The Washington Diplomat / February 2002
By Larry Luxner
Ever since Mexico's admission to the North American Free Trade Agreement (NAFTA) club in 1994, Caribbean and Central American countries had been complaining that the Mexicans' remarkably good access to the U.S. market was slowly eroding most of the trading advantages once offered by the Caribbean Basin Initiative (CBI), a Reagan-era measure aimed at boosting the region's fragile economies.
So these countries should have been thrilled when, last December, the House of Representatives passed new trade legislation that could spread to the Americas the type of free-trade benefits Mexico and Canada currently enjoy under NAFTA. This latest piece of legislation, known as the Trade Promotion Authority legislation, or "fast-track" trade legislation, squeaked through by a vote of 215-214.
But there are a few catches. The new legislation reverses certain key benefits guaranteed to Caribbean and Latin American countries under the Caribbean Basin Trade Partnership Act (CBTPA) passed in 2000, which at the time marked an important extension of the CBI.
Specifically, the CBTPA allows the duty-free and quota-free entry for U.S. imports of apparel sewn and assembled by CBI countries from U.S. cloth and yarn. This sector had been excluded from the original CBI law of 1983 but provided to Mexico under NAFTA.
The CBTPA, to last through September 2008, also allows the duty-free importation of footwear, petroleum products, watches and canned tunaóall of which was excluded from the original CBI.
Under the new rules, apparel from CBI countries gets the duty-free, quota-free treatment as long as it's assembled from U.S. fabrics formed from U.S. yarns and cut in the United States. If the fabric is cut in the CBI, it must be sewn together with U.S. thread to achieve duty-free access. In addition, all apparel exported from these nations must now be dyed and finished in the United States, according to the latest interpretation of the legislationónot in the countries from where they were exported.
And that's going to force dozens of garment factories across the region to close, putting approximately 90,000 people out of work, according to nine ambassadors who have already written a protest letter to two influential House lawmakers close to the issue, Reps. William M. Thomas (R-Calif.) and Charles B. Rangel (D-N.Y.).
"Of course for us and the companies we represent, the initial passage of the CBTPA legislation was very important. But any sort of caveat to it that softens the intent of the legislation is of concern to us, because it waters down the benefits to our countries," said Anton Edmunds, deputy director of Caribbean Latin American Action (CLAA), which is orchestrating the protest.
Two of the nine ambassadors signing the letter are Roberto B. Saladin Selin of the Dominican Republic and René León of El Salvador -- which also happen to be two of the most important CBI suppliers of garment and apparel to the U.S. market. The Dominican Republic leads the pack, with an annual $2.8 billion worth of exports annually, followed by Honduras ($2.7 billion), El Salvador ($2.1 billion), Guatemala ($900 million), Costa Rica ($700 million), Jamaica ($500 million), and Nicaragua ($300 million).
"It's a very important issue," Saladin told The Washington Diplomat. "We've created more than 200,000 jobs in industrial-free zones thanks to the CBI. Out of these 200,000, about 130,000 are related to the textile industry, and 50 percent of the total investment in these free zones is U.S. capital. We estimate that for every $1 billion in apparel exports, 20,000 jobs are created in the United States. In this sense, the Dominican Republic is a very important component for the survival of the U.S. textile industry."
In fact, U.S. Trade Representative Robert B. Zoellick called the CBI "one of the best examples of the positive power of trade."
In a Dec. 31 report to Congress, Zoellick said that "by opening its market to producers in the Caribbean and Central America, the United States is supporting the development of more prosperous economies, and stronger democracies, among our closest neighbors. American consumers benefit from the duty-free treatment of Caribbean Basin products. As part of the same process, we're creating more robust markets for the United States, with the CBI region now ranking 9th among U.S. export markets."
The USTR report notes that, during the first nine months of 2001, $3.5 billion worth of CBI goods entered the United States under the enhanced trade benefits of the CBTPA (nearly 25 percent of total U.S. imports from the region), while U.S. exports to CBI countries totaled $20.7 billion in 2000.
Yet the report shows little evidence that expanded apparel benefits have stimulated U.S. investment in the region. Although there has been a jump in apparel imports benefiting from the new duty-free, quota-free access, that has not translated into any overall increase in apparel imports. In fact, when cut pieces of apparel are added to yarn and fabric, overall apparel exports to the CBI countries have actually declined.
