Area Development / September 2000
By Larry Luxner
WASHINGTON -- In what observers are calling the most significant piece of trade legislation in years, the U.S. Senate in May approved the Africa-CBI trade bill -- a measure granting Central American and Caribbean countries with the Caribbean Basin Initiative broader access for their products in the U.S. market.
The Caribbean Basin Trade Partnership Act (CBTPA), approved by a 77-19 vote, followed intensive lobbying by Caribbean governments and U.S. investors, and was hailed by President Clinton.
"This step reaffirms America's commitment to open trade and strengthens the partnership between the U.S. and our friends in Africa and the Caribbean Basin," he said, adding that the bill would boost apparel trade by billions of dollars and help Caribbean nations reform their economies.
The new law, which takes effect Oct. 1, cuts tariffs on a wide range of imports -- largely textiles and apparel -- from 25 Caribbean and Central American nations. The law is intended to correct a situation that emerged from the North American Free Trade Agreement. Preferential tariff benefits granted by the U.S. to eligible CBI countries starting in 1983 were undercut by more generous benefits committed to Mexico under NAFTA.
CBTPA gives eligible CBI countries additional preferential tariff treatment through September 2008 or before that if the Free Trade Area of the Americas (FTAA) enters into force first. It provides immediate tariff reduction to NAFTA levels for imports now excluded under CBI, specifically canned tuna, petroleum and petroleum products, footwear, handbags, luggage, flat goods, work gloves and leather-wearing apparel.
It also provides duty-free, quota-free treatment to specific types of apparel depending on the origin of the fabric or yarn.
Peter King, chairman of Jamaica's Industrial Advisory Council, said the new law will result in about $58 million in new textile exports from Jamaica. Costa Rican President Miguel Angel Rodríguez said the expansion of trade benefits would enable his country to boost textile exports by $100 million and create 6,000 new jobs.
"We're going to see a surge in production and exports into the United States, particularly in places like Honduras, Dominican Republic, El Salvador and Guatemala," said Dr. David E. Lewis, senior associate at Manchester Trade Ltd. in Washington. "Smaller producers like Nicaragua, Haiti and Panama are also perched for growth."
Lewis adds: "W'ere getting closer to the end of the Multi-Fiber Agreement in 2005, which, if it doesn't get renewed, may open the door for Asian textile exports to the U.S. So in this window of five years, we're going to see very strong apparel growth into the CBI countries in order to benefit from this expansion of the duty-free arranamgent in the United States. For example, 42 new companies have set up in the Dominican Republic in the first six months of this year, while El Salvador expects to create 150,000 jobs over the next three years as a result of the growth expected from the new CBI bill."
Here's a country-by-country look at what's happening in manufacturing investment:
BAHAMAS: The Bahamas, fueled by tourism, are doing very well these days. According to the Central Bank, the Bahamian economy expanded by about 6% in 1999 and should grow by another 4% this year. This growth is being pushed largely by tourism, which generates over $1.5 billion a year -- some 70% of the country's GDP. The good news is that unemployment is down to 7.5% and falling, government revenues are up, and hotels are reporting record occupancies.
Meanwhile, Freeport is positioning itself as a transshipment hub to compete with San Juan, Puerto Rico; Rio Haina in the Dominican Republic, and Kingston, Jamaica.
Since its inauguration in July 1997, business has been so good at Freeport Container Port Ltd. (FCP) in the Bahamas that the port's owners now want to double the size of their operation.
Phase I of the container transshipment terminal -- which boasts 1,800 feet of berth, four gantry ship-to-shore cranes and 10 straddle carriers -- represented an investment of $78.3 million. Phase II, to cost another $71.3 million, envisions the addition of 1,200 feet of quay, another 12 straddle carriers and another three cranes. This will boost throughput from the present 560,000 twenty-foot equivalent units to around 930,000 TEUs.
"This will help speed air and sea intermodal transhipment for the region, with maximum security and minimum bureaucracy in a tax-free trade zone," says an HPH press release. "The center, providing a variety of warehouses and factory units tailor-built to meet specific requirements of potential users, will offer extremely cost-effective alternatives for companies selling in the U.S. and Central American markets."
BARBADOS: With a population of only 264,000 and high educational standards, Barbados enjoys one of the most successful economies of the Eastern Caribbean. Unemployment stands at a record low 9.3%, and GDP has been expanding by a healthy 3% annually in each of the last two years, with similar projections for 2000 and 2001.
