US embassy cable - 05SANTODOMINGO4479

UNCLAS SECTION 01 OF 03 SANTO DOMINGO 004479 
 
SIPDIS 
 
STATE/EB/TPP/ABT EDWARD HEARTNEY, STATE/WHA/CAR DAVID 
SEARBY, COMMERCE/ITA/OTEXA MARIA D'ANDREA, USTR ABIOLA 
HEYLIGER AND DAVID NAGOSKI 
 
E.O. 12958: N/A 
TAGS: KTEX, ECON, ETRD, DR 
SUBJECT: DOMINICAN REPUBLIC:  TEXTILE AND APPAREL SECTOR 
UPDATE 
 
REF: STATE 146213 
 
1.  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% of all 
Dominican textile and apparel companies are from the FTZs. 
In 2004 these companies generated more than USD 2 billion in 
revenue.  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 strong peso, and the unstable energy 
situation in the country have diminished the strength of the 
sector.  The recent approval by both the United States and 
the Dominican Republic of the Central American and Dominican 
Republic Free Trade Agreement (CAFTA-DR) should improve the 
situation, but it is only the first step to secure 
revitalization of the sector.  End Summary 
 
----------------------------------- 
Facts and Figures for the Year 2004 
----------------------------------- 
 
-FTZ's share of the total textiles and apparel exports:  98 % 
-Total production value of the FTZs: USD 4,416 billion 
-Total textile and apparel production value: USD 2,076 billion 
-Textile/apparel's share of total FTZ exports: 47 % 
-Total employment in the FTZs: 189,853 
-Total textile and apparel employment: 131,978 
 
(Source: Dominican Association of Free Trade Zones (ADOZONA) 
and the National Council for Free Trade Zone Exportation 
(CNZFE).) 
 
---------------------------------- 
Textile and Apparel Sector Review 
---------------------------------- 
 
2.  Garment manufacturing has been one of the Dominican 
Republic,s major export products since the introduction of 
Dominican Free Trade Zones (FTZs) in 1969.  Nearly all of the 
Dominican Republic,s exports of apparel come from the more 
than 40 FTZs. 
 
3.  Textile activities in the FTZs are mostly labor-intensive 
cut, make, and trim operations.  Large companies such as 
Grupo M and Inter Americana, as well as some medium-sized 
companies design, knit, and finish garments.  Several 
companies knit their own fabric, but most import fabrics. 
Approximately 85 percent of Dominican textile inputs come 
from the United States.  The country also imports fabrics and 
yarns from a number of countries including Taiwan, China, 
Mexico, and South Korea. 
 
4.  Major Dominican FTZ garment manufactures are contractors 
for some of the most successful apparel companies in the 
world.  They produce brand-name items in fashion wear, 
lingerie, sportswear and casual wear.  Some of these 
companies include Fruit of the Loom, Victoria's Secret, 
Oshkosh B'Gosh, Eddie Bauer, Maidenform, Kasper, Hanes, Gap, 
Jones of New York, Liz Claiborne, Wrangler, and Levi's, among 
others. 
 
-------------------------- 
Problems Within the Sector 
-------------------------- 
 
5.  While the 2005 removal of world textile and apparel 
quotas has affected the sector, the true villains robbing it 
of its competitiveness are the strong peso and high energy 
prices.  In 2003 the peso reached an all-time low of RD$55 to 
USD$1.  However, the peso recovered under the new 
administration of President Leonel Fernandez and currently 
averages around RD$30 to USD$1.  The strong peso has made 
Dominican products relatively more expensive than those made 
elsewhere in the region.  In dollar terms Dominican labor has 
become more expensive than that available in other countries 
in the region. 
 
6.  Executive Secretary of the Dominican Association of Free 
Trade Zones (ADOZONA) Jose Torres told EmbOff this September 
that more than the removal of quotas, the strong peso is what 
is currently damaging the textile and apparel sector.  He 
said that the full effect of the removal of quotas has not 
hit the Dominican Republic, thanks to safeguards against 
cheap Chinese exports put in place by the United States. 
However, he acknowledged that there is some pressure to 
reduce prices to meet heightened international competition. 
Torres added that he thought the safeguards have shifted some 
orders to Asian countries such as India that have been buying 
cheap Chinese textiles. 
7.  Approximately 40 textile factories, mostly 
Dominican-owned, have recently closed in the Dominican 
Republic.  Since November 2004, 30,000 employees 
(representing almost 15 percent of the FTZ labor pool) have 
been laid off.  In addition to these jobs, many others have 
been lost in the formal sectors that depend on the FTZs, such 
as utilities, transportation, and other services.  There has 
also been significant job loss in the informal sectors that 
employees of apparel firms support, such as child care and 
street vendors. 
 
