FREE TRADE ZONES CONFRONT CRISIS

UNCLAS SANTO DOMINGO 001936 SIPDIS SIPDIS SENSITIVE DEPT PLEASE PASS TO WHA/CAR ALAIN NORMAN, USTR CAROYL MILLER, EEB/TPP/ABT GARY A. CLEMENTS, AND COMMERCE ITA/OTEXA MARIA D'ANDREA E.O. 12958: N/A TAGS: ECON ETRD OTRA PGOV PREL DR SUBJECT: FREE TRADE ZONES CONFRONT CRISIS REF: SECSTATE 114799 ¶1. (SBU) Summary: The free trade zones (FTZ) of the Dominican Republic are experiencing a period of sharp decline. This decline has meant the loss of over 60,000 jobs since late 2004, concentrated almost exclusively in the textile and apparel industries, with additional job losses on the horizon if no action is taken over the next 6 to 12 months. The ruling Dominican Liberation Party (PLD) is worried about the political implications of the downturn. The Dominican government, private sector, labor unions and outside experts tend to agree broadly that the contributing factors in the weakening of the FTZ sector are the high production costs (e.g., energy, transportation, customs, labor costs and exchange rate pressures),international competition from Asia and Central America, and a lack of sufficient modernization of the business models employed by FTZ companies. However, they differ greatly on the relative importance of these factors, a fact reflected in the varying solutions preferred by the government (i.e., modernization) versus those preferred by the private sector (i.e., short-term costs savings). End Summary. Synopsis of the Current Crisis -------------- ¶2. (U) With the Dominican economy growing at a steady pace (over 10 percent in 2006),the only sector of the economy that is in decline is the FTZ sector, which fell by over 12 percent last year. The FTZ sector is made up of a range of manufacturing businesses, including medical equipment, jewelry, call centers, electronics, pharmaceuticals and textiles and apparel. Approximately 90 percent of the goods produced in the FTZs are bound for export to the U.S., and many of the goods produced, including in the textile and apparel industries, rely on U.S. inputs for their operations. Yet since the late 1990s, the sector's share of GDP has fallen from 3.5 percent to 1.9 percent. ¶3. (U) The Dominican government's National Council on Free Trade Zones (CNZFE) estimates that over 60,000 jobs have been lost in the FTZ sector since late 2004. According to figures presented to EconOff by the Santiago Association of Free Trade Zone Companies, the City of Santiago alone, which accounts for roughly 35 percent of FTZ activity, has lost over 21,000 jobs, dropping from 51,655 to 30,187 in the last two years. According to figures published by the Dominican government the textile and apparel industries employ over 50 percent of the people working in the FTZs. When asked if the job losses have been spread across industries in the FTZ sector, Vilma Arbaje, the Director of International Trade at the Ministry of Industry and Commerce, told EconOff that close to 100 percent of the job losses in the FTZs in the past couple of years have been in the textile and apparel industries. Statistics published by the CNZFE for 2006 show that the vast majority of company closures have also been concentrated in the textile and apparel industries. ¶4. (U) Fernando Capellan, the President of Grupo M, the largest textile and apparel manufacturer in the Dominican Republic, told EconOff that "the situation in the FTZs is critical. If nothing is done, we will have to shut down by next year." This perspective was echoed by a group of companies in a meeting with EmbOffs on August 8 in Santiago. These business owners, all members of the Santiago Association of Free Trade Zone Companies, said that if no action is taken in the next six to twelve months their companies would have to shut down resulting in massive layoffs. ¶5. (SBU) The job losses have had social and economic consequences that are getting the attention of political leaders. The Mayor of Santiago, Jose Enrique Sued, who is a leader of the minor opposition Social Christian Reform Party, told EmbOffs that the job losses have led to a rise in delinquency in Santiago. He also emphasized that the 21,000 job losses in Santiago, a city of only 800,000 residents, impacts a much broader group of people in terms of both the businesses that provide services to the FTZs and the extended families that relied on that lost income. Sued estimated that as many as 80,000 people have been affected by the job losses. And he mentioned the loss of transportation and food service jobs, in particular, saying that most of the unemployed have turned to the informal economy or construction in short-term projects. Sued said that while he cannot promote public disturbances, he believes significant demonstrations are on the horizon. Differences Exist Over the Contributing Factors and Solutions -------------- -------------- ¶6. (U) The government and the private sector differ considerably on both the relative importance of the various factors contributing to the decline of the FTZ sector as well as on the preferred solutions to the problems. The Dominican private sector has focused its complaints regarding current circumstances on the high cost of doing business in the Dominican Republic, including electricity costs, a transportation sector that is monopolized by the powerful Transport Workers Union, customs problems, labor costs and an overvalued exchange rate. Although they acknowledge increasing competition from Asia and Central America as an important factor, the companies allege that the government is biased against the export sector and are seeking short-term costs savings to keep their textile and apparel businesses afloat. As evidence of the government's supposed bias, they point to the exchange rate, which they claim is overvalued by roughly 10 percent and should be at 37 pesos to one dollar as opposed to the 33 or 32 pesos to one dollar rate the Ministry of Finance has maintained for the past couple of years. Minister of Finance Vicente Bengoa admitted to EconOffs in a meeting last month that the exchange is being kept artificially high in order to stem inflation in a country highly dependent on imports. ¶7. (SBU) The labor unions, at least in the Santiago region, appear to be adopting a business-friendly attitude to ensure the survival of the textile and apparel industries. Savino Reyes from the National Federation of Free Trade Zone Workers, known as Fedotrazonas, and Carlos Gonzalez from the Free Trade Zone Workers Union (Unatrazonas) cited the closure of the InterAmericana company earlier this year, which shed 11,000 jobs and closed its doors in a matter of a couple of months. They expressed fear at the prospect of additional closures, including Grupo M, which is now the largest employer in the sector. ¶8. (SBU) Reyes and Gonzalez both noted that the