US embassy cable - 05SANSALVADOR2572

UNCLAS SECTION 01 OF 02 SAN SALVADOR 002572 
 
SIPDIS 
 
DEPT FOR EB/TPP/ABT EDWARD HEARTNEY 
COMMERCE FOR ITA/OTEXA MARIA D'ANDREA 
USTR FOR ABIOLA HEYLIGER 
 
E.O. 12958: N/A 
TAGS: ECON, ETRD, KTEX, ES, CAFTA 
SUBJECT: TEXTILES AND APPAREL SECTOR: UPDATED STATISTICS AND 
PROJECTION OF FUTURE COMPETITIVENESS WAITING FOR CAFTA 
 
REF: STATE 146213 
 
1.   SUMMARY: This is in response to reftel. El Salvador's 
economy continues to be highly dependent on the textile and 
apparel industry, which represents a substantial portion of 
total industrial production, exports and employment. The 
sector, which has been crucial to the government's 
development plans in the past, is suffering the effects of 
the post quota era, and investment and employment levels 
have begun to drop. CAFTA could help reverse this situation 
and reinvigorate the sector by increasing the attractiveness 
of investing in El Salvador, but to date investors have not 
committed to significant new investments. END SUMMARY. 
 
2.   El Salvador's total industrial production was $3.61 
billion for 2004 and $951 million in the first quarter of 
2005. Of that amount, textile and apparel production 
accounted for $469 million in 2004 and $123 million in the 
first quarter of 2005. Textiles imports as a percentage of 
total imports went from 22% in 2004 to 20.9% in the first 
semester of 2005, whereas and exports of textiles and 
apparel went from 55.2% of the total in 2004 to 50.8% in the 
first semester of 2005. The total number of industrial jobs 
was 423,418 in 2004, .  As of May 2005 the textile and 
apparel industry accounted for approximately 70,000 jobs. at 
year-end(?). 
 
3.   There are no reports from the Salvadoran Garment 
Association (ASIC) that local companies are receiving lower 
prices for their orders, but  thatthey do report that 
companies are receiving fewer total orders. This situation 
has accounted for the closure of 6 companies in 2004 (6,000 
direct jobs lost) and, 7 in the first quarter of 2005 (5,000 
direct jobs lost).  An additional  and 5 more maquilas have 
temporarily suspended operations while they wait for new 
orders.  Comment:  Original projections of conditions in El 
Salvador's textile/apparel sector in the post-quota world 
(reftel) were harsh.  Government officials told Emboffs on 
September 13 that they may have been overly pessimistic, 
claiming that the sector has stabilized and that maquila 
exports had actually increased by 1% as of August over the 
same period last year.  End comment. 
 
4.   The Ministry of Economy has made keeping textile and 
apparel activity going in El Salvador a key element of its 
large part of its economic strategy for the near term. For 
its part, PROESA, the government's investment promotion 
office, has been working hard, with limited resources, to 
attract new investment to the sector. El Salvador's Vice 
President, who is the titular head of PROESA, will lead an 
iIt is sponsoring an investment promotion tour of eight U.S. 
cities over the next year, the United States, thea first 
focus of which will be the apparel industry in South 
Carolina.  No new construction has started , however, as the 
companies wait for CAFTA's implementation and to find out 
what sorts of incentives the GOES can will provide. The GOES 
wants to support the training and energy needs of targeted 
businesses, but resources are so limited that they can only 
effectively offer these incentives to half a dozen 
companies. 
 
------ 
CAFTA 
------ 
5.   The GOES and the textile sector have great expectations 
that CAFTA and the possible textile agreement between the US 
and China will be the key to reverse the current downward 
trend. Such a reversal will only come if it prompts US 
customers to look to Salvadoran factories to provide full- 
package services with locally sourced fabric that require 
more value added service (currently the value added services 
represents only 20.77% of total maquilas exports). If 
textile mills decide to invest in El Salvador, the sector 
could gain a competitive advantage and send a positive sign 
for other companies to expand operations, enhancing the 
opportunities provided by CAFTA.. 
 
----------------------------- 
Labor Commitments Under CAFTA 
----------------------------- 
6.   As a result of the commitments taken by the GOES in the 
framework of required by CAFTA, in March 2005, the Minister 
of Labor Jose Roberto Espinal Escobar and Acting Minister of 
Economy Blanca Imelda Jaco de Magaa signed an Agreement of 
Understanding to eEstablish iInteragency Ccoordination 
rRegarding the Eenforcement pProcedure of the Industrial 
Free Trade Zone Law. This agreement requires that the 
Inspector General of Labor and the Directorate of Commerce 
and Investment will to exchange periodically periodically 
information and will keep a shared database of the free 
trade industries that are not fulfilling labor standards, 
according to article 31 of the Free Trade Zone law. . 
7.   Comment. CAFTA will increase the attractiveness of 
investing in Central America, but it will not guarantee that 
the investment comes specifically to El Salvador. in 
particular.  For El Salvador to make the most out of CAFTA 
and compete in the post quota era, it must have more than 
geographic proximity to the U.S., and a number of factors 
must come together at the same time. The industry must learn 
more about regional production capabilities and find its a 
niche, probably in providing higher value full package 
production and just in time delivery of product;. banks must 
support the large investments necessary to expand capacity; 
and the government must provide an attractive environment 
for new investment.;  Pprivate business must leverage every 
competitive advantage (qualified labor, geographic 
proximity, adequate infrastructure);. and Ssmall and medium 
sized companies must have access to technology to allow them 
to change production lines quickly to meet market demands. 
Post believes that the GOES has invested too much in the 
industry to see it fail, however they have not revealed a 
broad package of incentives to promote the industry.  At 
this time current operators and possibPossible investors 
seem are still to be waiting to see the affects of CAFTA and 
what incentives the GOES will provide to take advantage of 
it., so the industry will not see any improvement in the 
short term. End Comment. 
 
Barclay