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