VZCZCXYZ0003
PP RUEHWEB

DE RUEHMU #2212/01 2692318
ZNR UUUUU ZZH
P 262318Z SEP 07
FM AMEMBASSY MANAGUA
TO RUEHC/SECSTATE WASHDC PRIORITY 1366
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS MANAGUA 002212 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
USDOC FOR 4332/ITA/MAC/WH/MSIEGELMAN 
3134/ITA/USFCS/OIO/WH/MKESHISHIAN/BARTHUR 
 
E.O. 12958: N/A 
TAGS: ECON ETRD KTEX PREL NU
SUBJECT: NICARAGUA: TEXTILE/APPAREL UPDATE 
 
REF: A. SECSTATE 123600; B. SECSTATE 114799 
 
Summary 
------- 

¶1.  (SBU) The textile and apparel sector continues to grow in 
Nicaragua as firms take advantage of CAFTA-DR market access, 
relatively low wages, and geographic proximity to the United States. 
 The sector added 6,000 new jobs in 2006, and exports to the United 
States grew from $525 million to $697 million, a 33% increase. 
International Textile Group's $100 million denim mill has attracted 
interest from U.S. apparel manufacturers operating in Nicaragua. 
However, high electricity prices and poor infrastructure limit the 
sector's competitiveness.  Some firms report increased scrutiny from 
buyers leery of President Ortega's close relationships with 
Venezuela and Iran.  Government officials, meanwhile, complain that 
the "one-for-one agreement" will limit the country's ability to take 
advantage of CAFTA-DR "Trade Preference Levels" for non-originating 
fabric over the next few years.  End Summary. 
 
Textile and Apparel Data 
------------------------ 

¶2. (U) The sector added 6,000 new jobs in 2006, and exports to the 
United States grew from $525 million to $697 million, a 33% 
increase.  The following table provides data requested in Ref A: 
 
                                       2005    2006    2007 
 
                                       ----    ----    ---- 
Industrial production (millions)       $801    $859      na 
Textile/apparel value added (millions) $158    $199    $225 
Textile/apparel % of total trade      19%     20%      na 
Textile/apparel exports to the U.S.    $525    $697    $750 
Manufacturing employment (thousands)    302     290      na 
Textile/apparel employment (thousands)   56      62      67 
 
Note: 2007 figures are full year projections. 
Sources: Central Bank of Nicaragua and the Nicaragua Free  Trade 
Zone Commission. 
 
New Investment Thanks to CAFTA-DR . . . 
--------------------------------------- 

¶3. (SBU) New investment in the textile and apparel sector, much of 
it in the pipeline before Ortega's January 2007 inauguration, seeks 
to take advantage of preferential market access granted through 
CAFTA-DR and proximity to the United States.  The largest investment 
by far is International Textile Group's (ITG) $100 million denim 
mill.  The mill, under construction on the outskirts of Managua, has 
gained strong support from President Ortega and other FSLN 
politicians, according to General Manager Steve Maggard.  In an 
August 14 visit to the nearly completed facility, Ortega told 
Maggard, "Congratulations. You are working very well, and we are 
pleased." 
 
¶4. (SBU) ITG's investment has triggered interest from other major 
apparel companies who had previously subcontracted in Nicaragua but 
avoided making direct investments.  Emilio Noguera, an official with 
Nicaragua's Free Trade Zone (FTZ) Corporation, told Econoff that 
U.S. companies VF Corporation and Hanesbrands, as well as Mexican 
apparel company Kaltex, plan to invest in Nicaragua.  Together, 
these companies could create another 3,000 jobs in Nicaragua, 
according to Noguera. 
 
¶5. (SBU) Dean Garcia, Executive Director of the Nicaraguan Apparel 
and Textile Manufacturers' Association (ANITEC), told Econoff that 
there are 16 firms -- including the companies mentioned by Noguera 
-- poised to invest up to $38 million in new apparel manufacturing 
facilities.  Of these 16, two are already preparing to operate, 
including U.S.-owned Tide Manufacturing.  In all, this new 
investment could create 6,500 new jobs.  Garcia also sees potential 
for other investments in the sector, including textile production, 
threads, and finishing (dying).  Currently, Garcia said many apparel 
companies send their garments to Guatemala for finishing. 
 
. . . While Others Succumb to Price Pressure 
-------------------------------------------- 

¶6. (SBU) Scott Vaughn, President of ANITEC and owner of Rocedes 
Apparel, told Econoff that he and other ANITEC members face 
"tremendous price pressure."  Rocedes Apparel sells to many 
well-known U.S. retailers, such as Walmart, one of the most 
aggressive retailers in seeking price cuts.  Vaughn reported that a 
number of companies had shut down within the past 12 months. 
Fortex, a Taiwanese company that had operated in Nicaragua since 
1992, closed its woven shirt manufacturing facility to consolidate 
operations in Asia, leaving 700 Nicaraguans unemployed.  Others 
closing recently include South Korean knit-wear manufacturers Uno 
Garments and Nicotex.  Vaughn also noted that U.S.-owned KB 
Manufacturing closed after parent company Bayer Clothing failed to 
reach a new agreement with JCPenny. [Comment: There is suspicion 
that both Fortex and Nicotex closed to thwart workers' attempts to 
form unions and that both companies intend to reopen under different 
names.  According to labor sources, Nicotex has done this at least 
once before.  End Comment.] 
 
