________________________________________________________________________

The Central American Clothing Assembly Industry and

China’s Producers for the US Market
Dale T. Mathews, University of Puerto Rico at Rio Piedras, Puerto Rico
____________________________________________________________________________________________________

This is a descriptive paper on the export performance of clothing industries in Central America and the Caribbean Basin
to the U.S. market. A brief summary of the history of the region’s garment export industry in the face of evolving trade
liberalization is provided. Attention is given to the evolution of CAFTA–DR’s apparel export industry according to changing
US preferential trade programs. The importance of China’s membership in the World Trade Organization, and the elimination
of Multi-Fiber Agreement quotas are highlighted in the fortunes of Central American clothing exporters’ attempts to expand
their shares in the US market.

Theoretical Context - The Eclectic Paradigm

This descriptive analysis can be situated within a wider context of the debate on the changing patterns of international
production. Within this debate, the eclectic approach elaborated by John H. Dunning is of particular relevance and represents
to some extent the culmination of the search for a comprehensive explanation of the patterns of cross-border value adding
activities by firms (Dunning & Lundan, 2008). This eclectic theory, as its name indicates, incorporates elements of three other
theories into what can be described as a dynamic framework for analyzing the phenomenon. These are: 1) the theory of
industrial organization, 2) locational theory, and 3) product or investment cycle theory.

John Dunning's eclectic ownership, locational and internalization approach (or OLI paradigm, as it became known) was
subject to refinement over the years, and while all of the individual refinements will not be considered here, one in particular
is helpful in understanding the present case study of the Central American competition to the Chinese exporters to the U.S.
market: the Location Specific Factors. Even more specifically, the L-bound resources of overriding importance to the garment
industry, as considered here, include mostly but not exclusively the availability of labor. It should be emphasized at this point
that Dunning did not expect his OLI approach to result in a single generalized theory on international production as much as to
provide a framework for analyzing the phenomenon. Reportedly at the suggestion of a colleague, Dunning subdivided his OLI
categories into country, industry and firm specific characteristics.

The International Division of Labor in the American hemisphere

During the second half of the twentieth century, firms involved in mature industries in the United States, such as clothing,
footwear, and some household appliances, among others, sought to improve their competitiveness by outsourcing their labor-
intensive segments to low-wage foreign countries, and in particular to export processing facilities beyond the country’s southern
border ( Grunwald & Flamm , 1991). Countries of the Caribbean and Central America (IDB - INTAL, 2007) as well as Mexico
(Gruben , 2007) welcomed and encouraged these production sharing developments as a way to earn foreign exchange, attract
foreign direct investment, reduce unemployment and provide a boost for industrialization and economic development. Initially
such assembly or maquiladora firms multiplied to become, in some cases, significant contributors to the economies of the
countries of the region, particularly ventures with enterprises in the garment industry. However, after the arrival of the twenty-
first century, the outlook for such production sharing arrangements in the region of the Caribbean Basin changed mostly for
the worse.

Free Trade and the Caribbean Garment Assembly Industry

The drive towards open markets led by the World Trade Organization meant the annulment or total elimination of
preferential trade programs which had served as an incentive to the expansion of maquiladoras in the Caribbean Basin region.
Of great impact were the incorporation of China into the World Trade Organization in 2001 and the final elimination of the
textile quota system under the Agreement on Textiles and Clothing in 2005. According to the World Bank (Lopez -Acevedo
and Robertson, 2012: 59), China increased its import share of U.S. clothing market from 10.5 percent in 2000 to 32.8 percent
in 2008 , while Vietnam has increased its market share of 3.7 percent in 2004 to 7.0 percent in 2008. Although Mexico remained

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exporting country number three in 2008, its share of imports severely decreased from 14.6 percent in 2000 to 5.6 percent in
2008. The share of U.S. imports from the group of countries that make up the Central America Free Trade Agreement -
Dominican Republic (CAFTA-DR, which includes Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua, in addition
to the Dominican Republic) - also fell, from 15.3 percent in 2000 to 10.5 percent in 2008.

