When China suddenly emerged as a manufacturing powerhouse at the beginning of this century, even the most optimistic trade experts thought that Central America’s manufacturing export sector was doomed.
For a time, their predictions looked accurate: in 2001, exports from the region’s manufacturing export sector shrank 7 per cent while those of China and other Asiatic countries boomed. Today, China’s share of the US apparel market, one of Central America’s traditional niches, is close to 35 per cent, according to the US Department of Commerce. In 2000, it was just 5 per cent.
Several years on, however, Central America’s manufacturing sector has not only refused to die but is actually growing. According to a study last year by the Economic Commission for Latin America (Cepal), the sector expanded at an average of 5.7 per cent a year between 2000 and 2006 – albeit with significant variations within the region.
That figure is lower than the average growth during the 1990s, the decade in which Central America made the greatest progress in consolidating its model of export-led development. But for many economists, the fact that the region’s “maquiladoras” – as the industrial export sector is commonly known – survived at all, is little short of a miracle. So what has been the secret?
One vital element is geography. Most of Central America is only a day or two away from US ports in Texas compared with four weeks or more in the case of China.
Ramón Padilla of Cepal and co-author of last year’s study, argues that, with the growing importance of just-in-time delivery in so many US industries and retail outlets, proximity is a huge advantage. “As a US retailer, who are you going to get to make the baseball caps for the World Series once you know which teams are in the final? If you ask China, it will all be over by the time you finally receive the merchandise.”
Daniel Facussé, president of the Honduran Manufacturers’ Association, says that exporters in his country have managed to reduce shipping times even more by working closely with US customs officials. Indeed, Mr Facussé says that exporters have even managed to get US officials in the main port of Puerto Cortés to inspect the merchandise before it leaves.
“Honduras now has the fastest clearance times of the whole region in US ports,” he says. “That speeds up delivery, and speed to market is one of our main competitive advantages over Asia.”
At the same time, Mr Facussé points out that rising oil prices, and the consequent increases in shipping costs, have made Chinese manufacturers more expensive than they used to be. In many cases, he says, the added transport costs erase the gains in labour costs that Asian manufacturers maintain over Central America. “It is ironic, but high oil prices have helped us a lot.”
A second element to survival is market access. Under the so-called Caribbean Basin Initiative and, more recently, the Central America Free Trade Agreement (Cafta), the region has consolidated its zero-tariff status for exports to the US. China and the rest of Asia, by contrast, still have to pay duty on products entering the US market – even though changes in 2005 meant that they are now no longer limited by quotas in the US apparel market.
When Nicaragua negotiated Cafta, it managed to persuade US authorities to grant it the ability to import cotton and other raw materials from third-party countries without violating the agreement’s rules-of-origin clauses. That advantage, together with the fact that Nicaragua has the lowest wages in the region – about 98 cents an hour – has led to growth rates in the sector averaging 26 per cent a year for the last six years.
A third element has to do with the manufacturing industry’s ability to adapt. In Costa Rica, one of the first Central American countries to start producing clothes for the US market, most of its maquiladora sector has migrated towards electronics. Intel, the microprocessor producer, set up operations in Costa Rica in the 1990s, and it now accounts for about 80 per cent of the country’s manufactured exports.
In Honduras, Elcatex, a domestically owned textile and apparel company, has managed to survive by becoming highly vertically integrated. In its factory in Choloma, about half an hour from the northern city of San Pedro Sula, workers watch over rows of spinning machines that carefully knit natural cotton thread into long lengths of fabric.
In an adjacent room, other workers are busy passing the cloth through an anti-bacterial solution before they dry it and send it away to another Elcatex factory to be sewn into garments.
Elcatex now works directly with large US retailers such as JC Penny, and even has its own label called “Lovable”. It says that it plans to increase current production of 1.5m lbs of cotton fabric a week to 1.8m lbs a week by the end of this year.
Mr Padilla of Cepal argues that this “complete package” approach, which contrasts with the simple one-stage assembly processes of Central America’s maquiladora sector a few years ago, ensures that companies stay competitive. “The more steps in the value chain you can incorporate, the greater your margin is going to be,” he says.
None of this is a guarantee for the future. While strategies such as that of Elcatex have made Honduras’ clothing sector one of the region’s most competitive, El Salvador and Guatemala have struggled to transform.
Since 2000, El Salvador’s clothing sector shrank an average 0.1 per cent a year. Vestex, which represents Guatemala’s textile and apparel industry, says that the country’s apparel industry only employs 66,000 people compared with 113,000 just four years ago.
A further worry is that Central American manufacturers remain highly dependent on the US market. Although companies have managed to diversify away from textiles and clothes towards electronics and car parts, they still rely almost entirely on the performance of the US economy.
Moreover, the tax advantages that companies have so far enjoyed in the region – all the governments have created free-trade zones or fiscal regimes in which companies are almost completely exempt from paying tax – are not going to last forever. World Trade Organisation rules state that member countries must not give exporting companies differential tax treatment from any other company after 2010 (although the region won an extension until 2015).
All of this means that Central America’s manufacturing sector will have to continue innovating, finding new niches and incorporating increasing layers of the value chain in their production processes. If they fail to do so, they can be fairly sure that they will not be in business for long.
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