unions hope to hold a tripartite meeting with the Dominican government and the business leaders to design solutions to the problems they face. The unions reiterated most of the company owners' evaluation of the sector's problems citing energy, transportation, infrastructure and international competition. And similar to the opinions voiced by the companies, Savino said, "The government hasn't had the vision to create diversification in job creation. (And that) insufficient attention has been given to the sector by the government." ¶9. (U) While the companies are focused on securing short-term cost saving measures, including securing additional preferences from the U.S. under CAFTA-DR for the purchase of fabrics from Asia, international observers believe the principal problem impacting the sector is cheaper competition from Asia. This competition, which is directly linked to the end of the Multi-fiber Agreement in January 2005 that lifted quotas on Asian textile and apparel imports to the U.S., coincides exactly with the initial decline of the textile and apparel industries in the Dominican Republic. A March 2007 study commissioned by USAID concludes that the "Dominican FTZ garment sector, in its current state, is in an irreversible decline." While the study reiterated many of the complaints of the Dominican private sector concerning the high cost of labor in comparison to the region, electricity costs, transportation costs, inadequate access to credit, customs delays and the exchange rate, it ultimately concluded that "the sector's internal problems limit its competitiveness." ¶10. (U) This view, that modernization and reform of the sector are the keys to its survival, has also been the public view adopted by the Dominican government. In his speech on Dominican Independence Day in February 2007, President Fernandez addressed the issue of the decline in the FTZ sector by linking the ill fortune of the industry to international competition and the lack of investment in modernizing to improve its competitiveness. Fernandez specifically emphasized the need for more value added production. His analysis has sparked anxiety among companies and unions that the government is not focused enough on solving the immediate structural problems in the sector. ¶11. (SBU) Another government official, Washington Gonzalez, the Director General for Labor at the Ministry of Labor, told EmbOffs that the problems in the sector are a direct result of the companies' failure to invest in their businesses. He even alleged that the job losses in the sector are probably only about 20,000 in total, despite the fact that the government body (CNZFE) charged with overseeing the sector published statistics citing the over 60,000 job loss figure. ¶12. (U) Jeannette Dominguez, a former director of the government National Council on Free Trade Zones under the Mejia Administration and the current owner-manager of a private FTZ park, also alleged that the textile and apparel industries have failed to modernize or adapt to changing global circumstances. While she didn't discount the cost problems that exist, she sounded a much less alarmist view of the future of the FTZ sector for non-apparel or textile companies. In a tour of her facilities, EmbOffs witnessed a vibrant FTZ park with businesses ranging from cigar production to medical equipment manufacturing. There appeared to be very few, if any, businesses that had closed their doors and Dominguez showed EmbOffs her draft plans for expansion of the park if circumstances improve. FTZ Crisis Creates Political Problems -------------- ¶13. (SBU) The collapse of the textile and apparel industries and the resultant job losses is putting political pressure on the PLD party. The PLD Governor of Santiago Province, Jose Izquierdo, confided to EmbOffs that the President is poised to announce a form of unemployment insurance or trade displacement assistance for individuals who have lost their jobs in the FTZs. According to Izquierdo the PLD will announce within the next couple of weeks a monthly stipend for the unemployed of up to 2,000 pesos per month (US$61),a little less than half the national minimum wage of 4,100 pesos per month (US$124). Such a move demonstrates that despite the belief that the long-term solution to the sector's problem lies in transformation of the sector, the government cannot ignore the immediate social, economic and political consequences of the job losses. ¶14. (SBU) Izquierdo also informed EmbOffs that the regional government is currently financing 99 public works projects that are putting people to work at least in the short-term. The PRSC Mayor, Sued, pointed to the political problems the job losses have created for the PLD and said that while the PLD still leads the polls in Santiago, the race there would be close in next year's presidential election. Are there solutions to the Problem? -------------- ¶15. President Fernandez has recently offered some specific short-term solutions to the FTZ crisis, including a small reduction in electricity rates, the approval of a line of credit for the industry totaling as much as 1,200 million pesos (approx. US$37 million),the extension of FTZ incentives through 2009, and a break on customs fees for exporters. In addition, there is the expected announcement of monthly cash payments to those individuals who have lost their jobs in the FTZs. But so far these solutions have been met with little enthusiasm by the business sector and the labor unions, which have focused instead on securing additional preferences from the U.S. and on pressuring the government to loosen its exchange rate policy. ¶16. (SBU) Comment: While the Dominican government and private sector have been quibbling over how to respond to this crisis for some time, the political pressures of May's presidential election appear to be spurring the government to take action. Whether these measures will be enough to satisfy the industry is unclear since the government seems to be committed to maintaining its exchange rate policy, which many consider to be overvalued, thus imposing an indirect tax on exports. A stronger exchange rate policy insulates the broader population (i.e., more voters) from price increases. Most experts agree that the long-term solution to the problem lies in the modernization and diversification of the textile industry in order to increase competitivenes in the global market. However, the local industry seems more interested in placing blame on the government to gain short-term concessions during the campaign season. The PLD in turn is doing what it can to provide economic relief to those who have lost their jobs in the form of small cash payments and short-term job creation programs showing that it is responding to the industry and addressing its concerns. End Comment. BULLEN