Several decades ago, it seemed that the garment assembly industry in the Caribbean Basin region, was only competing
with itself (Mexico included) to expand its share of the U.S. market through favorable treatment clauses of the U.S. tariff system
(Mathews, 2008). Historically speaking, the United States took particular interest in the region in the early eighties, offering
what would be a succession of preferential trade agreements, and modifications to existing agreements with countries of the
Caribbean Basin. The first of these, known as the Caribbean Basin Initiative (CBI), arose in response to the Central American
and Caribbean geopolitical conflicts of the time (Dypski, 2002).

The commercial component of the CBI initially consisted of tariff-free access to the U.S. market for all exports of
designated countries, with certain exceptions (Industry wise, textiles and clothing were excluded, while country wise, Cuba
was excluded for geopolitical reasons). The countries that were included in the agreement were Anguilla, Guyana, Antigua
and Barbuda, Haiti, Aruba, Honduras, Bahamas, Jamaica, Barbados, Montserrat, Belize, the Netherlands Antilles, the British
Virgin Islands, Nicaragua, Cayman Islands, Panama, Costa Rica, St. Kitts and Nevis, Dominica, St. Lucia, Dominican
Republic, St. Vincent and the Grenadines, El Salvador, Suriname, Grenada, Trinidad and Tobago, Guatemala, Turkish and
Caicos Islands. In order to qualify for entry into the US market CBI exports had to comply with a rules-of-origin criteria of at
least 35% of value added in one or more beneficiary countries. At the time of its enactment, the CBI joined two other important
tariff reduction programs available to U.S. trading partners: the Generalized System of Preferences (GSP) and applicable
provisions under the U.S. Tariff System (known initially as section 807, but later converted to section 9802.00.80 of the new
Harmonized Tariff System).

Apart from any political motivations, these trade agreements were also intended to link certain U.S. production chains with
low cost Caribbean assemblers, thus making them more price-competitive in relation to other exporters to the US market, like
China. This was particularly the case with regard to the US clothing/textile chain. Despite its initial exclusion from the CBI,
regional exports of apparel to the United States received a boost in 1986 with the inauguration of a "Special Access" program
known as Section 807a, or “Super 807” (later article 9802.00.8010 under the new harmonized system). Under said program,
which was limited to the aforementioned countries in the Caribbean, Central America and later to Mexico, exports of clothing
to the U.S. market enjoyed guaranteed access by virtue of their exclusion from bilateral quotas under the Multi Fibers
Arrangement (MFA) still in force, but subject to special bilateral agreements. However, while these “guaranteed access levels”
(GALs) were increased upon request (and thus were virtually unlimited), they only applied to garments assembled from fabric
manufactured and cut in the United States (Mathews, 2008: 12).

By the turn of the century a new installment, known as the U.S.-Caribbean Trade Partnership Act (CBTPA), was passed
into law. The CBTPA expanded the list of duty-free products and offered greater market access opportunities to eligible
countries for a period of eight years. Essentially, the U.S. agreed to convert the preferential access regime into a duty-free
regime for apparel assembled in CBI countries, provided they were sewn with US yarn and the fabric used in the production
process was formed in the US from US yarn. This development encouraged some companies to shift cutting operations to the
Caribbean basin where previously only the sewing process was performed. In addition, this placed the region on an equal
footing with the neighboring country of Mexico, which had been granted an advantage as an export platform for the garment
assembly industry with the establishment in 1994 of the North American Free Trade Area (USITC 2003).

CAFTA-DR
Also at the turn of the century, negotiations began for what would become the Free Trade Agreement between Central
American countries, the US and the Dominican Republic (CAFTA-DR). It became law in 2004, based on the precedent of prior
agreements. It was considered an improvement over previous agreements, as it converted preferential access to the US market
into something comprehensive, reciprocal and permanent, among other things. It is important to note that CAFTA -DR entered
into force for El Salvador, Honduras, Nicaragua and Guatemala on July 1, 2006 , the Dominican Republic on March 1, 2007,
and Costa Rica on January 1, 2009. According to Hornbeck (2012: 2), by advocating the elimination of regional trade barriers,
the CAFTA-DR once again aimed to stimulate the development of production sharing between the U.S. and CAFTA- DR
countries on the basis of comparative advantage and economies of scale. Hornbeck points to the areas of apparel manufacturing,
automotive parts, medical equipment, integrated circuits and other products as likely beneficiaries.