Recently, Standard & Poor's assigned an A- long-term rating to Barbados's 10-year, $100 million bond, issued in June. The stable ratings reflect "prudent economic management, which has contributed to seven years of economic growth," according to S&P.
While the Bajan economy is heavily dependent on tourism and financial services, the government of Prime Minister Owen Arthur has been encouraging the manufacturing sector as well.
Among the incentives Barbados offers investors: full exemption from taxes on corporate profits for 10 years, for export-only manufacturing companies; special tax rate of 2.5% after the tax-exemption period expires; full exemption from import duties on components, raw materials, production machinery and other equipment such as computers and spare parts; subsidized factory space for rental in well-planned industrial parks, and full and unrestricted repatriation of capital, profits and dividends.
Companies that have set up operations in Barbados include Atlantic Manufacturing Ltd., a U.S. maker of women's lingerie; MSI International Ltd., a U.S. manufacturer of printed-circuit boards, and Kaufel Caribbean Inc., a Canadian producer of electronic assemblies.
COSTA RICA: Among the six Spanish-speaking republics of Central America, Costa Rica appears to be the only one successfully making the transition from coffee, bananas and low-wage apparel manufacturing to a high-tech economy based on industries such as pharmaceuticals, computer software and electronics.
In fact, U.S. computer-chip maker Intel Corp. remains Costa Rica's top exporter in the first quarter of 2000, with overseas sales of $550 million -- more than a third of the nation's total exports. Central Bank President Eduardo Lizano said Intel exported 5.8% more in the first three months of 2000 than in the same period a year ago.
So far, the company has hired over 2,000 workers and invested $400 million in Costa Rica.
"Last year, Costa Rica's GDP grew by 8.3%, and we were 3.8% of that," says Danilo Arias, manager of corporate affairs at Intel here. "Costa Rica is a very small country, therefore any major influx of capital is bound to have a huge impact."
In March, Illinois-based Abbott Laboratories opened its first factory in Costa Rica, a $60 million investment. Costa Rican President Miguel Angel Rodríguez cut the ribbon at the 23,000-square-meter facility, which is located at an industrial park 10 miles west of San José and designed to produce pharmaceuticals and hospital supplies.
Not far away, Cincinnati-based Procter & Gamble is building a complex of office buildings that will soon handle all "back-office" functions for P&G's entire operations in North and South America.
"If a retired factory worker form Kentucky has a question on his payroll benefits, he'll call an 800 number and it'll get routed here," says Jack Horvath, general manager for P&G's Global Business Services. "Our employee in Costa Rica will know exactly what to tell him.
Horvath says P&G is investing $60 million in its Costa Rican venture, which in the long run will save the company $100 million a year. The company eventually hopes to have 1,200 college-educated, fully bilingual employees at its office complex, located about 10 minutes from San José's Juan Santamaría International Airport.
"We're trying to attract more high-tech into Costa Rica," says Lynda Solar, executive director of the Costa Rican-American Chamber of Commerce in San José. "We are no longer competitive in low-wage industries with Honduras, Nicaragua, Guatemala or El Salvador. A lot of high-tech companies are looking at Costa Rica, but they want to see what happens with the telecom situation. We are sorely lacking in telecommunications. You can buy a cellphone but you can't get a cellular line, because nobody at ICE [the state-owned phone monopoly] wants to privatize the company. The fact that Procter & Gamble came here is a miracle."
DOMINICAN REPUBLIC: Long touted as a success story by U.S. manufacturers, the Dominican Republic will see its economy grow by 6.5% this year, following spectacular growth of 8.3% in 1999 and 7.3% in 1998.
This makes the Dominican Republic the fastest-growing economy in Latin America, but many Dominicans never see this wealth. In fact, about 20% of the country's 8.5 million inhabitants live in extreme poverty.
Hipolito Mejia, the country's new president, promises to change this. Shortly before his Aug. 16 swearing-in, he pledged to boost social spending and reverse the unpopular policies of his predecessor, Leonel Fernández.
"The new government will be based on the program we presented to voters, with an emphasis on education, health, food and housing," said Mejia, the first Dominican Revolutionary Party (PRD) president since 1986
During his first trip to Washington, Mejia told bankers and executives that he'll establish "an attractive investment climate," adding that the U.S. should become a "regional gateway" for U.S. investment.
