Have CBI nations found a full package opportunity? - Caribbean Basin Initiative - import/export in clothing industry

As importers worry over potential problems with Asian quotas - as well as a few of Mexico's limitations - a window of opportunity may be opening for the Caribbean and Central American region to evolve beyond 807-type business into full package production.

U.S. apparel sourcing patterns have undergone a remarkable shift in the past decade, much to the benefit of countries in the Western Hemisphere. The buzz at a regional apparel sourcing show in Guatemala this past spring made clear that another shift may be imminent: Both manufacturers and U.S. buyers are focusing their attention on developing a full package business in Central America and the Caribbean to compete directly with both Asia and Mexico.

How can this be, you may ask, considering all the clamor over the benefits of NAFTA and rumors of bargain basement Asian apparel packages in the wake of the currency devaluation? The reasons revolve around concerns over quota availability for Asian imports, and surprisingly, for some key categories of non-NAFTA goods coming out of Mexico.

Before exploring these issues further, let's review some of the key shifts in U.S. apparel imports. Just 10 years ago, Hong Kong, Korea and Taiwan - referred to then as the "Big Three" - were the truly big players in full package production, accounting for a whopping 42 percent of U.S. apparel imports by volume. Conversely, the Caribbean/Central American region accounted for 8.2 percent of the apparel imported. Mexico was a relatively small player, with apparel shipments amounting to only 2.5 percent of total U.S. apparel imports.

Today, the Caribbean/Central American region has tripled its share of the market, supplying 25 percent of overall U.S. apparel imports in 1997. Mexico alone supplied almost 14 percent of U.S. apparel imports, a six-fold increase in its share. This growth came primarily at the expense of the Big Three, the traditional full package providers, which supplied less than 15 percent of the apparel imports into the United States in 1997. (See Table 1.)

Generally, U.S. retailers who import goods directly have not been involved in Mexico or the Caribbean because they don't have the manufacturing facilities or ability to coordinate 807-type programs. Instead, these buyers have sought full package providers, or at a minimum, CMT (cut, make and trim) resources, to produce their goods. Many have preferred to hire an agent or manufacturer who can coordinate everything from garment design to fabric and trim sourcing to CMT and packaging. This is the full package that Asian firms have offered U.S. retailers and their vendors for so many years.

Companies that attended the aforementioned Guatemalan event - The Apparel Sourcing Show, sponsored by Guatemala's Non-Traditional Products Exporters Association - appear to have concluded that they need to be more like the Asia of 10 years ago, only closer, to compete with Mexico. Guatemala's manufacturers, for example, are targeting U.S. buyers who traditionally have been reliant upon Asia. They may be well positioned to do this by taking advantage of both the few limitations on Mexico and the problems befalling Asia.

TABLE 1

Percentage of Overall U.S. Apparel Imports for Select Areas

(by volume)

                           1987       1997

Big Three(*)                42%     41.89%
CIB Region                 8.2%     25.05%
Mexico                     2.5%     13.70%

* Hong Kong, Korea and Taiwan

Source: International Development Systems Inc.
TABLE 2

Quota Categories Remaining for
Non-NAFTA Mexican Textiles and Apparel

Through 2000                              Through 2003

219 Cotton/MMF Duck Fabric                -
313 Cotton Sheeting                       -
314 Cotton Poplin/Broadcloth              -
315 Cotton Printcloth                     -
317 Cotton Twill                          -
611 Artificial Staple Yarn                611 Artificial Staple Yarn
410 Wool Woven Fabric                     410 Wool Woven Fabric
338 & 339 Cotton Knit Shirts (MBWG)       -
638 & 649 MMF Knit Shirts (MBWG)
340 & 640 Cotton Non-Knit Shirts (MBWG)   -
347 & 348 Cotton Trousers (MBWG)          -
647 & 648 MMF Trousers (MBWG)             -
433 Wool Sport Coats (MB)                 433 Wool Sport Coats (MB)
443 Wool Suits (MB)                       443 Wool Suits (MB)
633 MMF Sport Coats (MB)                  -
643 MMF Suits (MB)                        -

MMF = Man-made Fiber
M = Men's, B = Boys', W = Women's, G = Girls'

Source: NAFTA Annex 300-B, Schedule 3.1.2.

Mexico's Full Package Challenges

While it has become a huge player in the U.S. apparel sourcing picture, Mexico's growth to date has been more wedded to 807 programs - requiring cutting operations to remain in the United States - than has the Caribbean's growth. (Of the apparel exported to the United States from Mexico in 1997, 82 percent of the value was 807 merchandise.) Further, because of NAFTA, Mexico's apparel business is likely to continue to be dependent upon relationships with U.S. apparel manufacturers and the use of fabrics made in the United States.

Although Mexico has been the largest single beneficiary of increased U.S. sourcing, it has only stolen growth from its competitors, not reduced their trade volume. Next year could be a watershed, as 1999 marks the first tariff phaseout under NAFTA. As a result, a number of significant apparel products, including trousers, will become duty-free.

However, Mexico still faces a significant obstacle to expanding its full package business. Some of the most popular categories of apparel are still subject to small quotas applicable to apparel made from "non-originating" fabric. Mexican-made trousers and knit shirts using non-NAFTA fabrics, for example, will continue to be subject to quotas through the year 2000. (See Table 2.) So while many companies may be inclined to move cutting operations to Mexico, they are going to have to use North American fabric if they want to avoid quotas.

The CBI's Full Package Potential

While U.S. mills and trim companies supply much of the fabric and components used to manufacture clothing in the Caribbean Basin Initiative (CBI) countries, many CBI countries have been able to expand their trade in non-807 goods.

