MORE CAFTA-DR TRADE DATA AND SUCCESSES

UNCLAS SECTION 01 OF 04 SAN SALVADOR 000453

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 EAGR ES
SUBJECT: MORE CAFTA-DR TRADE DATA AND SUCCESSES

REF: SAN SALVADOR 381

Summary
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1. Maquila (apparel) exports, which account for 71 percent of El
Salvador's exports, fell by 15.7 percent during the first nine
months of CAFTA-DR, dragging down overall exports by 1 percent.
Nonmaquila exports grew by 73.2 percent, much of the increase the
result of third-country ethanol processed in El Salvador for
re-export. The food and beverage sector showed dynamic growth
thanks to CAFTA-DR, and a number of small and medium-sized
businesses have expanded production and increased employment.
However, El Salvador's refusal to allow U.S. poultry products to
enter the country mars an otherwise positive record on CAFTA-DR
implementation. The following paragraphs provide a sectoral view of
CAFTA-DR using Central Bank data and firm-level information, as well
as information on ongoing trade capacity building programs. End
summary.

Maquila Exports Falter, but Investment Continues
-------------- ---

2. According to Central Bank data, for the nine-month period since
CAFTA-DR entered into force Salvadoran exports to the United States
(including maquila, apparel manufactured for export in a free trade
zone using mostly imported components) decreased by 1 percent
compared to March 1 - November 30, 2005, falling from $1.076 billion
to $1.066 billion. Maquila exports fell 15.7 percent, from $898
million to $757 million, overshadowing the 73.2 percent increase in
other exports, which grew from $178 million to $309 million. The
maquila sector continues to consolidate in the face of Chinese
competition, and the firms remaining are focusing on full-package
assembly to take advantage of their proximity to the U.S. market.
Textile and apparel exports produced by firms that use more local
inputs (not located in free trade zones) doubled during the
nine-month period, from $9 million to $13.5 million. Towel exports
increased from $4.3 million to $6.6 million. There are a number of
firm-specific examples of CAFTA-DR trade and investment in the
textile and apparel sector:

- Youngone, a Korean company that specializes in wnter sport
clothing, expanded its operations by nvesting $3.6 million and
creating 500 new jobs uring 2006.
-- Fruit of the Loom expanded operatons by opening a packaging
center and investing $.5 million. It created 600 direct and 1,200
indrect jobs.
-- Asheboro Elastics invested $3 millon and created 100 direct and
200 indirect jobs.
-- Two U.S.-based apparel companies established operations in El
Salvador in 2006, employing 800 Salvadorans.
-- ADOC is a local shoe maker that has exported to the United States
for several years. It reports increased sales of athletic shoes
thanks to a CAFTA-DR's elimination of a 28.5 percent tariff for that
category. In addition, European shoe brands Callahan, Naturalizer,
and Camper are contacting with ADOC to produce shoes for export to
the United States.
-- Nina Simone, a Brazilian shoe manufacturer, plans to manufacture
high-end shoes beginning in 2007. With total investment of about
$3.5 million, the firm expects to create 400 jobs during the first
year of operations. Company officials report they would not have
invested in El Salvador had it not been for CAFTA-DR market access.

Ethanol Leads Non-Maquila Export Growth
--------------

3. Non-maquila exports increased 73 percent during the first nine
months of CAFTA-DR. More than 90 percent of this increase is
ethanol exports, which increased from $16.4 million to $136.4
million, a 732 percent increase. CAFTA-DR provides El Salvador with
an export quota of 5.2 million gallons of ethanol in the first year
with an annual increase of 1.3 million gallons every year. This
ethanol must be processed in El Salvador, but not necessarily from
locally grown raw inputs:

-- Two local companies, Grupo Liza and The Salvadoran Sugarcane
Company (CASSA),have teamed with Cargill and a Brazlian Investor to
establish American Renewable Fuel Suppliers (ARF) in Acajutla. The
plant processes alcohol derived from Brazilian and Chinese sources.


