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Regional integration efforts produce winners, losers
Bobbin / November 1996

By Larry Luxner

QUITO, Ecuador -- It's not easy being a small apparel producer anywhere in Latin America these days, but it's particularly difficult in Ecuador -- where manufacturers must contend with unfair competition, high interest rates and a haphazard electricity system.

Fabian Rivera ought to know. As president of Industrias Jogging S.A., Rivera employs 63 workers in the production of T-shirts, polo shirts, jogging shorts and warm-up suits. The factory has been in the same location in Quito's Cotocollao barrio since its inauguration in 1981.

Annual sales come to only $250,000, and it's very much a family affair, with Rivera's wife Yolanda and three sons also in the business. His plant covers 1,500 square meters, of which 260 square meters is used strictly for manufacturing operations.

Partly because of electricity shortages, production isn't what it should be.

"We can produce 650 pieces a day in theory, but in practice we're only making 150 to 180 a day," says Rivera, 58, whose varied career in private industry and government has even included a six-month stint as a hotel casino manager in Suriname. "Sales are dropping terribly because, in the first place, people don't have money to buy anything, and secondly, because we can't produce."

What really hurts Rivera and other producers like him throughout Latin America, however, is the trend toward regional integration and open markets. Ecuador, along with Bolivia, Colombia, Peru and Venezuela, is an Andean Pact nation, and as such was forced to open its internal market in order to gain access to the markets of other countries.

"When the Andean Pact market opened up four years ago, Ecuadoran producers weren't prepared for competition," said Eduardo Dousdebés, chief of the Quito-based Association of Small Textile Industries, which represents 600 companies. "Dumping is our biggest problem. I've seen T-shirts imported from Asia and Panama for as low as 2 cents each. How can we compete with that?"

From Buenos Aires to Barranquilla, Latin America's apparel and textile sector is in very serious trouble. Industry leaders warn that illegal dumping from Asia and competition from neighboring countries is affecting a number of Latin nations. In the case of Ecuador, acceptance earlier this year into the Geneva-based World Trade Organization means the country must let in used clothing -- something it never did before.

"We must compete with an invasion of products that don't meet quality standards established throughout the world," says Hernán León Guarderas, executive director of the Ecuadoran Federation of Exporters.

A similar situation exists in the region's largest country, Brazil, whose economy was closed to foreign markets for many years. In 1990, the market was finally opened, but tariffs remained prohibitively high. Then four years later, Brazil's newly elected president, Fernando Henrique Cardoso, slashed import tariffs to 20% and introduced his Plano Real. That controversial program tied the Brazilian currency, the real, to the U.S. dollar and succeeded in bringing down inflation from 20% a month to the current 2-3% a month, but it also encouraged foreign suppliers -- mainly Korean and Chinese -- to begin flooding the Brazilian market with relatively inexpensive and cheaply made garments.

Even now, apparel imports are still negligible compared to total market size -- representing $50 million, or only 0.2% of the pie. Yet "we Brazilians have been facing a lot of competition from Asia, particularly China. It's very difficult to compete with these companies," said Teresa Wagner, a trade specialist at the U.S. Commercial Service in São Paulo.

In order to protect Brazilian industry from Asian rivals, the government last year boosted tariffs on imported men's shirts and textile fabrics from 20% to 70%. The tariffs are to remain in effect for a year, though Brazilian textile industrialists are demanding even tougher restrictions. Industry leaders, pointing to Brazil's $3.16 billion trade deficit last year, have warned President Cardoso that the deficit will climb even higher unless he takes measures to stop the flood of Asian imports.

On the other hand, regional integration has been good news for Mexico. Since joining the North American Free Trade Agreement, the Mexican apparel industry is bursting at the seams. During the first six months of 1996, according to U.S. Commerce Department statistics, Mexican garment shipments to the United States skyrocketed by 32.3% to $1.53 billion, while Far East exports dropped dramatically. For example, Hong Kong exports fell by 10.31% to $1.6 billion, Chinese shipments tumbled 17.6% to $1.4 billion, Taiwanese exports plummeted 10% to $840 million and Korean garment orders fell 20.5% to $607 million.

Central America has also benefitted. Honduras, for example, has climbed to the ninth-leading world source of apparel exports to the United States. During the first six months of 1996, according to Caribbean Update, Honduran apparel exports rose by 26.68% to $522 million. This came at a time when apparel exports by the region's biggest garment producer, the Dominican Republic, declined by 5.89% to $754 million, and saw the layoffs of thousands of textile workers in the country's two dozen or so free zones.