¶7. (SBU) Dean Garcia also told Econoff that electricity outages were 
an issue for the sector.  He said that electricity costs, already 
the highest in the region, are further inflated when rolling 
blackouts force firms to run on expensive diesel generators for as 
long as six hours a day. 
 
¶8. (SBU) Vaughn reported that some companies, including his own, 
faced increased scrutiny from buyers leery of President Ortega's 
anti-American rhetoric and close relationships with Presidents 
Chavez of Venezuela and Ahmadinejad of Iran.  Vaughn said Rocedes 
and other apparel companies had already lost orders from prominent 
retailers worried they might face public backlash in the future by 
sourcing from Nicaragua. 
 
Safeguards, Low Wages Provide Some Relief 
----------------------------------------- 

¶9. (SBU) Garcia noted that U.S. restrictions on imports of certain 
textiles and apparel have created opportunities for Nicaragua to 
provide those goods and helped ease pressure to lower prices. 
Garcia said that Nicaragua has no plans to implement safeguards or 
other measures to reduce imports of Chinese textiles and apparel. 
 
¶10. (SBU) Wages in Nicaragua are still relatively low. Garcia 
reported that the average apparel worker earns about $162 per month, 
with some earning as much as $216, while the minimum wage for the 
manufacturing sector is $81 per month in rural areas.  Garcia sees 
room for improvement in labor relations.  As ANITEC Executive 
Director, Garcia will put this issue at the front of his agenda. 
 
CAFTA-DR: Tariff Preference Levels and One-for-One 
--------------------------------------------- ----- 

¶11. (SBU) Nicaragua's CAFTA-DR market access provides the country an 
important competitive advantage.  In particular, Tariff Preference 
Levels (TPLs) for non-originating fabrics have provided an instant 
boost to the sector, according to Garcia.  However, MIFIC Director 
for International Trade Sonia Somarriba recently told Econoff that 
she believes the boost will be short-lived, as difficulty sourcing 
fabric in the United States may result in TPL cuts; any shortfall in 
meeting the "one-for-one agreement," which requires the use of U.S. 
fabric for certain Nicaraguan apparel exports, is penalized by a 
reduction in TPL the following year.  Garcia of ANITEC separately 
voiced this concern.  He said that apparel companies are in the 
process of documenting this shortage of U.S. fabric supply. 
 
¶12. (SBU) Technical Secretary Alvaro Baltodano of the FTZ 
Commission, in coordination with MIFIC, has proposed that fabric 
produced in Nicaragua be allowed to count toward the one-for-one 
requirement.  In a recent conversation with the Ambassador, 
Baltodano suggested that otherwise, Nicaragua's TPL will be halved 
within two years as a result of difficulties sourcing fabric in the 
United States. 
 
CAFTA-DR: Cumulation with Mexico 
---------------------------------- 

¶13. (U) On September 6, 2007, the Nicaraguan National Assembly 
passed an amendment to Nicaragua's trade agreement with Mexico to 
allow Nicaragua to implement the CAFTA-DR cumulation agreement and 
use Mexican fabric in CAFTA-DR apparel exports.  Somarriba said that 
she expected President Ortega to sign the bill into law soon.  She 
said that Nicaraguan apparel exports could grow by as much as 17% 
under the agreement, with even more growth possible when the limit 
is increased to 200 million SMEs.  Somarriba expressed interest in 
seeing this provision implemented as soon as possible, that is, 
before all other parties had amended their agreements with Mexico. 
 
CAFTA-DR: Pocketing Amendment 
----------------------------- 

¶14. (SBU) Somarriba said MIFIC was working with the Ministry of 
Foreign Affairs to deposit the "pocketing amendment" to CAFTA-DR, 
which clarifies rules of origin for apparel components, in the 
archives of the Organization of American States.  Simultaneously, 
MIFIC is preparing legislation to implement the amendment.  When 
completed, MIFIC will send the legislation to President Ortega for 
review, who will in turn forward it to the National Assembly. 
Somarriba cautioned that it would be difficult to secure approval 
for the pocketing amendment because there are no clear benefits for 
Nicaragua, unlike the accumulation agreement.  She concluded that it 
would take several months, if not longer, to push through the 
legislation. 
 
Sector Outlook 
-------------- 

¶15. (SBU) The Nicaraguan apparel sector is faring relatively well in 
the face of increased competition from China, thanks in large part 
to CAFTA-DR trade benefits.  New investment in textile production, 
spurred by CAFTA-DR, will provide an additional boost to the sector. 
 FTZ officials project that by 2008 the sector will employ 75,000 
Nicaraguans and export $860 million.  In addition to external 
factors, such as increasing price pressure, that scenario depends on 
whether Nicaragua can continue to attract investment in the face of 
Ortega's anti-American, anti-business rhetoric. 
 
TRIVELLI