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 With regard to the textile and clothing trade, the latter now enters the U.S. market under a "yarn forward" rule-of-origin
whereby the yarn production and all operations that make up the product value chain, from the production of the fabric to the
cutting and assembly of garments, are required to be carried out in a CAFTA-DR member-country in order to qualify for duty-
free entry into the U.S. market (Hornbeck 2012). These new rules of origin, while containing certain exemptions, allow for the
use of fabrics originating in Central America, an option that existed under the CBTPA but in limited quantities.

A preliminary review of the most recent data for the garment sector suggests a small increase in the participation of some
countries of the Caribbean basin in U.S. imports of certain clothing sector items. However it is instructive to first review
changing Caribbean Basin export trends throughout the period just discussed, with an eye on those exports which have entered
the United States under none of the available preferential access programs.

Recent Performance of US Preferential Trade Programs for the CAFTA-DR Group

TABLE I: H.T.S. 61 & 62: Customs Values for CAFTA + Dom. Rep.*
U.S. Imports for Consumption
Annual Data
Import Program 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010… 2012… 2014… 2016
In 1,000 dollars (USA)
CAFTA-DR 0 0 0 0 0 0 2,952,494 5,154,049 5,679,232 4,889,799 5,616,143 6,295,467 6,590,064 6,935,898
No program 8,824,360 4,149,300 3,320,817 3,215,833 3,377,248 2,934,810 2,768,194 2,353,682 1,789,455 1,330,535 1,456,335 1,589,284 1,541,355 1,204,661
claimed
Caribbean (CBI) 72,155 77,044 71,435 71,543 3,581 5,241 6,330 422 257 0 0 0 0 0
CBTPA 149,209 4,840,773 5,737,902 5,934,971 6,180,298 6,209,858 2,743,699 454,188 192,355 0 0 0 0 0
GSP 167 89 137 55 50 15 5 0 0 0 0 0 0 0
Puerto Rico-CBI 0 0 0 36 0 2 0 0 0 0 0 0 0 0
Total 9,045,890 9,067,206 9,130,291 9,222,439 9,561,177 9,149,925 8,470,722 7,962,340 7,661,298 6,220,334 7,072,478 7,884,751 8,131,419 8,140,558
* Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua & Dominican Republic
Sources: Data in this Table have been compiled from tariff and trade data from the U.S. Department of Commerce and the U.S. International Trade Commission.

Table 1 presents apparel export data from the CAFTA-DR countries of El Salvador, Honduras, Guatemala, Nicaragua and
the Dominican Republic since the year 2000, when the U.S.-Caribbean Trade Partnership Act (CBTPA) was put into play.
What is noteworthy from the first two years of the Table is the “surge” in export values under the CBTPA from $ 150 million
in the year 2000 to $ 4.8 billion in 2001, while overall (Total) export values remained flat. Said increase in CBTPA exports
was evidently drawn from the category of apparel exports wherein no preferential program was claimed, hence it can be
surmised that companies merely shifted their apparel production to the program that stipulated quota and duty free benefits.
Similarly, production can be seen to shift programs once again in 2006 when the CBTPA was being superseded by the CAFTA-
DR. Overall exports from the region dropped and haven’t yet recovered to the levels prevailing during the first half of the first
decade of the new millennium.

