Offshoring closer to home

As the new Congress convenes this month, it is anticipated there will be a quick (for a governmental body) passage of the Central American Free Trade Agreement (CAFTA) and signing by the White House. The agreement is similar to the North American Free Trade Agreement (NAFTA) but took just one year of negotiation, while the U.S.Canada-Mexico pact took seven years of talks.

CAFTA members are Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and joining at the last minute, the Dominican Republic. The last-named is a curious addition to the treaty, since the other five countries are joined at their borders on the American isthmus, while the Dominican Republic — part of the Caribbean Basin Trade Preference Act — shares its landmass with Haiti on a Caribbean island. However, the Dominican Republic has the largest economy in the Caribbean and, combined with Haiti, a vigorous textile industry.

"The role of the governments in Central America will be to take advantage of CAFTA to accelerate the industrial evolutionary process," explains Dan Gardner, president Latin America, freight management division for third-party logistics provider (3PL) Exel (www.exel.com). "Costa Rica is a prime example, with [chipmaker] Intel Corp. coming into the country several years ago. The country has been able to build upon that in terms of Intel attracting its supplier base to Costa Rica around that primary manufacturing entity."

As with other suppliers of integrated services, Exel conducts business in the CAFTA region on two levels. First, it enables international commerce, both inbound and outbound. Second, once material and product is within the region, it offers transportation and domestic infrastructure for warehousing and distribution.

"We're optimistic about Central America because it has a unique geographic location relative to the U.S.," notes Charlie Dominguez, vice president for sales and marketing for Latin America with Crowley Maritime Corp. (www.crowley.com). "It has a common language in all of its countries. We also expect a lot of growth between the countries. We expect them to be cost effective in terms of this hemisphere. When you can deliver a garment in five or six days, door-to-door, that's very competitive, with only the border operations of Canada and Mexico being faster."

CAFTA is a two-way trade agreement, Dominguez points out, offering U.S. manufacturers and retailers the opportunity to sell their goods into those six countries.

For now, the trade agreement will be focused largely on textile and apparel operations for the CAFTA countries, particularly since the World Trade Organization is lifting restrictions on Chinese apparel exports beginning this month. Under intense pressure from Washington and other countries, the Chinese government announced at the end of 2004 that it would levy export taxes on some of its manufactured textiles, giving the rest of the world a reprieve, for the moment.

It's believed that CAFTA nations will enjoy a distinct geographic advantage over Asian apparel producers. All CAFTA countries have enjoyed peace for more than a decade and have worked to improve infrastructure and attract more business.

"Over the past two or three years, Nicaragua has had an incredible growth — over 30% annually in the maquilla sector alone," points out Bernardo Callejas, senior investment advisor for manufacturing operations for ProNicaragua (www.pronicaragua.org), a governmental agency. "In 1998, we had approximately 18,000 workers in maquillas. Today, we have more than 65,000 workers."

Suppliers of products complimentary to the apparel industry are moving into Central America so that manufacturers don't have to shop for services and supplies — instead, they're integrated into the countries.

Interestingly, as Callejas notes, particularly for jean manufacturers, Mexico is outsourcing some apparel work to CAFTA members. "Mexican businesses look to Central America, their little brother, where they can make the same garment for a lot less expense than in Mexico," he observes.

Exel's Gardner is optimistic about long-term possibilities of CAFTA. "Geographic proximity to markets is a huge advantage," he says. "Central America is a maximum of a three-hour flight or two-day sailing from the U.S. In terms of lead-time management and the importance of lead-time as part of replenishment programs for any type of industry, this is extremely important."

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