IMPLEMENTATION OF CAFTA-DR OFF TO ROUGH START FOR

C O N F I D E N T I A L SAN SALVADOR 000656 SIPDIS SIPDIS DEPT FOR EB/TPP/ABT EDWARD HEARTNEY E.O. 12958: DECL: 03/10/2016 TAGS: ECON ETRD KTEX ES CAFTA SUBJECT: IMPLEMENTATION OF CAFTA-DR OFF TO ROUGH START FOR SALVADORAN APPAREL INDUSTRY Classified By: DCM MICHAEL A BUTLER, REASON 1.4 (b/d) ¶1. (C) Summary. Entry into force of the CAFTA-DR for El Salvador on March 1 has led to problems for the Salvadoran apparel industry. The industry reports hundreds of containers delayed at U.S. ports by U.S. Customs due to unfamiliarity with new rules and changed documentation requirements. The Salvadoran apparel sector, also dependent on imported fabric from Guatemala and Honduras, now faces the reality that using those inputs will not allow duty free access to U.S. markets. Approximately 1000 jobs have been lost and companies are thinking about moving operations out of El Salvador if the problem is not resolved quickly. There has been limited coverage in the press of these events, but more publicity could be embarrassing to the Salvadoran government, especially with municipal elections two days away. End Summary. ¶2. (C) The March 1 entry into force for El Salvador has proven to be problematic for the local apparel industry. Industry officials cite problems with U.S. Customs as their main preoccupation. In a meeting with Claudia Riasco, Executive Director of CAMTEX, the association of textile and apparel manufacturers, she said there are currently 250 containers awaiting customs clearance at the port of New Orleans. Riasco said problems in clearance are a result of use of a new CAFTA-DR Certificate of Origin, and U.S. Customs' unfamiliarity with CAFTA-DR rules. One problem is that Customs has reportedly not decided if cargo shipped prior to March 1 but arriving after entry into force is subject to CBTRA or CAFTA-DR rules. She said this problem should go away as Customs adapts to the new rules, but for now it is a problem for importers. In a separate conversation, Jaime Guevara, General Director of Fruit of the Loom in El Salvador said they have 150 containers awaiting entry, again due to problems with customs clearance. ¶3. (C) Another issue for the Salvadoran apparel industry is 'co-production', the use of fabric originating in Honduras and Guatemala. The use of fabric from regional, non-U.S. sources does not permit duty free entry into the United States. Until CAFTA-DR enters into force for other CAFTA-DR signatory countries, Salvadoran apparel exporters cannot claim CAFTA-DR rules for those inputs under Article 4.1 of the CAFTA-DR, nor can El Salvador claim CBTPA rules for those inputs as it has graduated out of CBTPA. Industry was informed of this risk, and El Salvador chose to proceed with entry into force ahead of other countries under the rolling implementation option announced by USTR in December. Some companies stockpiled U.S. origin textiles for use, but many who are dependent on Guatemalan and Honduran inputs now have to pay duties in the U.S. Riasco said this has affected approximately $3 million in textile orders from Honduras and Guatemala, and has caused 1000 workers at Sara Lee in El Salvador to lose work as plants shut down until the situation is resolved. Jaime Guevara said this situation is affecting Fruit of the Loom, and that if it is not resolved quickly Fruit of the Loom may move operations to Honduras. Guevara said he feels although El Salvador was the first to have entry into force, it is being punished for doing so. ¶4. (C) There has been limited press coverage of this issue, with the first article coming out in the March 9 edition of La Prensa Grafica, a major daily newspaper. The article focused mainly on measures taken by companies to avoid the co-production problem by stockpiling material from the U.S. and did not mention any possible losses to the industry. The Salvadoran government has been keeping very quiet about the situation, particularly with municipal elections scheduled this Sunday. The government has taken a lot of pride in being the first to ratify and now implement CAFTA-DR, and problems due to implementation could be embarrassing. ¶5. (C) Comment. Embassy has been following the situation and the possible avenues of resolution offered by USTR. At this time industry here is worried about long term effects if the situation is not resolved quickly. According to contacts at U.S. Customs they are working on the clearance problems and are saying a resolution is imminent. Entry into force on April 1 for Guatemala and Honduras would solve the co-production problems; however, it is far from certain that both countries will be ready at that time. If other solutions requiring more time to implement, such as a U.S. legislative change are needed, there is a definite possibility that some apparel production could move out of El Salvador. Barclay