VZCZCXRO4962
RR RUEHLMC
DE RUEHSN #2419/01 2832119
ZNR UUUUU ZZH
R 102119Z OCT 06
FM AMEMBASSY SAN SALVADOR
TO RUEHC/SECSTATE WASHDC 3963
INFO RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC

UNCLAS SECTION 01 OF 02 SAN SALVADOR 002419 
 
SIPDIS 
 
DEPT FOR EB/TPP/ABT THOMAS LERSTEN 
COMMERCE FOR ITA/OTEXA MARIA D'ANDREA 
USTR FOR ABIOLA HEYLIGER 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON ETRD KTEX ES
SUBJECT: TEXTILES AND APPAREL SECTOR UPDATE FOR EL SALVADOR 
 
REF: STATE 138090 
 
¶1.  (SBU) SUMMARY:  This is in response to reftel.  El Salvador 
continues to have a strong apparel sector that generates most of the 
country's export revenue, but faces challenges in the future. 
Rising labor and energy costs are reducing margins in the sector, 
and the possible phase-out of export incentives is affecting the 
investment environment.  The staggered entry into force of CAFTA-DR 
in El Salvador vis a vis other Central American countries meant a 
temporary drop in exports to the U.S., but export figures have 
recovered and the free trade agreement has increased investment 
interest.  END SUMMARY. 
 
Sector Employment and Production 
 
¶2.  (SBU) El Salvador's apparel industry was hurt by competition 
from Asia beginning in 2004-2005, and has not recovered those 
losses.  According to Anamaria Rivas, Manager of Export Salva Free 
Trade Zone, CAFTA-DR is good, but came too late to save those jobs. 
As of September 2006 the textile and apparel industry accounted for 
approximately 61,000 jobs according to CAMTEX, the apparel and 
textile association.  However, the Salvadoran Institute for Social 
Security (ISSS) showed 59,000 jobs in the sector.  The latest 
figures for the overall manufacturing sector were from 2004, and 
showed 423,000 people employed in the sector. 
 
¶3. (SBU) El Salvador's total industrial production was $3.693 
billion for 2005 and $1.93 billion in the first half  of 2006. 
Textile and apparel production accounted for $1.92 billion in 2005 
and $979 million for the first half of 2006.  In 2005, El Salvador's 
apparel sector exported $1.65 billion in merchandise to the United 
States, and $777 million in the first six months of 2006.   Last 
year apparel and textile production accounted for 53.7 percent of 
exports, and 46 percent for the first six months of 2006.  The total 
import share was 20.7 percent in 2005, and 16.9 percent for the 
first six months of 2006.  These figures dropped due to the 
staggered implementation of CAFTA-DR, which entered into force for 
El Salvador on March 1, 2006, ahead of other countries.  CAFTA-DR 
rules of origin requirements temporarily lowered imports and exports 
until other countries entered into force.  Import and export figures 
have since rebounded to the averages of prior years. 
 
Salvadoran Market Faces Rising Costs and WTO regulations 
 
 
¶4.  (SBU) Apparel manufacturers in El Salvador face competition not 
only within the Central American market, but from China in 
particular and Asia in general.   El Salvador has a good workforce 
with higher productivity than other countries in the region, but 
also has higher costs.   Anamaria Rivas said companies that have 
production in El Salvador and other Central American countries can 
see the difference in productivity and place a value on Salvadoran 
labor.  Companies with no point of comparison only look at labor 
costs, and she has seen some of these companies move elsewhere to 
save on labor costs.  El Salvador recently raised its minimum wage 
10%, but only gave a 4% raise to textile and apparel sector workers, 
who now have a minimum wage of $157.26 per month.   Roberto Bonilla, 
president of CAMTEX said that only workers in the first month or so 
of a job earn the minimum wage, and then start to receive higher 
wages through incentives.  However, as the minimum wage figures are 
used to calculate other rates of pay, the increase does affect 
overall costs in the sector. 
 
