ECUADOR'S TEXTILE SECTOR: SURPRISING SIGNS OF STRENGTH

UNCLAS QUITO 000924

SENSITIVE
SIPDIS

TREASURY FOR MEWENS

E.O. 12958: N/A
TAGS: ETRD EINV ECON KTEX EC
SUBJECT: ECUADOR'S TEXTILE SECTOR: SURPRISING SIGNS OF STRENGTH

REFTEL: Quito 601


1. (U) Summary: Ecuador's textile sector has had to deal with the
bankruptcy of a large exporter and stagnant investment due to
uncertainty over Ecuador's political climate, the renewal of ATPA,
and the potential impact of the U.S.-Columbia free trade agreement
(FTA). However, exports of some products to Colombia and Venezuela
are growing, companies are planning new investments, and the
industry may rebound this year. End Summary.


2. (U) Ecuador's textile industry has shown flat investment and
declining exports for the past year. Due to concern over whether
the Andean Trade Preference Act (ATPA) will be renewed, textile
producers that export principally to the U.S. have invested only
amounts necessary to maintain business operations, rather than
expand exports. In addition, the industry has expressed concern
that if Colombia has an FTA with the U.S., Ecuadorian inputs into
Colombian products for export to the U.S. would not count toward
accumulation for origin purposes (as they do now under ATPA). This
is a significant market for Ecuador, and the impact of its loss
could be substantial.


3. (U) Total textile exports from Ecuador have declined steadily
over the last year, with manufactured textiles (sheets, towels,
tablecloths) the only subsector to experience export growth between
2006 and 2007. These problems mask hidden strengths in the
industry, however, and several factors suggest that the industry may
be well-positioned for the future.

Regional and International Strength
--------------


4. (SBU) The growth in manufactured textile exports from Ecuador
can be attributed to a growing competitive advantage vis-a-vis
Colombia and Venezuela. According to La Escala, a large U.S.-owned
textile company in Ecuador, the appreciation of the Colombian peso
has made Colombia's textile products more expensive, boosting demand
for imports from neighboring Ecuador. In Venezuela, government
policies have destroyed the textile industry, indirectly creating a
market opportunity for Ecuadorian textile exporters. La Escala
stated that it will expand its exports to both Colombia and
Venezuela this year.


5. (U) Ecuadorian textile companies also find themselves
increasingly competitive in comparison with companies from China.
Textile production costs are rising in China due to higher wages,
the elimination of export rebates, forced environmental compliance,
and the appreciation of the yuan. This has made Ecuadorian
companies more competitive and has allowed them to raise prices.
The industry has also benefited from a GOE crackdown on the
importation of cheap contraband goods from China (reftel),and from
changes to the GOE's procurement policy, both of which have
encouraged the development of the local textile industry.

Stagnant Investment May Soon Recover
--------------


6. (SBU) Although companies remain concerned about the renewal of
ATPA and the draft constitution, La Escala noted that its 2007-2008
investments will total $1.3 million. Other textile companies within
the Ecuadorian Textile Association (AITE) plan to invest a combined
$18 million in Ecuador during 2008. La Escala credits the improved
2008 textile investment climate to companies' ability to raise
prices in order to offset higher raw material costs. AITE suggests
that last year's declining exports were primarily due to the
bankruptcy of La Internacional, a large Ecuadorian textile exporter
that was taken over by Vicuna of Brazil. Vicuna took almost nine
months to reorganize La Internacional, but its exports are expected
to increase this year as Vicuna implements a $20 million expansion
of denim production. AITE expects additional investment to come
from a new government program to help textile producers in
Atuntaqui, a town near Otavalo known for quality textile goods,
prepare their products for export.

COMMENT:
--------------


7. (SBU) In spite of the continuing uncertainties, Ecuador's
textile industry is evidently strong enough that investors are
willing to devote resources (as seen by Brazilian firm Vicuna's
takeover of a bankrupt Ecuadorian company and planned 2008
investment). The combination of Colombia and China's rising textile
prices, the decline of the Venezuelan textile industry, and GOE
crackdowns on contraband have all improved Ecuador's competitive
position. The pending FTAs with Colombia and Peru have yet to have
an impact on Ecuador's textile industry.

CHRITTON