US embassy cable - 03TEGUCIGALPA1686

UNCLAS SECTION 01 OF 02 TEGUCIGALPA 001686 
 
SIPDIS 
 
PASS TO USITC FOR D.F. LEAHY 
STATE PASS USTR FOR CENTAM/CARIB DIRECTOR 
STATE FOR EB/TPP/MTA/IPC 
 
E.O.12958: N/A 
TAGS: ETRD, EINV, EIND, KTEX, HO 
SUBJECT: HONDURAN TEXTILE INDUSTRY DOWNTURN HIGHLIGHTS USITC 
CARRIBEAN BASIN INVESTMENT SURVEY 
 
REF: SECSTATE 141419 
 
1.  Post submits the following report in response to reftel 
request for the biennial report of the U.S. International 
Trade Commission (USITC) on the Caribbean Basin Economic 
Recovery Act (CBERA), as required by section 215(a) of the 
CBERA. 
 
2.  Summary: The slowdown and sluggish recovery of the U.S. 
economy during 2001 and 2002 continue to have a depressing 
effect on the Honduran maquila sector, and the future is 
clouded by fears of being unable to compete with China and 
other Asian producers after quotas are removed in 2005. 
While CBTPA benefits have been crucial to the establishment 
of the maquila industry in Honduras, the industry is now 
hoping for improved market access and rules of origin under 
CAFTA to provide opportunity for future growth.  During the 
period covered by this survey, total investment in the 
sector increased, passing 1.5 billion in 2002, but total 
employment in the industry fell by 15 percent from 2000 to 
2002.  In 2002, 13 maquilas closed in Honduras as a result 
of the slowdown in the U.S. economy and management problems. 
Of those 13 companies, eight were U.S. companies.  End 
summary. 
 
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Honduran Maquila Association Statistics 
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3.  The Honduran Maquila Association (AHM) is an active 
industry advocacy group based in the North Coast city of San 
Pedro Sula.  It represents 217 (roughly 90 percent) of the 
apparel assembly operations in Honduras, and is the primary 
source of statistical information for this industry.  Rather 
than attempting to collect data directly from individual 
companies, as we did two years ago with very incomplete 
results, we have this year relied on statistics from the 
AHM.  Investment statistics for 2002 are still preliminary 
and incomplete, but do provide a general picture. 
 
4.  Investment: According to AHM records, in 2002, the 
maquila industry totaled just over USD 1.56 billion of 
accumulated investment, up from 1.421 billion in 2001 and 
1.237 billion in 2000.  A detailed breakdown of investment 
by country of origin was not available; however, U.S. 
companies own 40 percent of the maquilas in Honduras. 
Honduran companies are the next largest owner with 31 
percent of all operations, followed by companies from Korea 
with 15 percent, Hong Kong with 4 percent and Taiwan with 2 
percent.  Total accumulated foreign investment in the sector 
was roughly USD 830 million in 2002, up from USD 750 million 
in 2001 and USD 650 million in 2000.  The AHM predicts 
investment growth of ten percent per year, which would bring 
total accumulated investment in the industry to USD 2.08 
billion by 2005.  Note: Four knitting operations and several 
investments in full package apparel operations were 
initiated during this period in response to enhancements 
included in the U.S. program.  End note. 
 
5.  The Central Bank reports that new FDI in Honduras in 
2002 totaled USD 219 million, of which USD 76 million (35 
percent) was in the maquila industry.  This is down from USD 
296 million of FDI in 2001, of 101 million (34 percent) was 
in the maquila industry. 
 
6.  Employment: Employment in the industry has been in 
decline, from 126,000 employees in 2000, to 110,083 in 2001, 
to 107,398 in 2002, a 15 percent drop over two years.  This 
decrease occurred despite the estimated creation of 10,000 
new jobs from 2001 to 2002.  AHM also estimates that the 
industry supports 535,000 direct dependents (assuming a 
ratio of five dependents to every one worker) and 1.07 
million supplier and service beneficiaries (based on a ten- 
to-one ratio).  In 2002, women comprised 67 percent of the 
maquila workforce, down slightly from 72 percent in 2000, as 
the diminishing stigma of working in apparel assembly 
factories leads to increasing male participation. 
 