Food and Beverage
--------------

4. Exports of food and beverage items such as cookies, pastries,
sauces, soups, condiments, dairy products, juices, and a broad range
of ethnic foods are booming under CAFTA-DR, growing 18.2 percent
during the first nine-months from $76.6 million to $90.6. Although
for many ethnic foods CBI already granted duty free access,

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CAFTA-DR's permanent market access has been instrumental in
providing stimulus to the sector. U.S. supermarkets such as
Wal-Mart feature Salvadoran goods in certain parts of the United
States, and one local exporter has even established its own
distribution center in the United States.


5. Exports of dairy products, mostly cheese, increased by 298
percent from $162,000 to $648,000. Frozen bean exports, another
typical ethnic food, grew by 23 percent to $1.1 million. Frozen
fruit exports grew by 27 percent to $1.3 million. Cookies,
pastries, and other prepared foods exports increased by 25 percent
from $3.8 million to 4.7 million. Prepared fruits and vegetables,
including juices, grew by 52 percent to $2.4 million. Other
prepared foods including "tamales" and the local beverage "horchata"
grew by 16 percent to reach $6.6 million. Although the value
exported is still small for most of these goods, the potential
market in the United States is large, given the 2 million
Salvadorans estimated to be living there. Many of these companies
export through associations with other small producers or seek
marketing assistance from larger firms. The following are examples
of food and beverage companies taking advantage of CAFTA-DR:

-- Bon Appetit, a large Salvadoran beverages producer and
distributor, has been exporting fruit juice to the United States for
several years. Tariff cuts under CAFTA-DR have allowed the company
to lower prices and increase sales to supermarkets such as Wal-Mart,
Publix, and Wynn Dixie located in areas of the United States with
strong demand for Latin foods. In 2007, the firm plans to hire an
additional 150 employees and begin exporting "horchata," a beverage
popular among Salvadorans that previously faced a 23 percent tariff
because of its high sugar content.
-- Arrocera San Francisco, one of the largest rice distributors in
El Salvador, has expanded its product line to include seasoned rice
blends and other products under the "Dona Lisa" brand name for
export to the United States. A company official reports they have
added 200 jobs since CAFTA-DR implementation. Recently, the company
incorporated All Foods in the United States to serve as its U.S.
distributor, and it plans to open up to five distribution centers in
the United States.
-- Calvo Tuna of Spain has invested about $138 million in processing
facilities in El Salvador over the past few years. The company
currently exports most of its production to the European Union but
plans to begin exporting tuna packed in oil to the United States in
2007, taking advantage of duty-free access under CAFTA-DR.
-- Natural Union Brands, an association of six independent producers
of organic and natural products, exported nearly $100,000 worth of
diverse products such as baked goods, horchata, honey, soaps, spice,
and concentrated lemon juice in 2006. They formed their association
two years ago with support from EXPRO, USAID's export assistance
program, and they currently receive support from the Salvadoran
Government's Small and Medium Business National Commission
(CONAMYPE). Forming an association has allowed them to offer a full
product line to potential buyers and cut transaction costs
dramatically. Natural Union Brands member companies already employ
175 people, and they forecast 25 percent growth in 2007.
-- Latin Food Distributors is a consortium of 11 micro and small
businesses organized with assistance from USAID's EXPRO program.
They exported $30,000 in food products to the ethnic supermarkets in
the United States in 2006 including cookies, noodles, red beans, and
spice mixes. In 2007, they believe exports will grow to $100,000.
-- Productos Especiales Salvadorenos, is another producer of
horchata that reports increased sales thanks to CAFTA-DR.
-- Florence plans to begin exporting baked goods to the United
States in March of 2007. The firm projects growth of 35 percent in
2007
-- Crio Inversiones is exporting frozen "pupusas" and "tamales"
under the brand "Dona Lita." With assistance from USAID's EXPRO
program, in 2006 they exported $39,000 worth of these staples of the
Salvadoran diet to ethnic supermarkets in the United States.
-- Pahnas also exports frozen "pupusas" and "tamales." Over the last
two years, the company has grown from 14 to 42 employees and has
seen export sales increase from $200,000 to $800,000.
-- La Canasta exports ethnic foods and spice mixes to the United
States. In the past year, the firm has grown from 12 to 84
employees.
-- Del Tropic Foods is a vegetable and fruit processor that exports
frozen okra, peas, and shredded coconut to the United States.
Thanks in part to CAFTA-DR's permanent trade benefits, the firm's
okra exports grew by 25 percent in 2006.