Preferential trade programs are used to advance U.S. goals, such as the protection of intellectual property rights and other
business interests. In the case of apparel, strict rules-of-origin criteria are applied to products in order to enjoy duty-free
treatment on their way to the US market. According to article 19 USC 4112: Earned Import Allowance Program (EIAP), under
the CAFTA-DR:

Eligible apparel articles wholly assembled in an eligible country and imported directly from an eligible country shall
enter the United States free of duty, without regard to the source of the fabric or yarns from which the articles are made, if
such apparel articles are accompanied by an earned import allowance certificate that reflects the amount of credits equal
to the total square meter equivalents of fabric in such apparel articles, in accordance with the program… (Office of the
Law Revision Counsel of the United States House of Representatives, n.d.)

It has historically been the case that such preferential trade programs are designed to favor US inputs over cheaper foreign
inputs. As noted by the US Government’s General Accounting Office:

One of the assumptions implicit in the design of the EIAP is that, generally speaking, most producers currently prefer to
use non-U.S. fabrics and yarns; otherwise there would be no need for an incentive to use U.S. inputs. The reasons for this
can vary, but industry stakeholders reported that it is primarily because certain non-U.S. inputs are usually less expensive
than U.S. inputs. (Yager, 2010: 18)

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 It can therefore be inferred from TABLE 1 that there continues to be a demand among CAFTA-DR apparel export
companies for input sourcing outside of the US preferential regime. Added to the fact, noted earlier, that CAFTA-DR allows
for the use of fabric originating in Central America, there is a provision to the agreement which permits fabric manufactured
in Mexico or Canada to be used in woven apparel products (Lopez -Acevedo and Robertson, 2012: 281). On the question of
the use of extra-hemispheric inputs, whether yarn or fabrics, it has been pointed out that a mechanism known as Tariff
Preferential Levels (TPLs) provides for temporary exceptions to CAFTA-DR’s "yarn forward" rule-of-origin. Out of the
Central American countries that make up CAFTA-DR, Nicaragua has been granted such an exception, thereby allowing local
manufacturers to source fabric from anywhere in the world, including, of course China and other Asian countries. Some authors
believe these TPLs have fueled Nicaragua’s recent export dynamism to the US apparel market. (Bair & Gereffi, 2013: 3-4).

Competing with China: comparing promising CAFTA-DR apparel items with similar imports from
China
Several CAFTA-DR apparel exports to the US market have shown a growth trend, even if minimal, and merit comparison
with similar imports from China. Most of them belong to the man-made fiber categories and the most notable are listed in
Table 2. The only item wherein the value of exports to the US market of any individual Central American country surpasses
that of China’s is the cotton knit T-shirt, singlets and tank tops category (HTS # 61091000). In fact, three Central American
countries surpass China in this respect for the years since the enactment of CAFTA-DR, and in some cases prior to. Of
particular note is Nicaragua’s meteoric rise from zero at the beginning of the millennium.

China leads in the other four categories, although Guatemala appeared to be closing the gap for a spell in the women's and
girls’ trousers (not knitted) category (HTS # 62046335). According to the World Bank, Guatemala is mainly a supplier of
women’s apparel to US firms, with 130 of 244 firms Korean owned (Lopez -Acevedo and Robertson, 2012: 283). Of particular
note is the fact that the country has a strong woven fabric manufacturing sector centered on the VESTEX association.
Projections at the beginning of the year are for Guatemala’s textile exports to rise between 4 and 5 percent in 2014
(Fiber2Fashion, 2014), with growing exports going to Haiti and Nicaragua.

