Brent Christensen  10/04/2007 01:47:17 PM  From  DB/Inbox:  Brent 
Christensen

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UNCLAS        SAN SALVADOR 01964

SIPDIS
CXSANSAL:
    ACTION: ECON
    INFO:   DCM FCS AMB POL

DISSEMINATION: ECON
CHARGE: PROG

APPROVED: DCM: MBUTLER
DRAFTED: ECON: EESCALANTE, AG
CLEARED: ECON: DTITUS

VZCZCSNI001
RR RUEHC RUCPDOC
DE RUEHSN #1964/01 2741222
ZNR UUUUU ZZH
R 011222Z OCT 07
FM AMEMBASSY SAN SALVADOR
TO RUEHC/SECSTATE WASHDC 8022
INFO RUCPDOC/USDOC WASHDC

UNCLAS SECTION 01 OF 02 SAN SALVADOR 001964 
 
SIPDIS 
 
DEPT FOR WHA/CEN, EEB/TPP/ABT GARY A. CLEMENTS 
COMMERCE FOR ITA/OTEXA MARIA D'ANDREA, 4332/ITA/MAC/WH/MSEIGELMAN 
STATE PASS TO USTR FOR CAROYL MILLER 
 
E.O. 12958: N/A 
TAGS: ECON ETRD KTEX ES
SUBJECT: CAFTA HELPING STABILIZE SALVADORAN MAQUILA SECTOR 
 
REF: A. STATE 114799 B. SAN SALVADOR 001779 
¶C. SAN SALVADOR 001423 
 
¶1. SUMMARY: El Salvador's textile and apparel industry is showing 
signs of greater stability in 2007 after two years of decline 
following the end of global textile quotas.  As reported in reftel 
B, CAFTA-DR has helped to attract new investment in the maquila 
sector.  The extension of Free Trade Zone benefits (ref C) and U.S. 
restrictions on Chinese textile imports have also helped Salvadoran 
maquilas. The textile/apparel industry is adapting to increasing 
competition by shifting towards full-package production and vertical 
integration.  New investments suggest that CAFTA-DR will help 
Salvadoran maquilas remain competitive with Asian producers. 
Nevertheless, many Salvadoran garment producers remain vulnerable to 
Asian competition, particularly when US restrictions on Chinese 
textile exports expire in 2008.  In response to reftel A, post is 
providing data for El Salvador in paragraph 2. END SUMMARY. 
 
--------------------------------------------- ------ 
Textile and Apparel Production and Trade Statistics 
--------------------------------------------- ------ 
 
¶2.  Statistics requested in Ref A are from GOES sources except where 
indicated: 
 
--  Total industrial production was $3.87 billion for 2006 and $1.03 
billion in the first quarter of 2007. 
 
--  Textile and apparel production accounted for $503 million in 
2006 and $134 million in the first quarter of 2007 in value-added 
terms, the only production statistic available. The industry 
averaged 24.15% value-added in maquila exports from 1996-2006. 
 
--  Textile/apparel imports declined from 20.52% of total imports in 
2005 to 15.78% in 2006. Exports of textiles and apparel fell from 
53.59% of total exports in 2005 to 45.60% in 2006. 
 
--  Textile and apparel exports to the U.S. were $1,432 million in 
2006 and $841.5 million during January-July of 2007 (an 8.3% 
increase over the same period in 2006)  (Source: US Census Bureau) 
 
--  Total manufacturing employment was estimated at 465,760 in 2006; 
the textile and apparel industry accounted for approximately 81,000 
jobs at year-end. 
 
----------------------------------- 
Maquilas Showing Signs of Recovery 
----------------------------------- 
 
¶3.  According to GOES statistics, textile exports fell by 1% in the 
first semester of 2007 from the same period in 2006, following 
sharper declines of 5.6% in 2005 and 11.7% in 2006.  Imports to the 
textile/apparel sector grew by 5% for the same period suggesting 
that textile production may rise during the second semester of 2007. 
 Marta Chan, the Acting Executive Director of the Textile and 
Apparel Industry Association (CAMTEX) questioned the reliability of 
GOES statistics which are based on customs declarations.  CAMTEX 
instead uses U.S. trade statistics which showed a 10.6% rise in 
Salvadoran textile/apparel exports to the U.S. during the first 
semester of 2007 from the same period in 2006. 
 
¶4.  The GOES projected in August that textile and apparel exports 
will grow by 16% in 2007.  CAMTEX has set a more modest objective of 
recovering to pre-CAFTA production levels during 2007.  Chan pointed 
out that 2007 export statistics reflect a recovery from temporary 
disruption of textile trade in 2006 caused by delayed implementation 
of CAFTA in some countries that supply thread and cloth to 
Salvadoran maquilas.  (Comment: CAMTEX goals appear more realistic 
than GOES projections which predict 33% export growth during the 
second semester of 2007. End comment) 
 
¶4. As reported in ref B, CAFTA has helped draw increasing investment 
into El Salvador's textile and apparel sector.  The National 
Investment Promotion Agency (PROESA) informed post that new maquila 
sector investment increased from $35 million in 2006 to at least 
$325 million in 2007, including two major investments in fabric 
production: a $200 million investment recently announced by Hanes 
Brands International (HBI) and a $95 million investment by 
Pettenati, a Brazilian firm. As new investment has increased, 
closures of uncompetitive maquilas have declined from 30 in 
2005-2006, to six closures in 2007.  Most of these closures involved 
Asian investments in low-cost products. 
 
¶5. During a visit by Econoff to a 3,500-employee thermal underwear 
factory run by HBI, general manager Edgardo Gonzalez commented that 
CAFTA "levels the playing field" for Central American producers. 
Noting that HBI operates in many countries, he suggested that HBI's 
recent commitment to invest $200 million to acquire and expand a 
Salvadoran fabric producer, "says a lot about the country and the 
region".  Gonzalez underscored the high productivity of HBI's 
Salvadoran facilities which have recently outperformed HBI's 
Honduran facilities in productivity indicators that are prominently 
posted above the production floor.  Gonzalez also praised PROESA for 
their active efforts to attract investment. 
 
--------------------------------------------- - 
ADAPTING TO QUOTA FREE ENVIRONMENT AND CAFTA 
--------------------------------------------- - 
 
¶6. El Salvador's garment industry is continuing to adapt to a 
changing market conditions following the end of the quota regime and 
implementation of CAFTA.  Producers have confirmed that prices and 
demand have declined since the end of the quota regime, but CAFTA 
has helped to mitigate this trend.  Increased competition has not 
affected wages since most maquilas combine the legal minimum wage 
(currently $157.25 per month) with incentive pay. Although Chan said 
that U.S. restrictions on Chinese textile imports have helped 
Salvadoran producers, they underscored that Salvadoran maquilas also 
face stiff competition from south Asian producers.  Textile and 
apparel producers have adapted to increased price competition by 
expanding full-package services, emphasizing other competitive 
advantages and pursuing vertical integration. 
 
¶10.  COMMENT:  New investment highlights continuing promise of 
Salvador's textile industry.  Although maquila exports may show 
modest recovery in 2007, smaller firms remain vulnerable to foreign 
competition.  GOES and CAMTEX hope that new investments and a 
continuing shift toward vertical integration and more competitive 
maquilas will make up for further closures after U.S. restrictions 
on Chinese textile imports expire in 2008.  END COMMENT 
 
 
Glazer