VZCZCXYZ0013
PP RUEHWEB

DE RUEHDG #3129/01 2761733
ZNR UUUUU ZZH
P 031733Z OCT 06
FM AMEMBASSY SANTO DOMINGO
TO RUCPDOC/USDOC WASHDC PRIORITY 1567
RUEHC/SECSTATE WASHDC PRIORITY 6284
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE PRIORITY
RHEHAAA/WHITEHOUSE WASHDC PRIORITY

UNCLAS SANTO DOMINGO 003129 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR WHA/CAR, EB/TPP/ABT THOMAS LERSTEN; 
COMMERCE FOR ITA/OTEXA MARIA D'ANDREA, 
4322/ITA/MAC/WH/CARIBBEAN BASIN DIVISION; 
3134/ITA/USFCS/RD/WH; 
DEPT AND WHITE HOUSE PASS TO USTR ABIOLA HEYLIGER 
 
E.O. 12958: N/A 
TAGS: ECON ETRD KTEX DR
SUBJECT: DOMINICAN TEXTILES AND APPAREL - STATS AND 
PROJECTED COMPETITIVENESS 
 
REF: STATE 12958 
 
¶1.  (U) Summary.  Textile and apparel production represents 
an important part of the Dominican Republic's economy.  Half 
of all companies in the Dominican Free Trade Zones (FTZs) are 
textile and apparel related companies and 98 percent of all 
Dominican textile and apparel companies are located in  the 
FTZs.  The Dominican Republic is one of the largest consumers 
of U.S. textile inputs in Central America and the Caribbean 
region.  The January 1, 2005 phase-out of textile and apparel 
quotas, the overvalued peso, the unstable electricity 
situation, and recent increases in customs processing charges 
have diminished the profitability of the sector.  The Central 
American and Dominican Republic Free Trade Agreement 
(CAFTA-DR) should improve the situation, once it enters into 
force, probably by early 2007, but it is only the first step 
to secure revitalization of the sector.  End Summary. 
 
- - - - - - - - - - - - - 
FACTS AND FIGURES FOR 2005 
- - - - - - - - - - - - - 
 
-Total value of industrial production in the Dominican 
Republic: USD 4.365 billion. 
-Total textile and apparel production value: USD 1.904 
billion (a decline of 10 percent from 2004) 
-Textile/apparel's share of total FTZ exports: 40 percent 
-Textile/apparel's share of total exports: 31 percent 
-Textile/apparel's share of total FTZ imports: 45 percent 
-Textile/apparel's share of total imports for domestic use: 
less than one percent 
-Total manufacturing employment in the FTZs: 152,955 (a 
decline of 18 percent from 2004) 
-Total textile and apparel employment: 91,491 (a decline of 
30 percent from 2004) 
 
(Sources: the Central Bank, the Dominican Association of Free 
Trade Zones (ADOZONA), and the National Council for Free 
Trade Zone Exportation (CNZFE)). 
 
- - - - - - - - - - - - - - - - - - 
REACTION TO THE PHASE-OUT OF QUOTAS 
- - - - - - - - - - - - - - - - - - 
 
¶2.  (U) After the expiration of the quotas of the Multi-Fibre 
Accord, there was an evident drop in the average price of 
most goods exported from the Dominican Republic to the United 
States in 2005.  However, in the first semester of 2006, 
prices have risen, mainly due to increases in energy prices 
and a mandatory salary increase. 
 
¶3.  (U) The phase-out of quotas also affected the level of 
textile production in the Dominican Republic.  A recent 
survey by the National Council of Free Trade Zones reveals 
that the level of production, which is directly proportional 
to the number of orders, was less in 2005 than in 2004. 
Accordingly, a total of 98 textile and apparel companies have 
closed down either temporarily or permanently, including both 
local and foreign companies. 
 
¶4.  (U) The safeguard measures set by the United States on 
China on more than 10 textile categories have had a slight 
positive short term impact on Dominican textile exports. 
However, these measures are only temporary.  The European 
Union's restrictions on certain exports of textiles and 
apparel from China have not affected Dominican export 
prospects because 95 percent of Dominican textile exports go 
to the United States. 
 
¶5.  (U) Although the phase-out of quotas has negatively 
affected the Dominican Republic, the current administration 
has not considered imposing any safeguards or other measures 
to counter imports of Chinese textile and apparel products 
into the Dominican Republic. 
 
¶6.  (U) In an attempt to compete with Chinese textiles, the 
Dominican Association of Free Trade Zones requested the 
Minister of Labor to modify Resolution No. 6/2004 in order to 
delay the second part of a salary increase which was to have 
taken place on April 4, 2005.  This request was granted via 
Resolution No. 2/2005, which postponed the salary increase to 
January 2, 2006. 
 
¶7.  (U) ADOZONA and CNZFE are working together with the 
textile manufacturers to offset the challenges they face with 
the phase-out of quotas.  They continue to take advantage of 
their close proximity to the United States by providing 
services that expedite the supply chain.  For example, some 
companies package and tag finished products, such as Hanes 
wear, so that the products can be shipped from the Dominican 
Republic directly to the stores.  A small number of firms are 
engaged relatively high tech custom cutting and sewing. 
 
