CAFTA HELPING STABILIZE SALVADORAN MAQUILA SECTOR

UNCLAS SECTION 01 OF 02 SAN SALVADOR 001964

SIPDIS

DEPT FOR WHA/CEN, EEB/TPP/ABT GARY A. CLEMENTS
COMMERCE FOR ITA/OTEXA MARIA D'ANDREA, 4332/ITA/MAC/WH/MSEIGELMAN
STATE PASS TO USTR FOR CAROYL MILLER

E.O. 12958: N/A
TAGS: ECON ETRD KTEX ES
SUBJECT: CAFTA HELPING STABILIZE SALVADORAN MAQUILA SECTOR

REF: A. STATE 114799 B. SAN SALVADOR 001779

C. SAN SALVADOR 001423


1. SUMMARY: El Salvador's textile and apparel industry is showing
signs of greater stability in 2007 after two years of decline
following the end of global textile quotas. As reported in reftel
B, CAFTA-DR has helped to attract new investment in the maquila
sector. The extension of Free Trade Zone benefits (ref C) and U.S.
restrictions on Chinese textile imports have also helped Salvadoran
maquilas. The textile/apparel industry is adapting to increasing
competition by shifting towards full-package production and vertical
integration. New investments suggest that CAFTA-DR will help
Salvadoran maquilas remain competitive with Asian producers.
Nevertheless, many Salvadoran garment producers remain vulnerable to
Asian competition, particularly when US restrictions on Chinese
textile exports expire in 2008. In response to reftel A, post is
providing data for El Salvador in paragraph 2. END SUMMARY.

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Textile and Apparel Production and Trade Statistics
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2. Statistics requested in Ref A are from GOES sources except where
indicated:

-- Total industrial production was $3.87 billion for 2006 and $1.03
billion in the first quarter of 2007.

-- Textile and apparel production accounted for $503 million in
2006 and $134 million in the first quarter of 2007 in value-added
terms, the only production statistic available. The industry
averaged 24.15% value-added in maquila exports from 1996-2006.

-- Textile/apparel imports declined from 20.52% of total imports in
2005 to 15.78% in 2006. Exports of textiles and apparel fell from
53.59% of total exports in 2005 to 45.60% in 2006.

-- Textile and apparel exports to the U.S. were $1,432 million in
2006 and $841.5 million during January-July of 2007 (an 8.3%
increase over the same period in 2006) (Source: US Census Bureau)

-- Total manufacturing employment was estimated at 465,760 in 2006;
the textile and apparel industry accounted for approximately 81,000
jobs at year-end.

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Maquilas Showing Signs of Recovery
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3. According to GOES statistics, textile exports fell by 1% in the
first semester of 2007 from the same period in 2006, following
sharper declines of 5.6% in 2005 and 11.7% in 2006. Imports to the
textile/apparel sector grew by 5% for the same period suggesting
that textile production may rise during the second semester of 2007.
Marta Chan, the Acting Executive Director of the Textile and
Apparel Industry Association (CAMTEX) questioned the reliability of
GOES statistics which are based on customs declarations. CAMTEX
instead uses U.S. trade statistics which showed a 10.6% rise in
Salvadoran textile/apparel exports to the U.S. during the first
semester of 2007 from the same period in 2006.


4. The GOES projected in August that textile and apparel exports
will grow by 16% in 2007. CAMTEX has set a more modest objective of
recovering to pre-CAFTA production levels during 2007. Chan pointed
out that 2007 export statistics reflect a recovery from temporary
disruption of textile trade in 2006 caused by delayed implementation
of CAFTA in some countries that supply thread and cloth to
Salvadoran maquilas. (Comment: CAMTEX goals appear more realistic
than GOES projections which predict 33% export growth during the
second semester of 2007. End comment)


4. As reported in ref B, CAFTA has helped draw increasing investment
into El Salvador's textile and apparel sector. The National
Investment Promotion Agency (PROESA) informed post that new maquila
sector investment increased from $35 million in 2006 to at least
$325 million in 2007, including two major investments in fabric
production: a $200 million investment recently announced by Hanes
Brands International (HBI) and a $95 million investment by
Pettenati, a Brazilian firm. As new investment has increased,
closures of uncompetitive maquilas have declined from 30 in
2005-2006, to six closures in 2007. Most of these closures involved
Asian investments in low-cost products.


5. During a visit by Econoff to a 3,500-employee thermal underwear
factory run by HBI, general manager Edgardo Gonzalez commented that
CAFTA "levels the playing field" for Central American producers.
Noting that HBI operates in many countries, he suggested that HBI's
recent commitment to invest $200 million to acquire and expand a
Salvadoran fabric producer, "says a lot about the country and the
region". Gonzalez underscored the high productivity of HBI's
Salvadoran facilities which have recently outperformed HBI's
Honduran facilities in productivity indicators that are prominently
posted above the production floor. Gonzalez also praised PROESA for
their active efforts to attract investment.

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ADAPTING TO QUOTA FREE ENVIRONMENT AND CAFTA
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6. El Salvador's garment industry is continuing to adapt to a
changing market conditions following the end of the quota regime and
implementation of CAFTA. Producers have confirmed that prices and
demand have declined since the end of the quota regime, but CAFTA
has helped to mitigate this trend. Increased competition has not
affected wages since most maquilas combine the legal minimum wage
(currently $157.25 per month) with incentive pay. Although Chan said
that U.S. restrictions on Chinese textile imports have helped
Salvadoran producers, they underscored that Salvadoran maquilas also
face stiff competition from south Asian producers. Textile and
apparel producers have adapted to increased price competition by
expanding full-package services, emphasizing other competitive
advantages and pursuing vertical integration.


10. COMMENT: New investment highlights continuing promise of
Salvador's textile industry. Although maquila exports may show
modest recovery in 2007, smaller firms remain vulnerable to foreign
competition. GOES and CAMTEX hope that new investments and a
continuing shift toward vertical integration and more competitive
maquilas will make up for further closures after U.S. restrictions
on Chinese textile imports expire in 2008. END COMMENT


Glazer