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Is the CAFTA Trade Deal Untouchable or Are We In For a Change?

So far, the Trump Administration has been relatively quiet on CAFTA-DR and manufacturers in Central America and the Dominican Republic have been quietly counting their blessings.

That has a lot to do with two things: NAFTA is the child currently getting the lion’s share of attention from the Trump Administration, and CAFTA—a deal between the U.S. and Costa Rica, Guatemala, El Salvador, Honduras, Nicaragua and the Dominican Republic—has been a trade success story for America.

“The Administration has been very focused on NAFTA. It was a key campaign topic, partly because NAFTA is associated with a large trade deficit. Our relationship with CAFTA—which is a lower profile trade agreement—is currently in surplus,” Steve Lamar, executive vice president of the American Apparel and Footwear Association explained. “CAFTA is a success story in U.S. trade policy. Not only do we have a trade surplus with Central America but, like NAFTA, it supports many well-paying U.S. jobs, and benefits communities and consumers across the country. [Commerce] Secretary Ross acknowledged CAFTA’s positive contributions in a recent speech on Western Hemisphere trade.”

In 2016, the U.S. exported $28.7 billion worth of goods across all categories to the CAFTA-DR countries and took in $23.5 billion, giving it a $5.35 billion trade surplus, according to U.S. Department of Commerce data. Based solely on Trump’s promises to curb trade imbalances, it would seem that CAFTA should be left alone.

For Gail Strickler, president of global trade for Brookfield Associates and former Assistant U.S. Trade Representative for Textiles at USTR, the likelihood of Trump tampering with CAFTA is slim.

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“I don’t think they’re [the Trump Administration] going to touch it at all,” she said.

Why CAFTA probably won’t change

There has been no pointed focus on amending CAFTA, but as with all other U.S. trade deals, the agreement is under review to ensure all of its provisions and inclusions put America First.

When asked to comment on the status of CAFTA and touch on what might come of it, Emily Davis, a spokeswoman for USTR had little to say: “USTR is now in the process of reviewing CAFTA and all other existing free trade and investment agreements, as directed by the President’s executive order. The findings of the reviews will help guide United States trade policy and trade negotiations going forward.”

Those findings will likely point to quite a few positives for the U.S.

“We run a significant trade surplus with CAFTA countries. If you look at Trump’s rhetoric, the last thing he wants to do is screw up something that gives us a trade surplus,” Strickler said, referring to overall trade in goods. “A lot of those imports are apparel, in which they are the single largest customer. So do you want to tell Parkdale Mills, Gildan, Unifi that have recently invested billions in U.S. yarn spinning and that have political clout that you’re considering taking away their single biggest export market? I doubt it.”

Central America is the second largest textile export market for the U.S. (after NAFTA) and the CAFTA-DR trade deal is the third largest source of apparel for the U.S. market.

Though the U.S. doesn’t run the same trade surplus in textiles and apparel as it does in overall goods, there’s still considerable business being done across these partners’ borders when it comes to cloth and clothing.

For the year ended April 2017, the U.S. exported $3.1 billion worth of textiles and apparel to CAFTA-DR, which was a 4.38% dip compared to the same period last year, according to the Office of Textiles and Apparel.

By country for the same period that comes out something like this: $1.47 billion worth of textiles and apparel to Honduras (down 1.72% year over year), $544 million to the Dominican Republic (a 10.62% drop), $377 million to El Salvador (though that was down nearly 20 percent), $298 million to Nicaragua (a 14.88% jump), $292 million to Guatemala (a 4.98% jump), and $119 million (down 9.77%) worth of textiles and apparel went to Costa Rica from the U.S.

“You’re talking about billions of dollars worth of exports from the United States to those countries,” Strickler said.

As a point of comparison, the U.S. imported $8.2 billion worth of apparel and textiles from CAFTA-DR for the year ended April 2017.

The Central America trade agreement works for U.S. yarn, fabric, apparel and footwear manufacturers because partner countries will buy raw materials, like yarn and fabric from the U.S. in order to assemble apparel in Central America and the Dominican Republic and have the goods re-enter the U.S. duty free.

For CS Central America, a synthetic yarn supplier, which established its business in El Salvador based on benefitting from CAFTA, the trade deal has been a positive one.

“What I can tell you for sure is that CAFTA has been good for the U.S. and for us,” sales and administration director Jorge Salazar said. “I think it’s the only trade deal that’s been good for both sides.”

What’s more, as Strickler added, CAFTA doesn’t have politically sensitive exports, like auto parts, as it trades largely in finished apparel and food. But beyond that, the big thing is the sizeable export market it provides for U.S. fiber, yarn and textiles.

So, as experts appear to agree, it will likely be status quo for CAFTA.

“We don’t expect any changes to CAFTA. The region is actually seeing increased interest because of concerns about NAFTA and the death of TPP,” Mike Todaro, managing director for the Americas Apparel Producers’ Network (AAPN), said. “CAFTA should be the model for the other trade deals.”

But could the border tax affect CAFTA?

Even if little else changes with CAFTA, the not-yet-dead border adjustment tax could end up rearing its head at the trade deal should it come to fruition.

(Read more about BAT: Update From Washington: BAT, NAFTA and What’s Dead or Alive)

“All products from CAFTA countries, even those that contain U.S. content and meet the rules of origin for duty-free access would be subjected to the Border Adjustment Tax,” Lamar explained. “Goods containing U.S. content would become much more expensive, undercutting a key incentive to use U.S. content. This would inject a considerable cost into CAFTA-DR trade, eroding the competitive model upon which Central American countries rely.”

How worried should the sourcing sector be about CAFTA?

Though sweeping changes to the CAFTA trade deal may be unlikely, brands and retailers sourcing in Central America are still spending at least a little time on the edges of their seats.

“Of course we are worried. We are always worried,” Todaro said. “China entering WTO…$5.2 billion invested in Vietnam over two years…the end of quotas…the end of Nicaragua’s TPL [tariff preference levels]…Haiti getting lots of TPLs…TPP…so yes we are worried, but we have become very efficient worriers.”

The sense was similar for Unifi’s Campos, though he’s looking more at worry over changes to NAFTA sending benefits CAFTA’s way.

“If you go to Mexico today and you try to speak with the textile sector, they’re nervous,” UNIFI general manager Jaime Campos said during an interview at the company’s El Salvador factory in December. “From our side, we’ve got to take advantage of that. If he [Trump] starts affecting NAFTA, people are going to want to come here.”

If anything does change with CAFTA, it might be more customs or more enforcement of labor issues, but “nothing major,” Todaro said.

Adding to that, Lamar said CAFTA could see changes that would improve its ability to be a speed to market partner.

Either way, CAFTA could still be up for change and sourcing executives would be best advised to remain on alert.

“Smart sourcing executives are always worried about potential changes to trade policies that may adversely affect their operations,” Lamar said. “But that is one of the reasons why we push for permanent trade agreements—they provide predictable, rules-based frameworks under which trade partnerships can develop and through which trade flows can occur.”