Light Manufacturing
--------------

6. Costume jewelry exports grew by 187 percent to $6.4 million,
while exports of knives and tools almost doubled from $1.4 million
to $2.2 million. Exports of wire harnesses for motor vehicles, none

SAN SALVAD 00000453 003 OF 004


of which were exported in 2005, were $2.7 million over the
nine-month period in 2006. Electronic parts exports grew by 207
percent to $4.5 million, while plastic exports increased 35 percent
to $1 million. Toys and art (including handicrafts) exports grew by
76 percent and 92 percent respectively. These are examples of firms
benefiting from CAFTA-DR:

-- Specialty Products, a division of the SIGMA/Q packaging company,
manufactures and exports luxury packaging for jewelry, collectables,
and other high-value items. Before CAFTA-DR went into force, the
company's packaging faced a 16.7 percent tariff at the U.S. border.
That tariff is now zero, and Specialty Products has seen a 30
percent increase in sales in the past year. A company official
reports they will double their exports to the United States in 2007
and will employee at least 400 additional workers. They have
already invested $2 million in a new production facility and will
invest another $3 million this year.
--The Artisan Development Center of Guatajiagua, which brings
together 900 mostly-female artisans, exported $15,000 in pottery to
the United States in 2006. USAID's program with Aid to Artisans has
provided assistance on quality control and marketing, helping to
secure contracts with two large U.S. buyers.
-- Arnecom, a Mexican automotive parts company, established a joint
venture with a Japanese firm in 2006 to assemble automobile wiring
harnesses for export to the United States. With initial investment
of $6 million, the facility will employ 2,000 workers.
-- Saturn Electronics also established a facility to assemble
automobile wiring harnesses for export to the United States, and the
plant currently employs approximately 150 workers
-- Implementos Agricolas CentroAmericanos (IMACASA) manufactures
agricultural implements and knives--company officials report a large
increase in export sales to the United States.

U.S. Exports Show Diversified Growth
--------------

7. Central Bank data show that U.S. exports to El Salvador,
excluding maquila, grew by 27 percent during the first nine months
of CAFTA-DR, from $1.1 billion to $1.4 billion. Including maquila,
export growth was 13 percent, up from $1.7 to $1.9 billion. Most of
the increase was concentrated in fuel (oil) exports, which increased
from $58 million to $205 million, up 253 percent. U.S. exports of
electric motors and electronic components grew by 36 percent to $184
million, while exports of engines and turbines grew by 14 percent to
$200 million. Exports of basic grains such as yellow and white corn
and rice increased by 14 percent from $135 million to $184 million.
Other sectors that experienced growth during the period were
plastics, paper and paperboard, food products, chemicals, steel and
iron products, oils and fats, inorganic chemicals, binding, apparel,
steel and iron, aluminum, shoes, precious metals, and jewelry.
Lower prices for U.S. goods have resulted in sales growth for at
least one U.S. retailer:

-- For PriceSmart (similar to Costco),CAFTA-DR has boosted sales in
their two El Salvador stores, with half of their top 20 products
increasing in sales by at least 30 percent due to the duty savings
in product cost.