Apparel exports from the entire Caribbean Basin Initiative region over the first half of 1996 rose by 4.32% to $2.63 billion. In the sub-category of Item 807, 807-A and GAL (Guaranteed Access Levels), apparel exports from CBI countries rose by 4.6% to $2.18 billion. Leading the pack was the Dominican Republic, followed by Honduras, Costa Rica, El Salvador, Guatemala, Jamaica and Haiti.

To allow them to compete fairly with Mexico, CBI nations are seeking "parity" and the removal of all restrictions on their exports to the three NAFTA partners.

"We want to get NAFTA parity back on the legislative agenda of the U.S. Congress as soon as possible after the presidential election in the United States," said the prime minister of Jamaica, P.J. Patterson, at a recent meeting of the 14-member Caribbean Community (Caricom) called to discuss how the region should deal with its trade relation-ships with NAFTA and the European Union. Twice before, measures that would give 24 CBI countries increased preferential access over the next six years were withdrawn by Washington lawmakers under pressure from U.S. labor unions and textile manufacturers.

The CBI-NAFTA parity debate coincides with the rise of another important trading bloc: the Southern Common Market (known in Spanish as Mercosur). Originally comprising Argentina, Brazil, Paraguay and Uruguay, Mercosur got a big boost on Oct. 1, when Chile was admitted as an associate member. The distinction underscores Chile's dramatic economic strides under President Eduardo Frei and his predecessors. Last year, Chile's GDP grew by 8.5%, reaching an estimated $56.6 billion (or $4,015 per-capita).

Joining Mercosur provides Chile easier market access to 200 million consumers in the other four countries, while giving companies from those nations the access they've always sought to Chile's Pacific ports, and hence the Pacific Rim. Some 90% of all products traded by the five nations will see an immediate 40% reduction in tariffs, though trade won't be tariff-free until 2003. Even then, certain agricultural products will be protected for up to 15 years. Chile will also keep its own external tariff of 11%, despite Mercosur's common external tariff of 13%.

Notwithstanding its Mercosur success, however, Chile won't be getting into NAFTA anytime soon -- despite intensive lobbying by the Chilean-American Chamber of Commerce and the Chilean Embassy in Washington. U.S. opposition by lawmakers still upset at free trade with Mexico, not to mention labor and environmental concerns, have prevented Congress from giving President Clinton fast-track authority on the NAFTA legislative debate.

"There's no way Chile will get in next year," remarked Dean Alexander, director of international business development at Grant Thornton Chile. "In the United States, there's no voting base, and it's not a strategic national interest. Besides, Chile has played its cards with Mercosur."

Being a member of a powerful trading bloc, however, doesn't prevent Latin nations from being drawn into trade disputes with the United States. Earlier this month, for example, Washington opened proceedings with the WTO against Argentina, charging that country's duty hikes on imports of textiles, apparel and footwear violate global trade rules. The case -- initiated following a complaint by sporting-goods giant Nike -- alleges tha the imposition of import duties in excess of the bound rate of 35% violates Argentina's obligations under relevant WTO accords.

Along those same lines, the European Commission has asked the government in Buenos Aires to take urgent action to remove trade barriers which are "severely restricting" access to Argentina's market for EU textiles. The EU -- alleging restrictive legislation on labeling and certificates of origin contrary to WTO rules -- warns it'll seek a formal WTO consultations should current negotiations fail.

"If European industry is to compete globally, it is essential that it too has fair access to markets in third countries," said Sir Leon Brittan, the EU commissioner responsible for external trade, indicating that it would be the first instance the EU launched a WTO case on textiles.

The most important development in regional integration, however, involves South America's two major trading blocs. Both Mercosur and the Andean Pact have voted to join forces, creating a 10-member entity that will eventually encompass all of South America except the three Guianas.

The decision, announced at a Sept. 4 presidential summit in Cochabamba, Bolivia, comes as Chile assumes associate membership in Mercosur. Analysts say the proposed merger between Mercosur and the 27-year old Andean Pact also strengthens Brazil's hemispheric standing at a time when the U.S. -- mired in election-year politics -- is viewed as having dropped the ball following the hyped-up 1994 Miami Summit of the Americas.

Riordan Roett, director of Latin American Studies at Washington's Johns Hopkins University, says he's confident the marriage will succeed. "As long as negotiations are as careful as they were with Chile, there shouldn't be any problem," he said in an interview. "It probably won't be a complete integration process, but it does set the stage for further negotiations as we move into the next century."

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