This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 LIMA 000068 
 
SIPDIS 
 
DEPT FOR WHA/AND, WHA/EPSC, EB/TPP/ABT 
TREASURY FOR OASIA/INL 
COMMERCE FOR 4331/MAC/WH/MCAMERON 
USDA FOR FAS/ITP/GRUNENDFELDER 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: KTEX ETRD ECON PGOV PREL PE
SUBJECT: Textile Industry Fears End of MultiFiber Agreement 
 
REF: A) 04 Lima 5816     B) 04 Lima 5445 
 
¶1. (SBU) Summary.  The Peruvian Government fears that the 
termination of the World Trade Organization's MultiFiber 
Agreement (MFA) on January 1 will limit the Peruvian textile 
industry's ability to compete on both the domestic and 
international markets.  The textile industry accounted for 
approximately 10 percent of exports in 2004 and its leaders 
are politically well connected.  The GOP in October 
implemented temporary textile safeguards on 20 specific 
products in an effort to protect its domestic market.  The 
real challenge to Peru, however, is not in protecting the 
domestic market but rather in ensuring Peru's international 
competitiveness, as Chinese garment exports may threaten 
Peru's textile trade.  End Summary. 
 
Peruvian Textile Industry 
------------------------- 
 
¶2. (U) Peru has a vibrant textile and apparel sector, which 
has grown almost 25 percent since the implementation of 
ATPDEA in 2002.  According to Ministry of Trade and Tourism 
(Mincetur) estimates, over 150,000 individuals are gainfully 
employed in the Peruvian textile sector.  The industry 
manufactures many types of clothing, including high-end pima 
cotton shirts and pants as well as standard quality apparel. 
The textile industry uses both imported and locally produced 
cotton and wool in its products.  Local textile officials 
argue that by using first-rate Peruvian grown cotton and 
wool, they produce higher-quality apparel than other 
countries, giving them a unique niche in the international 
textile market. 
 
¶3. (U) Textile and apparel products account for 
approximately 10 percent of Peru's exports.  Through January 
- October 2004, Peru exported $883.3 million in textiles and 
apparel, Peru's fourth-largest export.  According to 
Mincetur, 63 percent ($516 million) of Peruvian textile 
exports in 2003 went to the United States (which only 
accounted for two percent of U.S. textile imports).  The 
export of textiles to the United States has increased in 
recent years, due primarily to ATPDEA benefits.  Exports 
grew 21 percent from 2002-2003. 
 
--------------------------------------------- -------------- 
           Peruvian Textile Exports, 2002-2004* 
--------------------------------------------- -------------- 
                  USD, millions           Percent Share 
               2002    2003    2004    2002    2003   2004* 
--------------------------------------------- -------------- 
Textiles      144.5   165.0    170.0    1.9    2.1    1.7 
Apparel       532.1   654.0    709.3    6.9    8.5    7.0 
Txtl/Appl     676.7   819.0    883.3    8.8   10.6    8.7 
Total Expts  7722.9  8965.6  10064.7  100.0  100.0  100.0 
--------------------------------------------- -------------- 
Source: INEI (Statistics Bureau), Central Bank 
*Through October 2004 
 
Protecting the Domestic Market 
------------------------------ 
 
¶4. (U) GOP officials fear that the January 1, 2005 
termination of the MultiFiber Agreement (MFA) will threaten 
the ability of its textile industry to compete both 
domestically and internationally.  Peru has already faced 
increasing competition from China in its domestic market; 
textile imports from China tripled from $6.0 million in 1997 
to $17.6 million in 2003.  The Ministry of Labor estimates 
the industry has lost approximately 40,000 jobs since 2000. 
 
