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 002523 
 
SIPDIS 
 
SENSITIVE 
 
DEPT FOR WHA/AND, WHA/EPSC, EB/TPP/ABT 
TREASURY FOR OASIA/INL 
COMMERCE FOR 4331/MAC/WH/MCAMERON 
USDA FOR FAS/ITP/GRUNENDFELDER 
 
E.O. 12958: N/A 
TAGS: KTEX ETRD ECON PGOV PREL PE
SUBJECT: PERU'S TEXTILE EXPORTS INCREASE 13 PERCENT IN Q1 
2005 
 
REF: A) Lima 68     B) Lima 2235 
 
¶1. (U) Summary.  Peru's textile industry witnessed a 13 
percent increase in exports during the first quarter of 2005 
year-on-year, despite local fears that the end of the Multi- 
Fiber Agreement (MFA) would limit the Peruvian textile 
industry's ability to compete internationally.  The GOP, 
noting the overall success of the textile industry, refused 
to renew temporary safeguards on 20 sensitive textile 
products, which expired on May 1.  Bowing to political 
pressure, the GOP established new customs regulations on 36 
different items, including 13 of the sensitive textile 
products.  Exporters and industry representatives continue 
to pressure the GOP to re-implement safeguards, arguing that 
a flood of Chinese exports would cause a 30 percent drop in 
Peruvian textile prices over the next year.  End Summary. 
 
Solid Growth in Textile Exports 
------------------------------- 
 
¶2. (U) Since the implementation of ATPDEA in 2002, which 
granted increased access to the U.S. market, Peru's textile 
and apparel sector has grown over 25 percent.  This growth 
is primarily seen in the external sector, as domestic market 
sales have increased by less than 5 percent since 2002. 
Textile and apparel products now account for approximately 
10 percent of exports, the majority of which are sold to the 
United States.  Under ATPDEA, Peruvian textile exports to 
the United States increased from $532 million in 2002 to 
$887 million in 2004 - a 60 percent increase.  The benefits 
of ATPDEA for the textile industry are proven; without 
access to U.S. markets, analysts confirm that Peruvian 
textile exports would not have increased at such a quick 
pace. 
 
¶3.  (U)  In 2004, Peru exported approximately $1.1 billion 
in textiles and apparel products, increasing from $900 
million in 2003.  Peru has over 30,000 national companies 
involved in the textile sector.  Only 62 companies, however, 
account for 94 percent of textile exports.  Peruvian textile 
companies produce a wide range of products, from high-end 
pima cotton shirts to lower-quality t-shirts.  The 
manufacturers that account for the majority of exports focus 
primarily on high-end niche products, for which there is a 
high demand worldwide.   Nevertheless, the industry feared 
that the elimination of the Multi-Fiber Agreement, which 
allowed China to export its inexpensive textile products, 
would cause Peru to lose international market share (ref A). 
 
--------------------------------------------- -------------- 
           Peruvian Textile Exports, 2003-2005* 
--------------------------------------------- -------------- 
                  USD, millions           Percent Share 
               2003    2004    2005*   2003   2004   2005* 
--------------------------------------------- -------------- 
Textiles      165.0    170.0   242.2    2.1    1.7     1.3 
Apparel       654.0    709.3    48.1    8.5    7.0     6.5 
Txtl/Appl     819.0    883.3   290.3   10.6    8.7     7.8 
Total Expts  8965.6  10064.7  3706.7   100.0  100.0  100.0 
--------------------------------------------- -------------- 
Source: INEI (Statistics Bureau), Central Bank 
*Through First Quarter 2005 
 
¶4.  (U) These fears appear unwarranted: the Peruvian textile 
industry exported $290.3 million during the first quarter 
2005 - 13 percent higher than the $252.1 million exported 
during the same period last year.  Textile exports to the 
United States also increased from $103.3 million in first 
quarter 2004 to $121.5 million in 2005, an increase of 17.6 
percent.  Overall prices of Peruvian textiles exported to 
the U.S. rose by 12.9 percent, which reflects the higher 
value of Peru's high-end textile products.  Peruvian textile 
firms also import from the United States approximately 50 
percent of pima cotton used in producing high-end products, 
which further aids Peru's competitiveness in up-market 
product sales. 
 
