Journal of Commerce / March 15, 1999
By Larry Luxner
SAN PEDRO SULA, Honduras -- Thanks to low wages and lucrative government incentives passed in the wake of Hurricane Mitch, more and more garments -- from Hanes underwear to Banana Republic safari shirts -- are sporting "Made in Honduras" labels.
Now, even the labels themselves are being made in Honduras.
Paxar Corp., a New York-based maker of fabric labels for brand-name clothing, expects to have 100 employees by year's end at the ZIP Bufalo industrial park in San Pedro Sula. Its main customers will be other free-zone manufacturers such as Fruit of the Loom, Sara Lee and Maidenform.
"Typically, labels are now being shipped from the U.S. in ocean containers, along with zippers, buttons and cut fabric, and they just do the assembly work," said Jim Rollo, Paxar's vice-president of Latin American business development. "With us operating in San Pedro Sula, they would have less inventory and faster delivery time."
Mr. Rollo, whose $630 million-a-year company already has factories in Mexico, Brazil and Colombia, says Honduras is an ideal place to manufacture because of the combination of low wages and the lack of an income tax in free zones.
"All things being equal, a company operating in a Honduran free zone pays no corporate income tax. That's not the case in Mexico, where corporate income tax is about 35%," he said. "The fact that Mexico's labor rate is $1.08 versus $1.31 for Honduras is not really a showstopper. Honduras has a developed infrastructure to support the apparel industry. They're very pro-active in training people to enter the sewing trade. In Mexico, they're organized but not on a national level to the same degree Honduras is."
Yet Honduras is facing unprecedented competition from Mexico because of that country's unfettered access to the U.S. market through the North American Free Trade Agreement -- a subject sure to come up during the U.S. Commerce Department's trade mission to Central America set for Mar. 21-27.
During 1998, according to Commerce figures, Honduras exported $1.90 billion worth of knit and woven apparel to the United States -- an 18% jump over the same period last year. That impressive growth exceeds the gains reported by El Salvador, Guatemala and the Dominican Republic, but pales in comparison with Mexico, which grew 25% to $6.70 billion.
"Mexico has an advantage over us in that they don't pay any duties on aggregate value," says Jose Molina, chairman of ZIP Choloma, a free zone located just outside San Pedro Sula. He explained that U.S. duties aren't assessed on labor-added value, but are assessed on raw materials added to the final product. In the case of blue jeans, this can be as high as 25%. "Any cost advantage we had in Honduras is taken away by the duties we pay on aggregate value."
That poses a particular danger for Honduras, whose 5.5 million people face an uncertain future following the economic upheavals inflicted last year by Hurricane Mitch.
Unprecedented damage was done to the transport network in Honduras when Mitch passed through the country, killing 8,000 people and leaving hundreds of thousands homeless. More than 90 bridges were either completely destroyed or severely damaged, eight of them in Tegucigalpa. An estimated 70% of the road network was affected. Preliminary estimates of the damage to roads are on the order of $454 million, or about 10% of the country's GDP.
Mr. Molina and other industry officials are lobbying lawmakers in Washington to grant Honduras the same U.S. trade benefits that Mexico enjoys under NAFTA. If passed, the so-called "CBI-NAFTA Parity Bill" now pending in Congress could result in an explosion of textiles and apparel factories, more garment exports -- and much more volume out of the country's Caribbean port, Puerto Cortes.
"The hurricane destroyed about 50,000 houses, and another 38,000 houses were badly damaged," says Mario Canahuati, president of the Cortes Chamber of Commerce, which includes San Pedro Sula. "We need $388 million to rebuild these homes, without considering the fact that we already had a housing deficit. These are very hard times for Honduras, and our people are at risk of losing their jobs. I don't think there's any alternative to CBI-NAFTA parity."
At present, some 220 companies operate in nine free zones around the country. Most are centered on San Pedro Sula, a growing industrial center located 45 minutes from Puerto Cortes. About half the companies operating in the free zones are U.S.-based, with the remainder divided among Taiwanese, Korean and local companies.