¶5.  (SBU) In addition to labor costs, El Salvador has seen an 
increase in electrical rates, particularly damaging to high users of 
electricity such as the apparel sector.  Electrical rates increased 
between 25 percent and 30 percent for industrial users, depending on 
the level of use.  The increase in rates is due to the dependence on 
electricity generated using petroleum products, and the high costs 
of petroleum.  There are no short term solutions on the table for 
this problem.  While it is unlikely that there will be a significant 
increase in prices in December when rates are recalculated, this is 
a problem confronting the industry unless alternatives to petroleum 
generation are found.  These increased costs, coupled with buyers 
requests for lower pricing, leave very little profit margin in the 
business in El Salvador. 
 
¶6. (SBU) Looming on the horizon is the required phase out under WTO 
regulations of incentives for free trade zones - where most apparel 
and textile companies operate - beginning in 2008.  Companies now 
receive duty free importation of capital goods, unrestricted 
remittance of net profits, exemptions up to 15 years from income 
taxes and up to 10 years from the municipal taxes.  The GOES will 
attempt to negotiate a 10 year extension in the expiration date for 
the current benefits, bringing it in line with phase outs for other 
countries in the region.  The GOES is also working on a Service Law 
that would offer alternative incentives for companies inside free 
zones that the GOES believes could be accepted by the WTO.  Textile 
and apparel industry representatives have stated that without the 
 
SAN SALVAD 00002419  002 OF 002 
 
 
fiscal benefits offered by the free zones, they would not be able to 
compete with other countries such as Honduras and Nicaragua, where 
incentives are not scheduled to phase out for years.  They said the 
impact would be as bad as if there was no CAFTA-DR.  While we do not 
know of any companies have decided against investing due to this 
issue.  Still, there are concerns that it will begin to impede 
investment. 
 
CAFTA-DR Implementation 
 
¶7. (SBU) El Salvador was the first country in Central America to 
enter into force with CAFTA-DR, and while it showed the level of 
interest and hard work of the GOES to make the agreement work, 
staggered implementation had effects within the apparel industry. 
El Salvador could not use inputs such as fabric and thread produced 
in non CAFTA-DR countries to manufacture apparel and import it duty 
free into the United States.  This, along with customs delays at 
ports in the United States during the initial implementation phase 
dropped apparel export figures for El Salvador, in some product 
lines by 25 percent.  According to the Salvadoran Central Bank, 
export figures in the sector from January - August 2006 dropped 10.7 
percent compared with figures for the similar period in 2005.  The 
export figures have since rebounded, with June and July 2006 U.S. 
import figures for apparel from El Salvador, as reported by the 
Department of Commerce, reaching average monthly levels from 2005. 
 
¶8. (U) The GOES has done an excellent job promoting the country as a 
manufacturing center, and has done much to make El Salvador 
attractive to investors.   El Salvador has an excellent road 
infrastructure, and a number of projects are underway that will 
further improve logistics.  The port of Acajutla has expanded its 
container storage facilities, and traffic increased 30 percent in 
the first half of this year.  Construction of a new container port 
at La Union continues, and it is expected to open in 2008.  The 
Millennium Challenge Corporation is in the last stages of 
negotiating a compact with El Salvador, the basis of which is a 
third East - West highway that will improve traffic flow and 
commerce in the country.  Continued efforts at customs integration 
have seen improvements in transit times for goods transiting the 
region, which is important for El Salvador as it must export via 
Honduras or Guatemala to access U.S. east or gulf coast markets. 
PROESA, the GOES investment agency, is actively seeking investment 
in El Salvador with an eye for taking advantage of CAFTA-DR.  An 
example of such investment is LaCoste, which opened a plant to 
export under CAFTA-DR to access the U.S. market. 
 
Comment 
 
 
¶9. (SBU) El Salvador is in a good position to compete in the apparel 
market with CAFTA-DR, but competition within the region and from 
Asia is strong.  El Salvador faces significant challenges in the 
sector, namely rising labor and energy costs, as well as an 
uncertain future of export incentives.   It must continue to work to 
diversify its industry and take advantage of its relative proximity 
to the United States and a proficient labor force.  According to 
Roberto Bonilla, companies are interested in managing risk through 
diversification, and investing in El Salvador is one way to 
counterbalance Asian investment.  El Salvador's stable political 
environment and active attraction of investment are helping the 
sector, but it will have to work hard to maintain and increase 
market share. 
 
Barclay