US embassy cable - 05SANSALVADOR2583

UNCLAS SECTION 01 OF 02 SAN SALVADOR 002583 
 
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: CORRECTED VERSION TEXTILES AND APPAREL SECTOR: 
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. Textile imports as a percentage of 
total imports went from 22% in 2004 to 20.9% in the first 
semester of 2005, 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. 
 
3.   There are no reports from the Salvadoran Garment 
Association (ASIC) that local companies are receiving lower 
prices for their orders, but they 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 5 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 
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 investment 
promotion tour of eight U.S. cities over the next year, a 
first focus of which will be the apparel industry in South 
Carolina.  No new construction has started as companies wait 
for CAFTA implementation and to find out what sorts of 
incentives the GOES 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. 
 
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CAFTA 
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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 value added services 
represent only 20.77% of total maquila 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. 
 
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Labor Commitments Under CAFTA 
----------------------------- 
6.   As a result of the commitments 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 establish 
interagency coordination regarding enforcement of the 
Industrial Free Trade Zone Law. This agreement requires the 
Inspector General of Labor and the Directorate of Commerce 
and Investment to exchange periodically information and keep 
a shared database of the free trade industries that are not 
fulfilling labor standards. 
 
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.  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 a niche in providing higher 
value full package production and just in time delivery of 
product; banks must support the large investments necessary 
to expand capacity; the government must provide an 
attractive environment for new investment; private business 
must leverage every competitive advantage (qualified labor, 
geographic proximity, adequate infrastructure); and small 
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.  Possible investors seem still to be waiting to 
see the affects of CAFTA and what incentives the GOES will 
provide to take advantage of it. End Comment. 
 
Barclay