8.  Also affecting the Dominican textile and apparel sector 
is the current energy crisis.  After labor, electricity is 
the second-biggest cost in garment production in the 
Dominican Republic.  High energy theft coupled with low bill 
collections has left distribution companies financially 
stressed and has led to regular blackouts across the country. 
 The power crisis has raised the electricity prices from the 
national power grid even further, making them among the 
world's highest.  Recurring blackouts have increased 
dependence on expensive back-up generators.  FTZ companies 
frequently use their generators, as most FTZ businesses are 
24-hour operations. 
 
----------------------------------- 
Sector Solutions: CAFTA-DR and More 
----------------------------------- 
 
9.  A November 2004 USAID study on textiles estimated that 
CAFTA-DR would prevent the loss of 24,000 jobs in the 
Dominican textile industry.  Given the Dominican government's 
ratification of CAFTA-DR this September, the Mission expects 
the Dominican Republic,s textile and apparel industry to 
benefit from permanent duty-free access to the U.S. market 
and accompanying unlimited duty-free use of local and 
regional fabric and yarns.  CAFTA-DR also permits limited 
access to woven-fabrics constructed in NAFTA countries, 
including Canada and Mexico, permits unlimited use of 
extra-regional trims and buttons, and for a few products, 
permits unlimited use of third-country fabrics. 
 
10.  CAFTA-DR,s rules of origin offer advantages over those 
of the Caribbean Basin Trade Partnership Act (CBPTA), which 
was signed in 2000.  The CBTPA rules of origin require 
apparel to be constructed of U.S. fabrics and yarns and limit 
the use of non-regional trims and buttons.  CBTPA is also 
subject to change or withdrawal at any time because it is not 
a negotiated trade agreement between countries, and there is 
no requirement that it be renewed when it expires in 
September 2008.  CAFTA-DR has flexible rules of origin and 
once implemented does not need to be renewed.  Therefore, 
CAFTA-DR gives the Dominican Republic a competitive boost 
over other Caribbean countries. 
 
11.  Apart from CAFTA-DR, there has been some government and 
private industry action to increase the Dominican Republic,s 
competitiveness in the area of textile and apparel.  The 
Dominican government promised to find cheaper energy for FTZ 
businesses, according to ADOZONA, but thus far has not been 
successful.  The government is also trying to attract 
investment in fabric production by informing companies of the 
benefits of CAFTA-DR. 
 
12.  The Dominican Government is modernizing its ports and 
increasing its efficiency.  A private port, the Port of 
Caucedo is vying for certification under the Container 
Security Initiative (CSI) of the Department of Homeland 
Security.  With CSI, Caucedo, already the largest and most 
modern Dominican ports, will be able to ship items to the 
United States as "pre-cleared,8 thus decreasing shipment 
time and costs. 
 
13.  Dominican contacts seem optimistic about the future for 
textile and apparel in the country, but they do realize the 
dangers they face when the full force of the removal of 
quotas hits the country.  On September 28, the President of 
ADOZONA announced the establishment of two new textile 
companies, a USD 200 million-dollar investment.  It is 
estimated that these new companies, one Canadian and the 
other American, will generate between 6000 and 8000 new jobs. 
 
14.  Some textile and apparel firms are diversifying their 
production and markets.  In this, producers are moving from 
products that had a high margin of preference under the quota 
system, into items for which the United States has high duty 
levels.  Likewise, a few textile and apparel companies are 
beginning to fill short-order requests for U.S. companies. 
In this instance, the Dominican Republic can use its 
proximity as an advantage and fill such requests expediently. 
 There are other areas for improvement.  An AID report noted 
that Dominican textile and apparel firms should concentrate 
on non-traditional products, such as footwear. 
 
15.  Comment:  The Embassy agrees that there is a future for 
the textile and apparel sector in the Dominican Republic. 
The Dominican Republic,s proximity to the United States is a 
major advantage for exports.  Additionally, CAFTA-DR makes 
permanent many benefits under CBTPA and thereby gives the 
Dominican Republic a boost over other Caribbean nations. 
However, further job loss in the textile and apparel sector 
is likely.  If the strong peso and the energy crisis 
continue, the increased international competition following 
removal of the textile and apparel quotas may further damage 
the sector.  Textile and apparel producers must enhance their 
competitiveness by focusing on diversification of exports, 
and more rapid production and delivery.  Additionally, the 
Dominican Government needs to improve infrastructure, 
including tackling the energy crisis. 
Hertell