Under Fernández, employment in the country's free zones grew from 160,000 in 1996 to 200,000 at present. In 1996 there were 34 industrial parks, while today there are 46 -- a 33% growth. Exports are up 39% in the four years, going from $3.11 billion to $4.33 billion in 1999.
Forecasts call for a 25% jump in free-zone employment as the Dominican Republic begins to enjoy the benefit of the Caribbean Basin Trade Partnership Act (CBTPA). An estimated 250,000 people could be working in Dominican free zones by December 2001.
Meanwhile, a group of investors led by Samuel Conde and Manuel Enrique Tavares (of Itabo Industrial Park) are planning to build a $200 million transshipment port adjacent to Las Américas International Airport. Construction of the Puerto Multimodal de Punta Caucedo should start in January and be completed in late 2002.
The port will primarily handle container freight cargo coming from Latin America and headed for North America or Europe. The new port will compete for traffic with the Freeport, Bahamas, terminal, that of Panama's Colon Free Zone and the Kingston, Jamaica.
In an unrelated development, Microsoft -- the world's largest software producer -- will donate $13 million in "investment, software, training and scholarships" to support the new Cybernetic Park in Santo Domingo. Funds will be used to educate the population in the uses of technology and eradicate software policy in all government offices.
But problems persist. Recently, the Asociación de Indústrias y Empresas de Haina, a leading industrial association, complained that the practice of power distributors charging based on average rather than actual consumption is cutting into their members' profits.
A spokesman for the group says there are cases of companies closed down for a month, and the bill for that month is higher than the previous month. He says the cost of electricity in the Dominican Republic continues to exceed that of other countries in the region, making it difficult for Dominican companies to compete.
EL SALVADOR: El Salvador has surprised investors by showing the biggest improvement in creditworthiness of any of the 136 countries recently surveyed by Institutional Investor.
According to the prestigious magazine, El Salvador's credit rating rose 4.1 points in the six-month period ending September 1999, and 7.1 points in the one-year period ending September 1999 -- outperforming other strong contenders such as Slovenia, Estonia, Latvia, the Dominican Republic, Greece and Botswana.
It's ranked 13th in the world by the Wall Street Journal/Heritage Foundation's annual survey of economic freedom, and is tied with Chile for first place in Latin America.
Yet compared to Costa Rica, Honduras and other nearby countries, El Salvador "hasn't gotten the U.S. investment it deserves," says Anne Patterson, the U.S. ambassador here.
"El Salvador has the third best credit rating in the hemisphere. But still they've had difficulty attracting investment," she told Area Development. "I see this changing. It's an image issue. People still think this is a country of war, and it's not. Peace broke out a long time ago."
In January, El Salvador celebrated the eighth anniversary of the Chapultepec peace accord, which ended a civil war between government forces and Faribundo Marti National Liberation (FMLN) rebels that had taken the lives of 75,000 people and destroyed the country's economy.
Vice President Carlos Quintanilla Schmidt, who's been put in charge of attracting foreign investment by President Francisco Flores, says his country has undergone a complete transformation.
"In the last eight years, people from the FMLN became a political party by law, and now in our national assembly we have legislators from across the political spectrum," Quintanilla said in an exclusive interview. "When we talk about El Salvador, investors ask about social stability. That is now the most important question."
In fact, El Salvador is a violent society, and its six million inhabitants suffer the highest homicide rate in Latin America -- even higher than blood-soaked Colombia.
At present, El Salvador has a per-capita income of $2,400, and a GDP of around $12 billion. GDP grew around 2.6% in 1999, and is expected to reach 3% this year. Yet the largest single source of foreign exchange -- well ahead of garment manufacturing and coffee exports -- is remittances from an estimated 1.3 million Salvadorans living legally and illegally in the United States.
On the plus side, notes the ambassador, is El Salvador's relatively clean record when it comes to corruption. In its latest ranking by Transparency International, it ranked much better than most other Latin American nations including Honduras and Paraguay.
"Corruption is less of an issue in El Salvador than in most other Latin countries," she said. "You don't bribe the police force here."
Quintanilla said privatization is good for all Salvadorans, and says that both he and Francisco Flores, the country's 40-year-old president, have made it a priority of their administration.
"We are the third government of the same political party. This has given us an opportunity to continue the privatization policies begun by President [Alfredo] Cristiani," he said. "We believe the government has to be a facilitator of the private sector. We don't have to own factories or utilities."