U.S. Poultry Products Denied Access
--------------

8. El Salvador's failure to allow imports of U.S. poultry products
(in particular, table eggs and raw chicken and turkey) mars the
country's otherwise positive record on CAFTA-DR implementation. For
several months, Emboffs have worked with USDA and USTR on a series
of technical discussions at both the Ministry of Economy and
Ministry of Agriculture. In the Ambassador's first meeting with
Minister of Economy de Gavidia in on February 2, he asked for the
Minister's assistance in resolving this issue (reftel). On February
28 and March 1, Ambassador Glazer and EEB A/S Sullivan raised the
issue directly with senior GOES officials, including Vice President
de Escobar, Minister of Economy de Gavidia, and Minister of
Agriculture Salaverria. On March 7, the Ambassador raised the issue
directly with President Saca's chief of staff and principal economic
advisor, Technical Secretary Eduardo Zablah. The Ambassador will
continue to push this issue with senior GOES officials in support of
ongoing USDA-led technical discussions.

Trade Capacity Building
--------------

9. The following are examples of trade capacity building programs
in El Salvador:

-- The USAID Export Promotion Program supports and promotes exports
of micro, small, and medium-sized business. It offers a variety of
technical assistance services, the costs of which are shared by the
beneficiaries. USAID launched the program in 2003, and to date it

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has invested $12.4 million assisting 1,500 businesses and government
officials. The program has also supported Salvadoran participation
in international trade fairs and missions and has organized business
roundtables in El Salvador. Moreover, USAID's Agricultural
Diversification Program has helped over 1,500 farmers to shift into
a diversified mix of high-value vegetable production, while USDA and
USAID have also provided assistance on SPS issues for agricultural
exports.
-- The GOES National Commission for Micro, Small, and Medium
Businesses (CONAMYPE) plans to provide $6 million in technical
assistance in 2007 through a Technical Assistance Fund (FAT).
-- The Ministry of Economy's Export Promotion Fund (FOEX) offers
grants for activities that support small and medium-sized
businesses.
-- EXPORTA is the GOES export promotion agency that provides
services to exporters facilitating access to market information,
business links, and other public and private mechanisms to support
export development.
-- The Inter-American Development Bank (IDB) is working with
COEXPORT, a local association of exporters, to implement a Central
American Small and Medium Business Assistance Program that would
provide $4.4 million for training about on how to meet labeling and
other technical requirements to export to the United States.
-- In 2007, Salvadoran exporters plan to participate in 24 fairs and
commercial missions with support from the GOES Productive
Development Fund (FONDEPRO),which offers $3.5 million to finance up
to 70 percent of the exporters' costs of participation. FONDEPRO
will also provide $43.7 million for technical assistance and
financing for innovative private-sector investments.

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

10. Most firms currently benefiting from CAFTA-DR had previously
exported to the United States but are now taking advantage of the
agreement's preferential access to increase sales and make new
investments. Small and medium-sized businesses have especially seen
growth in the food and beverage sector, catering to the Salvadoran
ethnic market in the United States. Some estimate that the
acquisitive power of the some 1.5 million Salvadorans in the United
States matches that of the 6 million living in El Salvador, making
this ethnic market lucrative for years to come and a potential
toe-hold in the United States from which to expand sales to other
consumer groups.


11. It is still early, only one year since CAFTA-DR entered into
force here, but the stage is now set for increased growth in El
Salvador through trade with the United States. In 2007, the GOES
hopes to surpass last year's 4.2 percent GDP growth, the best in a
decade. The next step we hope to see is more investment from
prominent Salvadoran families to take advantage of CAFTA-DR
opportunities, just as the Duenas family (owners of CASSA) has in
bio-fuels. Throughout El Salvador's history, these families have
shown a remarkable ability to recognize and seize opportunity,
whether it be cotton, coffee, sugar, financial services, or real
estate development. The risk, however, is that, given the criminal
situation in El Salvador, they view their best opportunity not here
in El Salvador but in other international markets where they believe
they will get better returns on their investments. In addition,
through trade and other capacity building programs we hope to extend
employment and business opportunities to other Salvadorans who have
not fully experienced the benefits of free trade. End comment.

Glazer