¶5.  (U) Although overall exports increased, a study on 
Peru's textile competitiveness conducted by Indecopi 
(government agency responsible for intellectual property and 
competitiveness issues) demonstrated that the majority of 
small and micro enterprises (SMEs) have not yet witnessed an 
increase in exports in 2005.  In fact, the Indecopi report 
pointed out that the top 50 exporters witnessed an increase 
in exports, but that several SMEs experienced a drop in 
export levels.  Other private sector studies highlighted 
that small domestic producers, particularly those who 
produce lower-end textile products, are, in fact, facing 
intense competition from China.  Luis Vega, President of 
ADEX, (an export association) explained that larger 
companies are better equipped to make necessary production 
changes to minimize the damage caused by Chinese exports, 
but that SMEs do not have the financial ability to shift 
into the production of high-end goods. 
 
A Need for Safeguards? 
--------------------- 
 
¶6.  (U) Peru was one of the few countries that imposed 
safeguards on Chinese textiles before the elimination of the 
MFA (ref A).  In October 2004, the GOP established temporary 
safeguards on 20 sensitive textile products; these 
protections expired on May 1.  After conducting a review of 
the textile industry from October 2004 - March 2005, the GOP 
decided not to extend these safeguards.  To appease the 
opponents, the GOP on the same day passed new customs 
regulations calling for "special attention" on 36 different 
imported items, including 13 sensitive textile products, 
stating that if not monitored, these products could harm 
local industry.  The new regulations also gave Customs the 
power to place additional tariffs on these 36 products if it 
detects that importers are engaging in fraudulent behavior, 
such as dumping. 
 
¶7.  (U) Despite new regulations, local industry and several 
export societies continue to demand that the GOP reinstate 
textile safeguards.  The National Manufacturer's Society's 
(SNI) study of the textile industry claims that without 
safeguards, Peruvian imports of Chinese textiles would 
increase by 300 percent in 2005.  Adex argues that textile 
prices will drop by 30 percent in order to be able to 
compete with the cheaper Chinese products.  On May 24, over 
3,000 textile manufacturers demonstrated in Lima, demanding 
higher tariffs on Chinese products (ref B). 
 
¶8.  (U) While the Executive continues to cite the lack of a 
need for safeguards, the Ministry of Production, working 
with Indecopi, plans to conduct another survey of the 
textile industry, which should be completed by the end of 
June.  Vice Minister of Production Antonio Castillo 
attempted to appease textile demonstrators last week, noting 
that safeguards could only be imposed after the new survey 
is completed, assuming that the survey shows negative 
developments in the textile sector. 
 
Say No to Used Clothing 
----------------------- 
 
¶9.  (U) In keeping with the protectionist trend, the GOP in 
early May approved a new law that indefinitely prohibits the 
importation of used clothing and shoes (donations are 
exempted).  In justifying the law, Minister of Production 
David Lemor explained that used clothing imports would 
displace Peru's low-end products, affecting thousands who 
work directly and indirectly in the textile sector.  This 
law, he noted, is a measure to save local jobs. 
 
¶10.  (SBU) Comment: This law extended Peru's temporary ban 
on used clothing and shoes, and will have implications for 
our current FTA negotiations.  Several Peruvian Congressmen, 
in passing this law, noted that it provides guidelines for 
the Peruvian negotiators, comparing it to the U.S. Congress' 
guidelines for USTR found in the Trade Promotion Authority 
(TPA).  Unfortunately, while the new law does provide some 
guidelines for the negotiators, instead of enabling them to 
fully negotiate a beneficial agreement, it limits their 
ability to make deals.  End Comment. 
 
Comment 
------- 
¶11.  (SBU) Although the textile industry experienced a 
strong surge in exports in early 2005, it remains to be seen 
whether the sector will maintain this level of growth.  The 
United States continues to be the most important market for 
Peruvian textile products.  With American safeguards on 
Chinese products and self-imposed Chinese export tariffs, 
and the fact that Peruvian textile manufacturers produce for 
a higher end niche market, Peruvian textiles should continue 
to be competitive on the world market.  However, an in-flood 
of Chinese textiles will affect local textile prices and 
therefore the profitability of the industry.  The GOP will 
likely bow to political pressure and reinstate safeguards. 
After all, it is easier to impose safeguards than undertake 
the serious reforms necessary, including the development of 
more efficient techniques and procuring updated machinery, 
to make the industry, particularly the SMEs, more 
competitive. 
 
STRUBLE