¶8.  (U) The Dominican economy benefits from improvements in 
port facilities. The privately owned multimodal port of 
Caucedo, which opened in December, 2004, recently received 
its certification under the Container Security Initiative 
(CSI) administered by the Department of Homeland Security. 
With CSI, textile and apparel producers will be able to ship 
their products to the United State as "pre-cleared," which 
decreases shipment time and costs. 
 
- - - - - 
CAFTA-DR 
- - - - - 
 
¶9.  (U) The implementation of regional trade agreement 
CAFTA-DR will provide the textile/apparel sector in the 
Dominican Republic permanent duty-free access to the U.S. 
market, unlimited duty-free use of local and regional fabric 
and yarns, limited access to woven-fabrics constructed in 
NAFTA countries, unlimited use of extra-regional trims and 
buttons, and for some products, unlimited use of 
third-country fabrics.  These provisions are permanent 
greatly outweigh those of the Caribbean Basin Trade 
Partnership Act (CBPTA), signed in 2000. The CAFTA-DR 
agreement offers a basis for competitiveness. 
 
¶10.  (U) Even so, the CAFTA-DR agreement has not entered into 
force for the Dominican Republic. Discussions continue on 
specific changes in laws, regulations and procedures required 
for the U.S. president to certify compliance; this could 
happen in early 2007. The tangible effects of the delay in 
implementation can be estimated by looking at Guatemala and 
El Salvador, where textile exports to the United States 
substantially increased following implementation.  In El 
Salvador alone exports to the United States increased by USD 
70 million over the same period last year.  The Dominican 
Republic has reported only decreases in its textile exports 
to the United States. 
 
 
 
- - - - - 
OBSTACLES 
- - - - - 
 
¶11.  (SBU) Although the CAFTA-DR agreement could be a 
life-preserver for the textile/apparel sector in the 
Dominican Republic, the country carries with it many burdens 
that could still sink the sector altogether.  The Dominican 
peso has been overvalued by up to 15 percent opn a purchasing 
power parity basis since October 2004, due to tight monetary 
policy. The electricity sector is characterized by low 
payment indices, a lack of financing, subsidies untenable in 
the medium term, near-total government control of 
distribution, and cross-debts of more than USD 500 million; 
the practical result is high electricity rates and frequently 
interrupted supply.  Many -- perhaps most -- apparel 
manufacturers must generate their own electricity, much of 
the time, adding to costs.  Another issue of concern was the 
decision in June of 2006 by Customs Director General Miguel 
Cocco to charge a "service fee" of 0.4 percent of the CIF 
value of all merchandise entering the Dominican Republic, 
including that for the FTZs.  This action created an uproar 
from the textile/apparel manufacturing companies in the FTZs. 
 Sarah Lee cited the tax on those terms as having a negative 
USD 2 million impact on their annual operations, an amount 
that could jeopardize its operations in the Dominican 
Republic and cost the country 1,600 jobs.  After months of 
difficult negotiations, Customs signed an agreement with FTZ 
companies to calculate the service fee according to volumes 
(e.g., a flat customs fee of USD 100 per 40-ft container and 
a maximum of USD 60 for smaller shipments).  Embassy expects 
that similar treatment for non-FTZ companies will be required 
for DR-CAFTA entry into force. 
 
 
- - - - - - - 
LOOKING AHEAD 
- - - - - - - 
 
¶12.  (U) USAID recently contracted consulting firm Nathan 
Associates to update its analysis of apparel export 
performance from 2001 to 2005 and to project 2006 numbers. 
The results are as expected: for 2006, apparel exports to the 
United States are likely to fall from a little over USD 1.8 
billion in 2005 to USD 1.5 billion, an almost 20 percent 
drop.  Another projected outcome from the study is that the 
average unit price of U.S. imports of cotton trousers is 
expected to increase in the Dominican Republic, losing 
competitiveness vis-a-vis the world average due to high 
electricity costs and an increase in salaries. 
 
¶13.  (SBU) The potential effects of continuing falls in the 
textile market are increases in unemployment and poverty, 
possible increases in social unrest, and increases in illegal 
immigration. 
 
 
 
- - - - - 
COMMENT 
- - - - - 
 
¶14.  (SBU)   There is a future for the textile and apparel 
sector in the Dominican Republic.  The Dominican Republic's 
proximity to the United States along with Caucedo Port's CSI 
certification are major advantages.  Additionally, CAFTA-DR 
makes permanent many benefits under CBTPA and thereby gives 
the Dominican Republic a boost.  But textile and apparel 
producers must enhance their competitiveness by focusing on 
diversification of exports, higher value added, and faster 
production and delivery.  Further job losses in the textile 
and apparel sector are likely, due to the overvaluataion of 
the peso, the unresolved problems of high costs and uncertain 
delivery for electricity, and the perceptions of an uncertain 
business environment.  End Comment. 
HERTELL