Textile Companies Eagerly Await CAFTA Laws

December 7, 2007

Another textile factory is set to close this month, further unraveling the Costa Rican textile industry. VF Corporation, the owner of brands like Lee and JanSport, is closing a factory in Pavas, west of San José, that employs 500 people.

It’s the third factory the company has closed here in a year.

Overall, Costa Rica’s textile exports, which make up less than 7% of all exports, have fallen by almost a third since 2002, to $556.9 million.

But some trade group heads and factory owners say the picture isn’t as dire as it seems. They say the industry is adjusting to a shifting international market, and Costa Rican textile manufacturing could recover once the Central American Free-Trade Agreement with the United States (CAFTA) goes into effect.

“I think that the textile sector right now is in an extremely difficult position because we’ve been hanging by a string,” waiting for CAFTA, said Michael Borg, president of the Costa Rican-American Chamber of Commerce (AMCHAM) and owner of a factory that makes tailored suits for export to the United States.

He added: “Most of our customers are waiting for the benefits of the trade agreement to come through.”

CAFTA, which Costa Rica ratified by referendum on Oct. 7, won’t go into effect until after the Legislative Assembly passes laws to put the country in compliance with the treaty’s provisions. The deadline is March 1.

CAFTA is especially crucial to Costa Rica’s textile exporters because of its “rule of origin” provisions, said Miguel Schyfter, president of the National Textile Exporters Association.

Currently, under Caribbean Basin Initiative trade benefits (set to expire next year) some Costa Rican textiles can enter the United States duty free – but only if they are made from U.S.-manufactured fabrics and thread.

CAFTA, however, allows Costa Rican exports to the United States to be made from material manufactured in any CAFTA country, a significant boost since fabric and thread made in Guatemala, for example, are much cheaper than U.S. materials.

The treaty contains other special provisions, depending on the material. For example, CAFTA rules of origin will allow boxer shorts from Costa Rica to be made from material from anywhere in the world.

That, in a nutshell, will save Hanes Costa Rica the roughly $10 million in duties it was paying every year to ship its boxers into the United States, because it doesn’t use U.S. materials to make them, Schyfter said.

Borg’s factory will benefit as well, as he will be able to manufacture his duty-free suits out of Mexican material, thanks to another special rules-of-origin exception.

With 700 people working in his factory right now, Borg said he plans to add another 200 to 300 jobs after CAFTA passes.

In the end, however, Costa Rican textile manufacturers will have to compete on the basis of something other than price. Schyfter said textile manufacturers must adapt by making niche products, increasing efficiency and exploiting Costa Rica’s skilled workforce.

He drew a comparison to Costa Rica’s small-scale coffee producers, which turned to making high-quality niche coffee when international prices dropped.

“The world is full of places where you can do things cheaper than in Costa Rica,” Schyfter said.

 

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