Observers say this trend suggests that companies have merely shifted production to apparel that is eligible for the quota-free, duty-free benefits. As a result of this shift, importers are saving millions in duties. For example, the American Apparel and Footwear Association (AAFA) said its members paid $100 million less in duties on apparel, headwear and footwear imports during the first half of 2001 than they did in the first half of 2000.
Ambassador León of El Salvador said that ever since the CBTPA's approval, he's been lobbying for final regulations to be implemented as soon as possible, "precisely to eliminate uncertainties and all sorts of doubts that investors and companies doing business in the Caribbean Basin region might have."
In El Salvador alone, some 75,000 jobs are dependent on continued apparel exports to the United States (and another 90,000 in Honduras and more than 100,000 in the Dominican Republic.)
"We only regard the Trade Partnership Act as a stepping-stone for a much broader trade negotiation with the United States, which would be a free-trade agreement," said LeÛn. In fact, even though the CBTPA is supposed to remain in force until 2008, it would be made irrelevant if the much-talked about Free Trade Area of the Americas -- stretching from Alaska to Tierra del Fuego -- comes into being before that.
"We're worried that some political negotiations that were conducted in Congress compromises or might jeopardize one of the specific benefits we can get: the possibility of dyeing and finishing raw fabric constructed with U.S. yarn," said León. "We are expressing our support but also voicing concern that this might come at the expense of the TPA."
Importers claim that such implementation issues surrounding the agreement have prevented them from shifting production to the region. In the first 10 months of 2001, apparel imports from the Caribbean totaled 21.6 percent of the world total, down from 22.3 percent during the same period in 2000, according to the Office of Textiles and Apparel at the Department of Commerce.
Apparel importers and politicians also complain that uncertainties surrounding how the U.S. Customs Service will implement rules have created a disincentive to invest in the Caribbean. One example is the dispute over eligibility for apparel made from fabric that is dyed and finished in the region.
"Because of all the threats related to amendments on dyeing and finishing in the U.S., there's been a divestment of trade from Central America and the Caribbean to Asia, because somehow investors don't feel completely sure the law would be fully applied," said Saladin of the Dominican Republic.
"Some members of the House and Senate made commitments not to allow dyeing and finishing to be done outside the United States," he continued. "We, the countries of Central America and the Caribbean, continue to ask for the full application of the CBTPA, because for six years a lot of House and Senate members supported the approval of this legislation and it could be really uncomfortable for those members to see those benefits eroded."
In its public comments to USTR, the American Apparel and Footwear Association urged the Bush administration to issue final CBTPA implementing regulations to resolve uncertainties regarding the application of benefits, while the National Retail Federation said the CBTPA "has been a failure so far in promoting economic growth and development in the region because of unresolved implementation and technical issues."
Saladin said the Caribbean deserves U.S. assistance, not only because of the region's proximity to the United States, but also because it helps the United States.
"For every dollar we export to the United States, we spend between 50 and 70 cents in the U.S. economy," said the Dominican Republic envoy. "In comparison, the Asians spend only 10 to 15 cents in the U.S. economy for every dollar they export to the United States."
Despite its name, the Caribbean Basin Initiative has generally helped Central America more than the islands of the Caribbean with regard to apparel exports. That's becauseówith the exception of the Dominican Republic and, to a lesser extent, Haiti and Jamaica -- the islands are generally too small to support large-scale factories, while labor, and shipping costs are higher than countries such as Honduras or El Salvador.
Even so, Spanish-speaking Central America needs the English-speaking Caribbean, so that all the CBI nations are on the same page when it comes to legislation that helps or hurts the entire region.
"That's why we work very closely with the Caribbean countries to lobby Congress and the administration, so that our countries benefit the most," said León. "For us, the possibility of having a flexible CBTPA is very important because in a time of recession, this is the only competitive advantage we might have in the U.S. market."
The CLAA's Edmunds said his Washington-based, non-profit organization is the main voice for small Caribbean islands and Central American states that, individually, would have no clout in Washington. But he insists that CLAA is not a lobbying agency.
"We advocate private sector-led economic development in the region. We don't get paid by companies to go to the Hill to address specific issues of concern," said Edmunds, a native of English-speaking St. Lucia. "Our work is to advocate policy reform in the countries of the Caribbean and Latin America, consistent with best business practices. So in that sense, we're not lobbyists. I'm not saying that we don't strongly advocate certain issues. But the foundation of the organization is one based on the promotion of policy change."