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### Viewing cable 07MANAGUA2212, NICARAGUA: TEXTILE/APPAREL UPDATE

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
07MANAGUA2212 | 2007-09-26 23:18 | 2011-06-23 08:00 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Embassy Managua

`

    VZCZCXYZ0003
    PP RUEHWEB

    DE RUEHMU #2212/01 2692318
    ZNR UUUUU ZZH
    P 262318Z SEP 07
    FM AMEMBASSY MANAGUA
    TO RUEHC/SECSTATE WASHDC PRIORITY 1366
    INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
    RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

` `

    UNCLAS MANAGUA 002212

    SIPDIS

    SENSITIVE
    SIPDIS

    USDOC FOR 4332/ITA/MAC/WH/MSIEGELMAN
    3134/ITA/USFCS/OIO/WH/MKESHISHIAN/BARTHUR

    E.O. 12958: N/A
    TAGS: ECON ETRD KTEX PREL NU
    SUBJECT: NICARAGUA: TEXTILE/APPAREL UPDATE

    REF: A. SECSTATE 123600; B. SECSTATE 114799

    Summary
    -------

    ¶1.  (SBU) The textile and apparel sector continues to grow in
    Nicaragua as firms take advantage of CAFTA-DR market access,
    relatively low wages, and geographic proximity to the United States.
     The sector added 6,000 new jobs in 2006, and exports to the United
    States grew from $525 million to $697 million, a 33% increase.
    International Textile Group's $100 million denim mill has attracted
    interest from U.S. apparel manufacturers operating in Nicaragua.
    However, high electricity prices and poor infrastructure limit the
    sector's competitiveness.  Some firms report increased scrutiny from
    buyers leery of President Ortega's close relationships with
    Venezuela and Iran.  Government officials, meanwhile, complain that
    the "one-for-one agreement" will limit the country's ability to take
    advantage of CAFTA-DR "Trade Preference Levels" for non-originating
    fabric over the next few years.  End Summary.

    Textile and Apparel Data
    ------------------------

    ¶2. (U) The sector added 6,000 new jobs in 2006, and exports to the
    United States grew from $525 million to $697 million, a 33%
    increase.  The following table provides data requested in Ref A:

                                           2005    2006    2007

                                           ----    ----    ----
    Industrial production (millions)       $801    $859      na
    Textile/apparel value added (millions) $158    $199    $225
    Textile/apparel % of total trade      19%     20%      na
    Textile/apparel exports to the U.S.    $525    $697    $750
    Manufacturing employment (thousands)    302     290      na
    Textile/apparel employment (thousands)   56      62      67

    Note: 2007 figures are full year projections.
    Sources: Central Bank of Nicaragua and the Nicaragua Free  Trade
    Zone Commission.

    New Investment Thanks to CAFTA-DR . . .
    ---------------------------------------

    ¶3. (SBU) New investment in the textile and apparel sector, much of
    it in the pipeline before Ortega's January 2007 inauguration, seeks
    to take advantage of preferential market access granted through
    CAFTA-DR and proximity to the United States.  The largest investment
    by far is International Textile Group's (ITG) $100 million denim
    mill.  The mill, under construction on the outskirts of Managua, has
    gained strong support from President Ortega and other FSLN
    politicians, according to General Manager Steve Maggard.  In an
    August 14 visit to the nearly completed facility, Ortega told
    Maggard, "Congratulations. You are working very well, and we are
    pleased."

    ¶4. (SBU) ITG's investment has triggered interest from other major
    apparel companies who had previously subcontracted in Nicaragua but
    avoided making direct investments.  Emilio Noguera, an official with
    Nicaragua's Free Trade Zone (FTZ) Corporation, told Econoff that
    U.S. companies VF Corporation and Hanesbrands, as well as Mexican
    apparel company Kaltex, plan to invest in Nicaragua.  Together,
    these companies could create another 3,000 jobs in Nicaragua,
    according to Noguera.

    ¶5. (SBU) Dean Garcia, Executive Director of the Nicaraguan Apparel
    and Textile Manufacturers' Association (ANITEC), told Econoff that
    there are 16 firms -- including the companies mentioned by Noguera
    -- poised to invest up to $38 million in new apparel manufacturing
    facilities.  Of these 16, two are already preparing to operate,
    including U.S.-owned Tide Manufacturing.  In all, this new
    investment could create 6,500 new jobs.  Garcia also sees potential
    for other investments in the sector, including textile production,
    threads, and finishing (dying).  Currently, Garcia said many apparel
    companies send their garments to Guatemala for finishing.

    . . . While Others Succumb to Price Pressure
    --------------------------------------------

    ¶6. (SBU) Scott Vaughn, President of ANITEC and owner of Rocedes
    Apparel, told Econoff that he and other ANITEC members face
    "tremendous price pressure."  Rocedes Apparel sells to many
    well-known U.S. retailers, such as Walmart, one of the most
    aggressive retailers in seeking price cuts.  Vaughn reported that a
    number of companies had shut down within the past 12 months.
    Fortex, a Taiwanese company that had operated in Nicaragua since
    1992, closed its woven shirt manufacturing facility to consolidate
    operations in Asia, leaving 700 Nicaraguans unemployed.  Others
    closing recently include South Korean knit-wear manufacturers Uno
    Garments and Nicotex.  Vaughn also noted that U.S.-owned KB
    Manufacturing closed after parent company Bayer Clothing failed to
    reach a new agreement with JCPenny. [Comment: There is suspicion
    that both Fortex and Nicotex closed to thwart workers' attempts to
    form unions and that both companies intend to reopen under different
    names.  According to labor sources, Nicotex has done this at least
    once before.  End Comment.]