Approximately 96,000 salaried workers -- 80% of them women -- work at the huge industrial parks, where they turn out apparel for a growing U.S. market. The factories, known as "maquilas," generated $390 million in foreign exchange last year, making apparel manufacturing the country's No. 2 source of income after coffee, which brought in $397 million. Bananas were in third place, with around $150 million.
This year, however, maquilas will jump to $450 million, while coffee income will drop significantly as a result of the hurricane, and bananas -- with nearly the entire crop destroyed -- will be close to zero.
"My guess is, clearly with the effort being spent on reconstruction and the damage to agriculture, exports to the U.S. are going to take a hit," says Walter Bastian, the U.S. Commerce Department's director for Latin America and the Caribbean. "We want to work with governments in the region to integrate the amount of damage, and being able to share information on a timely basis. It's a tragic event that may have a positive result. The intent isn't to put it back the way it was, but to make it better."
Mr. Molina insists "we're not really asking for a handout, we're asking for jobs." He adds that "right now, because of Mitch, there could be sympathy for approving the bill."
Yet not everyone supports the Honduran maquila industry. Persistent allegations of worker abuses at garment factories -- particularly those owned by Korean investors -- have damaged the country's reputation at a time when it's trying to win support in Congress for even more trade benefits. The controversy came to a head with the recent disclosure that Kathie Lee jeans were being manufactured by Honduran subcontractors in sweatshop-like conditions. The TV celebrity has since begun a campaign to improve working conditions in Central American free zones.
Some activists, however, claim the abuses are continuing. Charles Kernaghan, executive director of the National Labor Committee, says young women in free-trade zones in San Pedro Sula are being injected against their will with Depo Provera, a contraceptive that blocks pregnancy for up to three months.
Mr. Kernaghan, whose New York-based organization is supported by the AFL-CIO, says the women are often misled about what they're being injected with, with many believing they're actually getting tetanus shots. Those who refuse the shots are suspended without pay, he says.
"There is absolutely no supervision or education provided to the workers by qualified gynecologists," charges Mr. Kernaghan, adding that Honduran factories which produce U.S. garments have long sought to "avoid delays to production resulting from pregnancy and legally mandated maternity leave."
Textile factory owners deny such allegations, though Mr. Canahuati admits that certain abuses involving underage workers did take place.
"We have established relationships with human-rights groups so we can monitor the situation. There's no question there were things we need to rectify," he said without elaborating. "When you have 100,000 people working in maquilas, eventually you're going to have a problem."
James Creagan, the U.S. ambassador to Honduras, said that "after the Kathie Lee controversy, the maquila owners became very sensitive to this issue. Under Honduran law, it's legal to work at age 15 with parental consent. Yet the maquilas studiously avoid anything that comes close to child labor. They're also conscious of working conditions, so they put in a code of conduct. Some Americans have told me it's more manageable here than in Mexico."
Salomon Leiva is president of Interfashion S.A., a sprawling company in the ZIP Choloma free zone which assembles close to 80,000 pairs of pants a week.
"Sales would double if we didn't have tariffs," says Mr. Leiva, who employs 2,000 workers under one roof. "Our main client is now looking at Mexico, so we need some sort of favorable legislation for this part of the world. If we don't get it, it's going to be tough."
Mr. Creagan says that's why he supports CBI-NAFTA parity for Honduras and other Central American countries.
"The Honduran textile industry was built up through CBI benefits. They've done very well. In many of these plants, the work is done in the U.S., cloth is cut in Honduras and goes back to the U.S., providing jobs for Americans," said the ambassador. "In the aftermath of the hurricane, Washington wants to support Central America. With the banana industry destroyed and $200 million worth of exports lost, they need foreign exchange now, and the best foreign-exchange earners are maquilas, and they produce jobs fast."
"CBI enhancement is good for the U.S., by the way, because it prevents illegal immigration, which is a burden for the United States. It's best to have prosperity for Honduras, and CBI enhancement could be the next step on the road to free trade by the year 2005."
Paxar's Mr. Rollo said he hopes the U.S. government will see "that one way of giving aid without directly sending dollars to Honduras is to give Central America parity." The manufacturing executive added, however, that "our customers are prepared and in need of our services in Honduras, regardless of whether parity comes about or not."