¶5. (SBU) In an effort to protect the domestic market from a 
potential flood of Chinese products, the GOP in October 
imposed temporary safeguards on 20 sensitive products, 
including shirts, pants, sweaters, coats and jackets, t- 
shirts, and sheets.  (Note: These safeguards are an 
extension of the safeguards implemented in November 2003 on 
106 Chinese products.  End note.)  These items, which 
represented 48 percent of Peru's total textile imports from 
China in 2003, will be subject to a tax of 12-28 percent, 
depending on the item, upon entry.  Peru is, to date, the 
only country in the world to impose textile safeguard 
measures against China.  The GOP, however, has yet to 
enforce the new safeguards.  GOP officials have also 
mentioned the possibility of negotiating a bilateral accord 
with China on preferential tariffs when Vice President Zeng 
Qinghong visits Lima in late January. 
 
Fear the Dragon: China 
Threatens Peruvian Exports 
-------------------------- 
 
¶6. (SBU) Several local consulting firms conducted impact 
analysis on the apparel safeguards and concluded that there 
is no clear evidence that Chinese products will damage the 
local industry.  They did, however, indicate that Chinese 
exports to the United States and the European Union could 
displace Peruvian textile exports.  According to 
Macroconsult, the textile industry could lose as much as 30 
percent of sales to the United States in 2005 and as many as 
50,000 jobs over the next three years.  Although the textile 
industry produces high-quality products, the overall cost of 
Peruvian textiles is 40-50 percent higher than Chinese 
costs. 
 
¶7. (SBU) Guillermo Arbe, Chief Global Analyst at Apoyo 
Consultants, told us December 15 that he believes Peru will 
have zero growth in textile exports in 2005.  The damage, he 
said, will occur in several ways.  First, China, with 50 
percent lower production costs, will increase production and 
sell its lower-priced basic apparel products on the world 
market.  Even though 45 percent of Peruvian textile 
production is basic apparel, the industry's higher prices 
will likely make it unable to compete effectively against 
Chinese products.  Second, other textile producing countries 
displaced by China may shift their production to higher- 
quality products, threatening Peru's niche market.  Thus, 
competition will come from not only China, but from other 
textile producing countries. 
 
Some Government Officials Confident 
----------------------------------- 
 
¶8. (SBU) Although the textile industry fears the worst, GOP 
officials have gone on record, confidently stating that Peru 
should not feel threatened by Chinese competition.  Ministry 
of Production officials argue that Peruvian production of 
high-quality goods (made from pima and tanguis cotton and 
alpaca wool) place Peruvian textiles in a different class 
than lower-quality Chinese products.  Ministry of Production 
officials argue that the textile industry should focus on 
exporting higher-quality products to stave off Chinese 
competition. 
 
¶9. (U) GOP officials emphasize that Chinese-imposed export 
duties on 148 specific items of clothing and textiles show 
serious effort on the part of the Chinese government to 
limit the competitive threat to other textile-producing 
economies.  Officials are also confident that other 
countries, including the U.S. and the EU, may impose their 
own safeguards, thus guaranteeing market access for Peruvian 
products. 
 
Need for Improved Efficiency, Competitiveness 
--------------------------------------------- - 
 
¶10. (SBU) Mincetur officials explain that in order to 
compete with China in the long term, Peru needs to improve 
its competitiveness.  Julio Chan, APEC Director at Mincetur, 
informed us December 27 that the textile industry must 
develop more efficient techniques, update machinery, and 
focus on producing higher-quality products.  The industry, 
he complained, wants government protection so that it does 
not have to implement any necessary and costly changes. 
Unfortunately, without industry-led change, he continued, 
the textile industry may die a quick death. 
 
¶11. (SBU) Chan also indicated that, to improve Peru's 
overall competitiveness, the GOP must undertake a broad 
effort to improve the quality of its seaports, which have 
some of the highest rates in the Western Hemisphere, and 
reduce the high average costs of labor (currently $1.68 an 
hour compared to $.69/hour in China). 
 
Comment 
------- 
 
¶12. (SBU) Peru is the only country to date that has placed 
safeguards on Chinese products.  Although protecting the 
domestic industry is important, in the post-MFA world the 
GOP must now focus on ways to improve the competitiveness of 
Peruvian textiles on the international market.  Without key 
improvements, it is likely the textile industry could lose 
up to a third of its export sales. 
 
STRUBLE