Reliance upon 807 programs is varied among the CBI nations - and countries like Jamaica, Costa Rica and the Dominican Republic still rely almost exclusively upon 807 trade - but nations such as Guatemala, El Salvador and Honduras have a noticeable volume of non-807 business. (See Table 3.)

In terms of growing their full package production, a number of factors bode well for countries in the region. First, only a few of the CBI countries are subject to a large number of quotas, and there are a number of relatively unrestrained categories in products that are very important today, such as knit shirts and dresses. (See Table 4.)

Second, it is unlikely that these unrestrained categories of imports from the CBI will be the subject of unilateral quota actions by the United States. As long as the overall percent of trade from the Caribbean and Central America in these categories is dominated by 807 production, the U.S. government could have a problem successfully defending a quota action before the World Trade Organization (WTO). In a case brought by Costa Rica regarding the unilateral imposition of a quota on underwear, the WTO's Dispute Settlement Body concluded that the largely 807 imports were not seriously damaging or threatening to U.S. manufacturers, many of which were importing the merchandise at issue.

TABLE 3

Percentage of U.S. Apparel
Imports Entering as 807

For Select CBI Countries, By Volume - 1997

Country                      Percentage of U.S.
                               Trade in 807

Belize                             99.92%
Costa Rica                         96.94%
Dominican Republic                 93.44%
El Salvador                        88.30%
Guatemala                          69.05%
Haiti                              95.02%
Honduras                           88.46%
Jamaica                            96.53%
Nicaragua                          36.65%
Panama                             60.81%

Source: International Development Systems Inc.

Third, the traditional Asian suppliers are constrained by comprehensive quotas, limiting their ability to expand. Quotas don't hem in the Caribbean/Central American region as much as they do Asia. To the extent expansion is possible, both the Asian financial crisis and tight quotas are making many importers leery of expanding their sourcing from the impacted Asian countries.

More Asian Crisis Considerations

The early returns on 1998 indicate that quotas will preclude Asian suppliers from expanding trade to the U.S. market. It seems that quotas are filling faster than ever this year, resulting in another banner year for embargoes. U.S. importers faced with the possibility of early embargoes for Asian-made goods are going to need an alternative.

Moreover, while there have been fears that the financial crisis would result in a plummeting of Asian apparel prices depressing prices elsewhere as well - that phenomenon has not materialized. According to data available as of February, average unit values have not declined for textile and apparel products from the countries most affected by the crisis, including Indonesia, Malaysia, Korea, Thailand and the Philippines, as well as their neighbors, Hong Kong, China and Japan.

While the currency devaluation has brought about declines in labor rates, these decreases have been offset by the rising cost of inputs, also caused by the devaluation. In addition, quotas, which limit the quantities available in the market, also keep prices up.

The greatest opportunity for downward pressure in price may be in the area of fabrics Asian countries are shipping to non-quota countries to be converted into apparel. More specifically, lower prices on Asian fabrics could help the CBI countries to be more competitive vis-a-vis Mexico. And a country like Guatemala, which already has the capability to provide full packages to U.S. buyers, is in a good position to act on this opportunity.

Gauging by reactions at the Apparel Sourcing Show, the greatest challenge for CBI countries going forward will be convincing potential U.S. customers - the U.S. retail community and its vendors - that they are capable of producing a quality fashion product in the quantities traditionally supplied by Asian contractors.

TABLE 4

Categories with Quotas for Carribbean/Central American Countries

Guatemala

340 & 640 Cotton Non-Knit Shirts & MMF Non-Knit Shirts (MB) 347 & 348 Cotton Trousers (MBWG) 351 & 651 Cotton Nightwear 443 Wool Suits (MB) 448 Wool Trousers (WG)

El Salvador

340 & 640 Cotton Non-Knit Shirts (MB) & MMF Non-Knit Shirts (MB) 342 & 642 Cotton Skirts & MMF Skirts

Jamaica

331 Cotton Gloves 338 & 339 Cotton Knit Shirts (MBWG) 340 & 640 Cotton Non-Knit Shirts & MMF Non-Knit Shirts (MB) 347 & 348 Cotton Trousers (MBWG) 638 MMF Knit Shirts (MB) 641 MMF Non-Knit Shirts (WG) 647 MMF Trousers (MB)

Dominican Republic

338 & 339 Cotton Knit Shirts (MBWG) 340 & 640 Cotton Non-Knit Shirts & MMF Non-Knit Shirts (MB) 342 & 642 Cotton Skirts & MMF Skirts 347 & 348 & 647 & 648 Cotton Trousers & MMF Trousers (MBWG) 351 & 651 Cotton Nightwear & MMF Nightwear 433 Wool Sport Coats (MB) 442 Wool Skirts 443 & 444 Wool Suits (MBWG) 448 Wool Trousers (WG) 633 MMF Sport Coats (MB) 6638 & 639 MMF Knit Shirts (MBWG)

Costa Rica

340 & 640 Cotton Non-Knit Shirts & MMF Non-Knit Shirts (MB) 342 & 642 Cotton Skirts & MMF Skirts 347 & 348 Cotton Trousers (MBWG) 443 Wool Suits (MB) 447 Wool Trousers (MB)

Honduras

No Quotas

MMF = Man-made Fiber M = Men's, B = Boys', W = Women's, G = Girls'

Source: International Development Systems Inc.

Brenda Jacobs is Of Counsel in the Customs and Trade Group of the law firm of Powell, Goldstein, Frazer & Murphy LLP, in its Washington, D.C., office. She may be reached at tel.: 202-347-0066, by email at bjacobs @pgfm.com or on the Web at www.pgfm.com.

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