Business Latin America / November 6, 2000
By Larry Luxner
The economies of Central America and the Dominican Republic are expected to benefit -- in some cases dramatically -- from passage of the recent Caribbean Basin Trade Partnership Act (CBTPA), which took effect Oct. 1.
The new U.S. law slashes tariffs on a wide range of imports -- largely textiles and apparel -- from 25 Central American and Caribbean nations. It's intended to correct a situation that emerged from the North American Free Trade Agreement, in which preferential tariff benefits granted by Washington to eligible countries under the Caribbean Basin Initiative (CBI) starting in 1983 were undercut by more generous benefits committed to Mexico under NAFTA.
"We expect it to have a positive impact. We saw a lot of orders on hold until things went through," says William Malamud, executive director of the American Chamber of Commerce of the Dominican Republic. He predicting a 10-15% increase in apparel exports from the country's 42 free zones over the next 12 months, with the value of Dominican garment shipments rising from $2.6 billion this year to $3 billion in 2001 and $3.5 billion in 2002.
CBTPA gives CBI countries additional preferential tariff treatment through September 2008. It provides immediate tariff reduction to NAFTA levels for imports that had been excluded under CBI, specifically canned tuna, petroleum and petroleum products, footwear, furniture, handbags, luggage, flat goods, work gloves and leather-wearing apparel.
In a concession to labor-rights activists, three countries -- El Salvador, Honduras and Nicaragua -- will be monitored until June 2001 to encourage compliance with international standards that prohibit child labor and allow the formation of unions inside free zones -- as required under the original CBI. Guatemala, which had been under scrutiny by the U.S. Trade Representative's Office since early this year, will be monitored until April 2001, after which USTR will determine whether or not Guatemala is eligible to continue receiving CBI benefits.
Nevertheless, says Dr. David E. Lewis, senior associate at Manchester Trade Ltd. in Washington, "we're going to see a surge in production and exports into the United States, particularly from places like Honduras, Dominican Republic, El Salvador and Guatemala. Smaller producers like Nicaragua, Haiti and Panama are also perched for growth."
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. In Guatemala, officials say apparel exports will likely rise by 20% a year from the $1.3 billion reported in 1999.
Likewise, El Salvador should see such shipments jump to $6 billion by 2004, up from the $1.5 billion in 1999 apparel exports. That will expand the country's GDP by 3% this year and create 150,000 jobs over the next three years.
Thorsten Rülle, senior economist at Dresdner Bank Latinamerika AG in Miami, says "the new allowance granted as part of CBI should buoy growth substantially in El Salvador, as the country can expect new investments and, in the medium term, a tripling in the volume of exports in the in-bond processing industry. Similar effects should arise from the free-trade agreement with Mexico, which El Salvador signed alongside Guatemala and Honduras."
The analyst added that, while the CBTPA won't put Central American apparel exporters on a level playing field with the Mexicans, it will go a long way to "reducing their countries' vulnerability to external shocks" due to their traditionally dependence on agricultural commodities like coffee and bananas.
Neighboring Honduras, despite its setbacks in the aftermath of Hurricane Mitch in November 1998, is bounding back as one of the leading Western Hemisphere supplies of apparel to the United States. Honduran apparel exports are expected to jump by $500 million a year over the next three years thanks to CBTPA.
Jorge R. Interiano, operations manager for the Honduran Apparel Manufacturers Association, says the country 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."
Nicaragua, the smallest Central American apparel exporter, with 30,000 workers and $280 million in 1999 apparel shipments to the U.S., will also benefit, though perhaps not fast enough.
In 1998, Nicaragua's average factory wage excluding fringe benefits was 32 cents an hour, according to James Pfaeffle, general manager of Nicaragua's Center for Exports and Investment. 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.
"Investment is increasing, but not at the rate Nicaragua needs," said Pfaeffle. "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."
While Central America and the Dominican Republic will obviously benefit from CBTPA, relatively high-wage Puerto Rico could suffer in the long run -- particularly in labor-intensive sectors such as mass apparel production and tuna canning.
"Almost all goods are now opened up to the U.S. market," said Lewis. "The difference now will be to what degree the Puerto Rican apparel industry can compete."