CAFTA Could Fulfill Promise With Looser Apparel ROO or Cumulation, Panelists Say

At a time when hurricane damage, violence and poverty are driving more Central Americans to the U.S., consultants, advocates and former diplomats say the Central America Free Trade Agreement, or CAFTA, needs changes to spur development in Guatemala, Honduras and El Salvador. Those Northern Triangle countries are the ones sending large numbers of asylum seekers to the U.S. in the last few years. Kellie Meiman Hock, a McLarty Associates managing partner who led the April 14 panel hosted by the Washington International Trade Association, noted that when CAFTA was ratified more than 15 years ago, the hope was that it would bring more economic development to Central America. But instead, trade from the region has been flat.

Patrick Ventrell, director of the Office of Central American Affairs at the State Department, said, “It is a national security imperative for the United States to drive job growth in Central America.” He said that while there are forces driving migrants to the border -- like the hurricanes, the effect of climate change on coffee growing, and violence -- they frequently tie back to weaknesses in governance and government corruption.

Former diplomat Matthew Rooney, now managing director at the Bush Institute, agreed that corruption is retarding job growth in those three countries. Encouraging the countries to move more government services online helps with that, he said. He said that if CAFTA were made more attractive, that could drive foreign investment. He suggested that CAFTA and the USMCA should be granted cumulation — in other words, an automobile assembled in Mexico could use parts made in El Salvador to qualify for the regional content requirements under USMCA. There is limited cumulation now for woven apparel, but the quota is generally not filled.

American Apparel and Footwear Association Vice President Beth Hughes said that as companies are trying to source outside China to escape Section 301 tariffs and forced labor, they're turning to Asia rather than Central America, despite the zero tariff trade opportunity there. “Why aren’t they looking to a region like CAFTA? It should be a logical choice, but it’s not as [cost] competitive as Asia, even with an FTA,” she said.

She said that the restrictive rule of origin on yarn and thread for apparel makes CAFTA unattractive for companies. “If those rules were updated to allow more access to globally produced yarns, we think that would drive investment,” she said. In response to a question from International Trade Today, she said that she did not think importing fabric from Vietnam, Korea or Japan would increase the risk of incorporating cotton grown in Xinjiang. Avoiding cotton made with forced labor is one of the current advantages of sourcing in the Western Hemisphere.

Hughes said that there are more than 1,500 tariff lines that cover apparel, but 85% of the exports from CAFTA countries come from 25 tariff lines, such as T-shirts or sweatpants. “They’re making basics,” Hughes said.

Even though it takes less time to ship from Central America to the U.S. than from Asia, Hughes said, “There are really burdensome Customs delays in countries in the region, We’re squandering that speed advantage they should have.” Hughes said it should be possible to add cumulation without reopening CAFTA.

Rooney agreed that reopening CAFTA would be problematic, but said there would need to be an upgrade to labor standards in CAFTA when changes are made, given the failure of the Guatemala enforcement case.

Maria Sierra, a trade staffer for Sen. Bill Cassidy, R-La., once worked in the Guatemalan embassy, and said that her boss feels that if outside investment leads to job growth, that will eventually reduce migration, as the rural poor will want to move to Guatemala City for a job, rather than to the U.S. She said that more jobs in the formal sector will also help with corruption and violence. “If people can make money or have jobs with the right opportunities, the need to engage in illicit activity will sort of come down,” she said. “We would miss an opportunity if we don’t highly focus on reengaging with Central America and engaging with them as economic partners,” she said. “There’s more value in a robust economic relationship than just extending foreign aid.”

Sierra added, “There are a number of senators and congressmen that are interested in doing something positive,” from both parties.

Ventrell also encouraged potential importers or investors to get in touch with the administration now as it works on shaping a response to the crisis in the Northern Triangle. “The timing is opportune for folks to make their voices heard,” he said.