7.  Thirteen maquilas closed in 2002, though 11 new maquilas 
opened during the same period.  Of the 13 closings, eight 
were U.S. companies, while only three of the new ventures 
were U.S. originated.  These numbers represent a lower 
turnover rate than in 2001, when 35 maquilas closed and 30 
maquilas opened in Honduras.  Since 1998 there have been no 
geographical restrictions for the establishment of a Free 
Trade Zone (FTZ) in Honduras.  Instead, any company may 
apply for FTZ status so long as they are producing for 
export.  The companies with FTZ status are still 
overwhelmingly concentrated at the north coast and near San 
Pedro Sula, with some operations in Tegucigalpa. 
 
8.  Exports: In 2002, Honduras ranked as the third-largest 
supplier of textiles and apparel to the U.S. market. 
Honduras ranks first among Central American and CBI 
countries in textile exports to the U.S.  Total exports from 
the Honduran maquila industry totaled USD 2.439 billion in 
2002, a slight increase over previous figures of USD 2.344 
billion in 2001 and 2.362 billion in 2000. 
 
9.  Note: The decline in employment and stagnation in 
exports are especially striking when viewed in historical 
context.  From 1994-2000, the value of maquila sector 
exports grew on average at a rate of 25 percent per year, 
compared with just 2 percent per year from 2000 to 2002. 
Likewise, during the 1990's employment in the Honduran 
maquila sector enjoyed tremendous growth - from only 9,000 
workers in 1990, to 55,000 in 1995, and then to its peak of 
126,000 in 2000.  At that time, industry officials predicted 
that employment would reach 250,000 by 2005.  These figures 
have since been adjusted to account for the U.S. economic 
downturn, which has affected the receipt of production 
contracts in the Honduran maquila sector.  Current estimates 
place the predicted number of employees in the maquila 
sector at 143,000 for the year 2005, though even this 
estimate assumes (somewhat optimistically) a ten percent 
annual rate of employment growth.  End note. 
 
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Industry Concerns 
----------------- 
 
10.  According to AHM, CBERA makes the country more 
attractive to drawback factory investment, construction and 
expansion of industrial parks, and importation of tax free 
textile machinery, equipment, and accessories.  However the 
slowdown of the U.S. economy impacts significantly the 
Honduran textile and apparel sector by reducing purchase 
orders and lowering revenues. 
 
11.  The future effects of the CBERA program will 
undoubtedly be influenced by the results of the ongoing 
negotiations for a Central American Free Trade Agreement 
(CAFTA).  The market access discussions represent a pivotal 
topic of discussion for the Honduran economy.  A key point 
in the CBERA program, rules of origin, is an essential 
component of the CAFTA negotiations for the maquila 
industry.  Under the current agreement, some maquilas cannot 
obtain the U.S. components required to meet U.S. standard 
requirements.  For example, manufacturers of brassieres 
cannot access all of the required components from U.S. 
suppliers.  Thus, the maquilas hope for a more flexible 
rules of origin regime under CAFTA.  Another problem 
regarding the CBERA program is certain exclusion provisions. 
The provision excluding socks was mentioned by an industry 
official as a limiting factor of the CBERA program's 
potential benefits. 
 
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Comment 
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12.  The maquila sector's poor performance during the period 
covered by this report (2001 and 2002) plainly demonstrates 
the sector's dependence on the U.S. economy.  No matter how 
beneficial the preferences under CBERA, the sector cannot 
maintain 1990's-style growth when the U.S. economy is 
stagnating.  Looking to the future, there are serious 
industry concerns about competition with China once textile 
quotas are removed in 2005.  Without immediate duty free 
treatment, maquila owners are concerned about their 
competitiveness in a non-quota driven market.  One industry 
official noted the flight of factories will be a given.  He 
noted a conversation with a prominent client who commented 
that the company would transfer at least 30 percent of its 
business to Asia if the CAFTA agreement does not provide a 
sufficiently attractive incremental market access, to allow 
the industry in Honduras to compete with Asia.  Proximity to 
the U.S. is important, but it is not enough.  End comment. 
 
PALMER