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TABLE II: US Imports Customs Value by HTS Number
U.S. Imports of Select Items for Consumption
Annual Data
HTS Number Country 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
& Description in $ 1000 dollars (US)
61091000 Honduras 560,983 510,980 624,746 399,857 556,105 707,977 659,438 548,114 489,696 522,318 553,708
T-shirts, China 120,038 184,318 200,925 339,859 477,325 467,835 459,355 435,804 393,803 387,067 352,510
singlets, El Salvador 344,736 358,929 415,454 344,196 452,204 419,943 477,332 432,366 422,397 377,857 369,730
tank tops Nicaragua 92,861 106,149 135,583 148,070 176,182 244,312 194,020 173,308 280,495 316,528 306,626
knitted, of Dominican Rep. 197,896 96,752 79,542 91,572 127,478 147,120 161,215 191,269 226,432 267,215 309,796
cotton Guatemala 184,710 115,176 154,422 162,805 187,400 169,539 148,386 177,529 169,388 198,080 180,492
Costa Rica 4,956 7,221 8,988 3,105 1,126 1,486 2,159 337 331 416 618
61099010 China 30,389 53,250 59,992 94,994 136,401 161,744 201,123 217,734 244,042 287,987 275,184
T-shirts, Nicaragua 9,738 11,948 41,379 51,484 61,920 81,428 102,103 89,283 123,453 165,309 194,828
singlets, Honduras 88,951 62,519 79,630 20,239 56,799 66,381 98,340 116,598 129,278 159,035 181,258
tank tops El Salvador 45,765 66,704 81,683 80,815 101,302 117,227 132,072 146,121 139,052 155,020 188,799
knitted, of Guatemala 24,835 14,241 16,362 18,019 23,535 35,428 40,882 64,689 81,005 87,072 104,309
Man-made Dominican Rep. 17,961 14,552 31,697 9,044 11,074 15,292 22,762 16,033 14,231 22,832 26,320
fiber Costa Rica 1,848 2,974 5,211 4,292 4,385 3,246 1,903 668 148 165 268
61102020 China 1,043,034 1,755,823 1,990,607 2,778,361 3,360,590 3,402,050 3,056,377 3,289,257 3,094,448 2,844,789 2,339,435
Sweaters, Honduras 650,558 595,405 516,519 414,773 389,239 440,189 335,758 334,696 359,206 385,846 309,607
pullovers, Guatemala 597,842 556,823 495,845 413,256 384,585 413,474 336,007 309,299 316,268 321,452 265,056
sweatshirts, Nicaragua 215,413 310,298 276,998 278,571 274,979 361,435 361,159 368,566 291,153 250,502 232,798
knitted, of El Salvador 251,274 264,375 265,827 193,855 202,047 217,006 139,895 121,720 110,830 156,285 151,837
cotton Dominican Rep. 52,536 49,753 57,623 33,517 60,859 81,817 58,397 46,514 63,361 72,696 60,272
Costa Rica 1,360 1,142 898 382 39 76 0 0 0 26 0
61103030 China 751,285 970,734 806,198 963,866 1,101,712 1,265,306 1,368,495 1,385,026 1,513,557 1,576,961 1,523,974
Sweaters, Honduras 104,283 213,115 240,118 197,222 259,631 306,354 380,934 341,136 428,191 441,080 426,914
pullovers, Guatemala 62,990 59,881 45,039 64,099 77,504 119,236 134,894 132,948 161,789 217,461 267,493
sweatshirts, El Salvador 55,702 73,729 69,067 46,690 84,735 81,766 111,531 138,200 195,590 208,003 234,699
knitted, of Nicaragua 13,084 19,166 27,787 36,384 50,310 72,352 106,033 147,056 153,369 110,241 106,799
Man-made Dominican Rep. 36,004 26,680 26,545 29,397 27,962 18,768 24,444 20,982 24,982 23,194 29,365
fiber Costa Rica 4,922 5,487 6,367 5,207 3,986 4,739 4,421 2,275 2,436 1,732 14
62046335 China 168,220 228,559 192,029 152,542 167,965 191,583 165,781 182,981 176,089 172,746 109,289
Women's or Guatemala 77,939 73,448 92,940 78,285 100,613 117,084 117,651 123,354 106,190 101,921 54,555
girls' trousers El Salvador 13,924 15,770 18,458 9,735 6,191 13,857 16,505 16,613 15,227 13,636 12,830
Synthetic Fiber Nicaragua 11,259 11,389 10,112 5,983 6,356 8,116 10,483 14,199 9,420 7,395 6,071
Not Knitted Dominican Rep. 7,749 6,002 4,124 3,306 5,726 6,869 7,164 6,819 6,328 7,201 5,110
Honduras 9,799 11,268 8,326 5,477 4,500 4,327 3,673 4,240 5,192 4,633 2,898
Costa Rica 1,610 1,812 1,776 699 203 313 236 294 86 152 78

Sources: Data in this Table have been compiled from tariff and trade data from the U.S. Department of Commerce and the U.S. International Trade Commission.