Under President Armando Calderón Sol, the government sold off 51% of state-owned phone company Antel to France Telecom for $575 million; it also privatized five pension funds.
"During our administration, we want to continue the process," said Quintanilla. "We'd like to privatize not only the distribution of power, but also the generation of power, and we're inviting anyone from the private sector who'd be willing to invest in the administration of ports and airports."
One U.S. company that's found success in El Salvador is American Textile Co., a 75-year-old Pittsburgh firm that got its start stitching mattress covers for Sears & Roebuck.
American Textile makes private-label pillow and mattress covers -- those zippered cases found underneath bed linens -- for some of America's biggest retailers, including Wal-Mart, Target, Sears, Kmart, Sears, Kohl's and Ames. Cost pressures forced American Textile to transfer factory operations from Pittsburgh to El Salvador, where it now employs 244 people.
HONDURAS: Its economy still suffering from the effects of Hurricane Mitch in November 1998, Honduras nevertheless is bounding back as one of the leading Western Hemisphere supplies of apparel to the United States.
Jorge R. Interiano, operations manager for the Honduran Apparel Manufacturers Association, says the country of 5.5 million now has 23 industrial parks -- of which only one is state-owned. He said that "by the end of 1999, Honduras had surpassed the Dominican Republic in total production."
The biggest free zone is ZIP Choloma, located on the outskirts of San Pedro Sula. Together with the adjacent ZIP Buena Vista, the two parks have 30 factories employing 25,000 workers -- mostly young women -- in the manufacture of apparel and textiles for export to the United States and other markets.
"Our labor force is highly trainable, and our average wage is around $1.30 per hour, about the same as Mexico," he said, predicting that the value of production from maquilas will come to $450 million this year, up from $415 million in 1999.
JAMAICA: With a population of 2.5 million, Jamaica is expected to show economic growth of only 1% after falling 0.4% in 1999 and 0.7% the year before.
Part of the reason is that Jamaica is no longer competitive with Mexico and Central America when it comes to low-wage manufacturing.
Earlier this year, the apparel sector received its worst shock in two decades when China's East Ocean Textiles -- the largest garment manufacturer in the Kingston Free Zone -- announced it would pull out of Jamaica, leaving 1,700 workers without jobs. The company has already sent home over 400 overseas contract workers and made an additional 1,700 workers redundant in the last few months.
At its height in the late 1980s and early 90s, the Jamaican garment sector employed over 30,000 people and grossed close to $550 million annually. But that has dwindled in recent years, falling to $429 million in 1999. A number of companies have moved out of Jamaica to set up shop in neighboring countries where production costs are lower.
In addition, East Ocean had grown impatient with poor security at Kingston Free Zone, according to Jamaican sources. The company was said to be suffering heavily from ongoing pilfering as well as the cost of securing its shipments against drug traffickers. It was also said to be frustrated with the long wait for approval of an industry-wide tax incentive scheme to encourage overtime work and boost productivity.
NICARAGUA: Easily the poorest country in Central America, with a population of 4.7 million and a per-capita GDP of under $500, Nicaragua nevertheless offers potential investors advantages not found in other countries.
In 1998, Nicaragua's average factory wage (excluding fringe benefits) was 32 cents an hour. This compares to 80 cents an hour in Honduras and Guatemala; 90 cents an hour in El Salvador, $1.30 an hour in Costa Rica, and $1.51 an hour in Mexico. In addition, factory space in Nicaragua costs $2.60 to $3.00 per square meter per month, considerably lower than rents in other Central American countries.
Jaime Pfaeffle, general manager of Nicaragua's Center for Exports and Investment, says nearly 30,000 Nicaraguans now work in maquila factories, nearly all of them apparel or textile manufacturers.
"Nicaragua has a lot of advantages in maquila. We have low salaries and low turnover -- the lowest in Central America," he said, listing the largest U.S. investors in Nicaragua as BellSouth, Enron, Coastal Power and Texaco, as well as some medium-sized maquila firms.
Pfaeffle said a Texan firm, Carr Manufacturing, was planning to assemble surge protectors and other electronic equipment at an industrial site in Managua, possibly employing as many as 300 people.
"Investment is increasing, but not at the rate Nicaragua needs," Pfaeffle told Area Development."Our unemployment rate could very well be above 30%. Maquilas are usually the fastest way to generate jobs. Putting your people to work also means you can substantially decrease poverty levels. That's why we're pushing for companies to invest in the maquilas."
