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Is CAFTA Working?

Rivet's 2020 Denim Circularity report takes a deep dive into how the global denim industry is plotting its circular future amidst a worldwide pandemic.

The Dominican Republic-Central America-United States Free Trade Agreement, or CAFTA-DR, was passed in 2005 to help stimulate trade between the U.S. and Honduras, Nicaragua, El Salvador, Costa Rica, Guatemala, and the Dominican Republic, essentially turning the group of trading partners into a new free-trade zone. U.S. yarn and fabric producers may export their products to factories in these countries where they are cut and sewn into garments, and shipped back to the U.S. duty-free. Since labor rates in Central America were much lower than those in the U.S., it was thought that this would help stem the decline of the U.S. textile industry while stimulating economic growth in a region that would ultimately become an attractive market for U.S. goods and services.

It was also assumed that U.S. apparel brands would clamor to participate in this program because CAFTA factories could accommodate smaller minimums and the proximity to the U.S. market would allow shorter production cycles and cheaper shipping costs than manufacturing in Asia.

Unfortunately, CAFTA hasn’t turned out to be the apparel juggernaut that many had hoped for. Though U.S. imports of apparel have grown 16% in the eight years since the agreement’s enactment in 2005, to $79 billion, apparel imports from CAFTA countries have actually declined 14%, from $9 billion to $7.8 billion. With the exception of Nicaragua, every CAFTA country has seen its apparel exports to the U.S. decline since the legislation was passed.

Most of the drop occurred in the first few years of the agreement. Between 2005 and 2009, CAFTA imports plunged to $6.1 billion. Their increase since then has been credited to “near-sourcing” programs designed to give products more of a domestic nature. However, CAFTA apparel imports’ share of U.S. apparel imports has dropped from 13.2% to less than 10% as continued price pressure, oversupply of apparel at retail, and sluggish consumer spending continue to favor lower-cost product from Asia.

Since 2005, the cost per square meter equivalent (SME) of U.S. imported apparel has slowly declined from $3.30 to $3.21, while the average from the CAFTA countries rose from $2.60 to $2.70 over the same time period.

Key garment categories imported to the U.S. from the region include men’s and women’s cotton knit tops, manmade fiber knit tops, and cotton underwear. CAFTA has benefitted U.S. yarn producers more than fabric makers, though, as more Central American apparel producers have begun knitting the fabric that ultimately goes into the garments that get shipped back to the U.S. Total yarn exports to CAFTA countries have increased from $650 million in 2005 to $1.55 billion last year, while fabric exports have plunged from $1.78 million to less than a billion.

Honduras is the largest source of U.S. apparel in the CAFTA region, with 2013 imports of $1 billion, down from $1.2 billion in 2005, followed by El Salvador ($800 million, down from $866 million) and Nicaragua ($440 million, up from $200 million). Costa Rica does the least amount of apparel trade with the U.S. ($43 million in 2013, down significantly from $290 million in 2005).

Though apparel from the CAFTA costs less than its Made in USA predecessors, it still has a hard time competing with product from China, Vietnam and other Asian countries, whose labor rates are considerably lower than those in Central America. In the same time period, China’s share of U.S. apparel imports has increased from 22% to 37%, and Vietnam’s has grown from 4% to 10%.

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