Although China dominates the pull-over categories for both women and men, several Central American countries are
showing a steady growth in export values, particularly since the enactment of CAFTA-DR. The increasing establishment of
textile factories in several Central American countries has enabled the expansion of value added in the region. Nevertheless,
there is still a lack of diversity in the apparel products being exported from the region, in comparison to countries like China.

Comparing Chinese exports of garments and clothing, woven and non-woven (ie knit and non-knit) to the United States
with similar figures for all the countries that make up the CAFTA-DR, It is evident that China enjoys an advantage in terms of
the diversity of garments that it is capable of exporting at present. This is despite advances in Central American countries such
as El Salvador, where most of the sector now offers full package services, and whose garment exports account for almost half
of total national exports. (Castano Freeman, 2016)

Figure 1

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Figure 2

Figure 1 shows that China exports thirty categories of garments (classified to four digits, according to the Harmonized
Tariff Code) to the United States, each valued at more than $ 150 million, whereas the entire set of countries that constitute the
CAFTA-DR only manages to reach thirteen categories (Figure 2). These figures for the year 2015 highlight the superior
capacity of the garment industry in China in relation to the same Central American export industry.

Conclusions
Clothing assembly, among other production sharing industries, has been an important economic and export activity for
several countries of Central America and the wider Caribbean Basin throughout recent history. In particular, apparel exports
from the CAFTA-DR region have prospered during the previous century and into the beginning decades of the current one due
largely to a series of preferential trade programs enacted by the region’s chief market destination for such exports: the United
States. These include such programs as the Caribbean Basin Initiative, sections of the US tariff system, the U.S.-Caribbean
Trade Partnership Act (CBTPA) and (most recently) the Central American–Dominican Republic Free Trade Agreement
(CAFTA-DR). The overall effect of these programs has been the promotion of production sharing via the integration of the
Central American and wider Caribbean Basin garment assembly industry into the North American clothing commodity chain.

The end of the Multi-fiber Agreements on January 1, 2005, however, signaled the elimination of the quota system which
had conditioned the development and expansion of the region’s clothing exports under Sections of the US Harmonized Tariff
System. This event empowered an extra regional rival exporter, China, whose exports to the US market had been constrained
for years by that mechanism. China (among other Asian exporters) has expanded its presence in the US clothing and textile
market as a consequence of having joined the WTO three years prior to the final stage elimination of MFA quotas.

It is believed these two events combined to counter any significant expansion that Central American clothing exporters
could have achieved in the US market. This situation is likely to be further exacerbated by the ascent of other Asian rivals such
as Viet Nam that stand to supplant China in the low value added range of garment production as the latter’s wages rise.

However, some considerations must be weighed in forecasting future trends regarding garment exports from Central
America and the Caribbean basin to the U.S. market. The approval of CAFTA - DR may have the effect of prolonging the life
of the Central American garment assembly sector within the US apparel supply chain. New developments such as the expansion
of the textile sector should be closely monitored in the future. It has been suggested that a liberalization of the still restrictive

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US rules of origin to allow use of cheaper Chinese and Asian fabric in offshore garment manufacturing firms could benefit the
Central American apparel industry.

Finally, it is incumbent on Central American and Caribbean Basin exporters to do what is possible to ascend the value
added ladder. An export industry focused on selling T-shirts, and low-end clothing in general does not form the basis of an
economically sustainable model. Producers must try to expand away from mere assembly and (where possible) into design
and marketing. The US preferential trade regime has evolved over the years to finally allow offshore assemblers to expand
into the production of cloth, cut, make and trim and even full package production. If the clothing export industry has a future
in the region, it must develop its capacity in these areas to its fullest.

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