    ¶7. (SBU) Dean Garcia also told Econoff that electricity outages were
    an issue for the sector.  He said that electricity costs, already
    the highest in the region, are further inflated when rolling
    blackouts force firms to run on expensive diesel generators for as
    long as six hours a day.

    ¶8. (SBU) Vaughn reported that some companies, including his own,
    faced increased scrutiny from buyers leery of President Ortega's
    anti-American rhetoric and close relationships with Presidents
    Chavez of Venezuela and Ahmadinejad of Iran.  Vaughn said Rocedes
    and other apparel companies had already lost orders from prominent
    retailers worried they might face public backlash in the future by
    sourcing from Nicaragua.

    Safeguards, Low Wages Provide Some Relief
    -----------------------------------------

    ¶9. (SBU) Garcia noted that U.S. restrictions on imports of certain
    textiles and apparel have created opportunities for Nicaragua to
    provide those goods and helped ease pressure to lower prices.
    Garcia said that Nicaragua has no plans to implement safeguards or
    other measures to reduce imports of Chinese textiles and apparel.

    ¶10. (SBU) Wages in Nicaragua are still relatively low. Garcia
    reported that the average apparel worker earns about $162 per month,
    with some earning as much as $216, while the minimum wage for the
    manufacturing sector is $81 per month in rural areas.  Garcia sees
    room for improvement in labor relations.  As ANITEC Executive
    Director, Garcia will put this issue at the front of his agenda.

    CAFTA-DR: Tariff Preference Levels and One-for-One
    --------------------------------------------- -----

    ¶11. (SBU) Nicaragua's CAFTA-DR market access provides the country an
    important competitive advantage.  In particular, Tariff Preference
    Levels (TPLs) for non-originating fabrics have provided an instant
    boost to the sector, according to Garcia.  However, MIFIC Director
    for International Trade Sonia Somarriba recently told Econoff that
    she believes the boost will be short-lived, as difficulty sourcing
    fabric in the United States may result in TPL cuts; any shortfall in
    meeting the "one-for-one agreement," which requires the use of U.S.
    fabric for certain Nicaraguan apparel exports, is penalized by a
    reduction in TPL the following year.  Garcia of ANITEC separately
    voiced this concern.  He said that apparel companies are in the
    process of documenting this shortage of U.S. fabric supply.

    ¶12. (SBU) Technical Secretary Alvaro Baltodano of the FTZ
    Commission, in coordination with MIFIC, has proposed that fabric
    produced in Nicaragua be allowed to count toward the one-for-one
    requirement.  In a recent conversation with the Ambassador,
    Baltodano suggested that otherwise, Nicaragua's TPL will be halved
    within two years as a result of difficulties sourcing fabric in the
    United States.

    CAFTA-DR: Cumulation with Mexico
    ----------------------------------

    ¶13. (U) On September 6, 2007, the Nicaraguan National Assembly
    passed an amendment to Nicaragua's trade agreement with Mexico to
    allow Nicaragua to implement the CAFTA-DR cumulation agreement and
    use Mexican fabric in CAFTA-DR apparel exports.  Somarriba said that
    she expected President Ortega to sign the bill into law soon.  She
    said that Nicaraguan apparel exports could grow by as much as 17%
    under the agreement, with even more growth possible when the limit
    is increased to 200 million SMEs.  Somarriba expressed interest in
    seeing this provision implemented as soon as possible, that is,
    before all other parties had amended their agreements with Mexico.

    CAFTA-DR: Pocketing Amendment
    -----------------------------

    ¶14. (SBU) Somarriba said MIFIC was working with the Ministry of
    Foreign Affairs to deposit the "pocketing amendment" to CAFTA-DR,
    which clarifies rules of origin for apparel components, in the
    archives of the Organization of American States.  Simultaneously,
    MIFIC is preparing legislation to implement the amendment.  When
    completed, MIFIC will send the legislation to President Ortega for
    review, who will in turn forward it to the National Assembly.
    Somarriba cautioned that it would be difficult to secure approval
    for the pocketing amendment because there are no clear benefits for
    Nicaragua, unlike the accumulation agreement.  She concluded that it
    would take several months, if not longer, to push through the
    legislation.

    Sector Outlook
    --------------

    ¶15. (SBU) The Nicaraguan apparel sector is faring relatively well in
    the face of increased competition from China, thanks in large part
    to CAFTA-DR trade benefits.  New investment in textile production,
    spurred by CAFTA-DR, will provide an additional boost to the sector.
     FTZ officials project that by 2008 the sector will employ 75,000
    Nicaraguans and export $860 million.  In addition to external
    factors, such as increasing price pressure, that scenario depends on
    whether Nicaragua can continue to attract investment in the face of
    Ortega's anti-American, anti-business rhetoric.

    TRIVELLI

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