USTR
USDOC FOR 4332/ITA/MAC/WH/MSIEGELMAN
3134/ITA/USFCS/OIO/WH/PKESHISHIAN/BARTHUR
SIPDIS

E.O. 12958: N/A
TAGS: ECON ETRD EINV ES
SUBJECT: SALVADORAN NONMAQUILA EXPORTS BOOM UNDER CAFTA-DR

REF: A. SAN SALVADOR 2526, B. SAN SALVADOR 2513, C. SAN SALVADOR
2475, D. SAN SALVADOR 1719

Summary
--------------

1. Central Bank data show that nonmaquila exports were 64 percent
higher during the first six months of CAFTA-DR than they were March
to August 2005, increasing from $123 million to $202 million. Much
of that increase reflects Salvadoran exports of ethyl alcohol,
thanks to liberal CAFTA-DR rules of origin, but exports of some
agricultural and processed foods as well as light manufactures also
increased. Maquila exports have largely rebounded from difficulties
related to CAFTA-DR's staggered entry into force, but their impact
resulted in an overall fall in exports (including maquila) of 6
percent for the period. End summary.

Maquila Exports Suffer, Overall Exports Decline
-------------- --

2. During the first six months of CAFTA-DR, Central Bank data show
Salvadoran exports to the United States (including maquila, that is,
apparel manufactured for export in a free trade zone using mostly
imported components) fell by 6 percent compared to the same March 1
- August 31 period in 2005, from $1.02 billion to $959 million. A
16 percent decline in maquila exports, from $898 million to $757
million, accounted for nearly all the decrease. Maquila exports
suffered because El Salvador pushed for CAFTA-DR entry into force
months ahead of its Central American peers and for several months
could no longer source raw materials for maquilas from neighboring
countries as it had under the Caribbean Basin Initiative.


3. Textile and apparel exports produced by so-called "national"
firms, which sell locally in addition to exporting and typically use
more local inputs, grew by 33 percent under CAFTA-DR, up to $16.2
million from $12.1 million in March to August 2005. Exports of
towels, which previously faced a 9.1 percent tariff, increased 48
percent from $3 million to $4.5 million. U.S. Department of
Commerce monthly data suggest Salvadoran apparel exports (including
both maquila and national firms) have rebounded in recent months,
and for July and August 2006 they exceeded 2005 levels for those
months. Ref. C described the textile and apparel sector in more
detail.

Nonmaquila Exports Grow 64 Percent
--------------

4. Central Bank data show a much more positive picture of
Salvadoran exports under CAFTA-DR when maquilas are excluded.
Nonmaquila exports were 64 percent higher during the first six
months of CAFTA-DR than they were March to August 2005, increasing
from $123 million to $202 million. Much of the increase in exports
can be linked directly to skyrocketing ethanol exports, which
increased from $5.9 to $85.4 million, made possible by liberal
CAFTA-DR rules of origin. Ref. B described current Salvadoran ethyl
alcohol production capacity and plans for expansion.


5. During the first six months of CAFTA-DR, Salvadoran data show
sugar exports fell by $16 million, reflecting the expiration of a
supplemental quota that El Salvador had filled in the period March
to August 2005. Other sectors took up the slack for sugar, in some
cases taking direct advantage of CAFTA benefits. Dairy exports
nearly quadrupled, increasing from $102,000 (March - August 2005) to
$378,000 (March - August 2006). Cheese, which faced a range of
tariffs before CAFTA-DR (and still faces a tariff-rate quota for
some varieties),accounted for most of that growth. Dairy exports
are expected to continue to grow as local producers target
Salvadorans living in the United States.


6. Other products that target Salvadorans in the United States also
show potential, based on exports during the first six months under
CAFTA-DR. Cookies, pastries, and other snack foods--although in
many cases not subject to tariffs before CAFTA-DR, showed 37 percent
growth, increasing from about $2.2 million before CAFTA-DR to $3
million after the agreement entered into force. Exports of tropical
fruit juice blends--once subject to a 7.4 cents/liter
tariff--increased 78 percent from $877,000 to $1.6 million. Exports
of beans, subject to a nominal tariff before CAFTA, increased from
$2.1 million to $2.7 million.


7. Light manufacturing showed positive growth as well under
CAFTA-DR, although nearly all these exports already entered the
United States duty free before the trade agreement entered into
force. Exports of tools and implements tripled, increasing from
$676,000 to $2.2 million, while exports of toys and games--some of
which did face a tariff before CAFTA-DR--increased from $182,000 to
$673,000, more than tripling.


SAN SALVAD 00002543 002 OF 002


Salvadoran Imports of U.S. Goods up 10 Percent
-------------- -

8. U.S. exports to El Salvador increased nearly 10 percent during
the first six months of CAFTA-DR, from $1.3 billion to $1.5 billion,
despite a 14 percent fall in exports of inputs for El Salvador's
maquilas (from $559 million to $482 million). U.S. export growth
was balanced among most sectors. For sensitive agricultural goods,
U.S. producers quickly took advantage of expanded access, though
they were still limited by tariff-rate quotas. For example, U.S.
pork and beef exports grew overall from $359,000 to $1.7 million.
Salvadoran rice imports grew only 4 percent over the period, $11.7
million to $12.1 million, while sensitive white-corn imports grew
only 2 percent from $6.5 million to $6.7 million. Less sensitive
yellow-corn imports increased from $25.7 to $32.4, a 26 percent
jump.

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

9. Given the size of the Salvadoran economy, the timing of
individual orders can have a noticeable impact on the data. Still,
the early data suggest that Salvadoran exports are already
benefiting from CAFTA-DR market access. When viewed with firm-level
information provided in Ref. D, the case is even stronger--juice
exports are growing thanks to Del Monte's focus on the U.S. market,
local firm Quesos Petacones is pushing cheese exports, and towel
manufacturer Hilasal is receiving more orders for U.S. export.
However, new investment--either greenfield or to expand existing
capacity--will be required to take advantage of other CAFTA-DR
opportunities. That could take time, because both domestic and
foreign investment have in recent years been among the lowest in the
region, attributable in part to the worsening security situation
here. See Ref. D. End comment.

Barclay