The United States, meanwhile, is urging Alemán to expedite hundreds of cases involving U.S. citizens trying to reclaim property seized by the 1979-90 Sandinista government or risk losing $50 million a year in U.S. economic assistance.
PANAMA: Since Dec. 31, 1999 -- the day the U.S. flag was lowered over the Panama Canal -- Panama has enjoyed full sovereignty over its most famous asset.
Yet Panama's biggest moneymaker isn't the canal. It's the Colón Free Zone, which saw an 8.2% rise in the value of re-exports during the first quarter of 2000.
Meanwhile, the U.S. Overseas Private Investment Corp. has signed an agreement with the Panamanian government to promote investment. The deal, hammered out between OPIC negotiators and Panamanian officials, seeks to strengthen legal safeguards for U.S. investments. OPIC currently has an investment portfolio totaling $1.54 billion throughout Central America and the Caribbean, but only $2.8 million of that is invested in Panama.
In 1999, U.S. exports to Panama came to $1.74 billion, down slightly from $1.75 billion in exports the previous year.
PUERTO RICO: Puerto Rico, a U.S. Commonwealth, is doing well economically, considering that a few years ago Congress began a 10-year phaseout of Section 936 -- a job-creating clause of the Internal Revenue Code under which U.S. manufacturers were exempt from paying federal taxes on profits earned by their Puerto Rico operations.
But passage of the new Caribbean Basin Trade Partnership Act could hurt Puerto Rico in the long run, particularly in low-wage sectors such as mass apparel production and tuna canning.
"Almost all goods are now opened up," said Dr. David E. Lewis, senior associate at Manchester Trade Ltd. in Washington. "The U.S. apparel market has always been the most open market. The difference now will be to what degree the Puerto Rican apparel indsutry has found its niche and is competitive, which is the high-value sector."
At present, Puerto Rico's jobless rate stands at around 10%. Of the island's 1.19 million employees, manufacturing accounts for 165,000 jobs, cmpared to 258,000 in the public sector and 248,000 in services.
Lewis adds: "Clearly, I'd say the push has been away from mass labor manufacturing and more into high-tech services manufacturing," says Lewis. "You haven't seen any mass exodus of these companies, but the ones that have relied on cheaper labor have had a hard time."
An example of high-value apparel is Olympic Mills Inc. A new subsidiary of this Puerto Rican company promises to create 1,000 new jobs from the purchase of the sweater-making facilities of Hampshire Group Ltd., the largest sweater company in North America.
Olympic expects to consolidate the Hampshire operations in Puerto Rico. Since 1956, Hampshire has operated Glamourette Fashion Mills Inc., which employs 700 people in Quebradillas in the production of 54,000 sweaters a week. More than $10 million will be invested, says Alejandro G. Asmar, president of Olympic Group. Glamourette plans to expand into nearby Isabela and has a 35,000-square-foot building available.
Meanwhile, BASF Pharmaceutical will invest $30 million to expand its Jayuya operation, building a new industrial complex. The company will hire 100 new workers in the production of a new weight-loss pill called Meridia.
Intelligroup Inc., a global software developer, will open a 23,000-square-foot facility in Trujillo Alto, just outside San Juan, and create 500 engineering jobs over the next three years.
The facility will begin operations by year's end, serving as a "hub for the Americas," said David Olivencia, senior service support manager. Intelligroup, based in India, has operations in Europe, Australia and Asia, reporting annual revenues of $146 million.
TRINIDAD & TOBAGO: This petroleum-exporting, twin-island republic of 1.3 million is enjoying an economic boom these days, thanks to rising oil prices. Most of its manufacturing industries are in some way connected to the oil industry, with a heavy emphasis on LNG products and petrochemicals.
Earlier this year, Reema International Corp. announced the start of engineering work on its $300 million gas-to-liquids facility. The plant -- the first of its kind in the Western Hemisphere -- will be built following the signing of an agreement with Parsons Energy and Chemical Group Inc. Upon completion, it'll convert 100 million cubic feet of natural gas every day into 10,000 barrels of sulphur-free and aromatic-free diesel, jet fuel, naphtha and other high-quality specialty products.
Prime Minister Basdeo Panday said that over the past five years of his administration, Trinidad has been able to attract $6 billion in foreign investment, particularly in the energy sector. That sector now employs 19,000 people directly, with thousands more in construction, exploration and service companies.