The Debate Over Multilateral versus Bilateral Trade Liberalization: An Empirical Assessment of the I

1
The Debate Over Multilateral versus Bilateral
Trade Liberalization An Empirical Assessment of
the Impact of US Sponsored Regional Trade
Liberalization on the Central American Woven
Apparel Sector

• By
• Jonathan A. Fink
• University of Southern Mississippi

2
Research Objectives

• Explore the extent to which trade preferences
  granted by the United States to apparel producing
  Central American nations will effect the
  competitiveness of that regions woven apparel
  exports to the United States.
• Assess the validity of hypothesis found in the
  literature that restrictive rules of origin
  embedded into US sponsored reciprocal regional
  trade agreements (RTAs) serve as a form of
  disguised protectionism for the US domestic
  textile industry.
• Contribute to limited but emerging body of
  theoretical and empirical literature that
  assesses impact of preferential trade on growth
  competitiveness.

3
Why is this study important?

• Allows for a deeper, empirically based assessment
  of a major academic debate over whether
  preferential trade arrangements serve as a
  building bloc or an impediment to trade creating
  multilateral liberalization.
• Provides specific policy related advice to
  industry executives in the US and Central
  American textile and apparel industries with
  regard to production and sourcing decisions that
  maximize global competitiveness in the recently
  liberalized global textile and apparel industry.

4
Literature Review

• Section 1 The Shifting Architecture of Trade
  Regulation, From Multilateralism Towards Regional
  Bilateral Agreements What Lies Behind the
  Change?
• 1982 US Announced it would deviate from
  longstanding support of multilateralism enter
  GATT arrangements to deepen liberalization
  with willing partners. (Krueger 1999, p. 108).
  Why the Shift?
• Panagariya (1999) traces shift to hardening
  European opposition to start of new GATT round in
  1982.
• Bhagwati (1990) traces shift to Latin debt crisis
  of early 1980s creating political necessity for
  US to deepen regional relations to ensure future
  economic stability.
• Baldwin (2006) traces shift to changing power
  relations that weakened US negotiating leverage
  in GATT relative to an emerging EU, Japan and
  newly industrialized nations of E. Asia in early
  1980s.
• Gordon (2003) shift due to US loss of
  competitiveness in global, especially Asian
  markets beginning in 1980s.

5
Literature Review

• The Three Waves of Regional/Preferential Trade
  (Pomfret 2006)
• Wave 1 1950s-1960s movements to form customs
  unions in Africa, Central and South America on
  heels of birth of European Economic Community.
• Wave 2 Initiated with US shift away from MTN in
  1982. US unilateral preferential Caribbean Basin
  Initiative (1984) FTAs with Israel (1985)
  Canada(1986) culminating with creation of NAFTA
  in 1994.
• Wave 3 The New Regionalism rash of FTAs in
  Asia. Sparked in early 21st century aftermath of
  Asian Financial Crisis and corresponding Asian
  rejection of Bretton Woods Institutions a waning
  APEC and breakdown of MTN in Seattle.
• Bhagwati Theory Weakness of GATT Article 24
  allowing for preferential agreements that
  departed from reciprocal MFN spawned movement to
  regionalism that was not foreseen by GATT
  architects (Bhagwati 1990)

6
Literature Review

• Section 2 The Great Debate, Towards a
  Theoretical Underpinning Do Bilateral and
  Regional Preferential Trade Arrangements Nurture
  or Undermine Global Liberalization? The three
  scholarly positions
• Group 1--Supporters of both Preferential and
  Multilateral Agreements Bilateral Regional
  Preferential Agreements serve as an engine of
  competitive liberalization leading to a circle
  of further liberalization and a movement towards
  genuine multilateral free trade. (Schott 2005
  Bergsten 2005 Trejos 2005)
• Group 2--Supporters of Multilateralism only
• Various economic studies argue trade diversion
  is significant by-product of preferential trade
  and find negative correlation between growth and
  participation in preferential agreements
  (Bhagwati 1990 Bhagwati, Greenaway and
  Panagariya 1998 Gordon 2003 Krueger 1999
  Panagariya 2004 Vamvakidis 1999)
• Group 3Supporters of a limited Multilateralism
• Shift in emphasis from tariff cuts towards
  institutional harmonization has led to
  contentious discrepancy of what constitutes
  fair trade. Diversity of national institutions
  are path dependent and positive for long run
  development. Attempts to homogenize institutions
  could be economically and socially disruptive and
  have swamped the WTO agenda (Rodrik 2005 Baldwin
  2006)

7
Literature Review

• Scholarly Debate Inconclusive Theoretical
  arguments both for and against reciprocal
  preferential trade as engine for global
  liberalization are inconclusive and contradictory
  with limited empirical support yet we know
• With recent breakdown of MTN (failure of Doha) we
  can expect recent trend towards regional
  liberalization to strengthen.
• According to WTO, in 46 year period between
  1948-1994, 124 regional trade agreements were
  commenced. And in ten year period since birth of
  WTO 130 new bilateral and regional trade
  agreements have been reported to WTO.
• Section 3 Assessing the Post MFA Textile and
  Apparel Market and the Policy Response.

8
The Post MFA Global Textile Apparel Industry

• Pre-Phaseout Literature Series of academic and
  policy papers produced in lead up to January 2005
  phase-out of MFA modeled forecasted impact of
  newly liberalized textile and apparel trade.
  (USITC 2004 Abernathy, Volpe and Weil 2004
  Andriamananjara, Dean and Spininger 2004
  Ianchovichina and Martin 2001)
• Post MFA Forecast With exception of Abernathy
  et al, consensus forecast predicted major gains
  for Chinese apparel exports in post MFA
  environment. Most predictions based on analysis
  related to reduced tax equivalence of quota
  (price of quota per unit of exports). Tax
  equivalence for China India estimated at
  30-35, thus allowing for major reduction in
  prices with no resulting loss in profit margins.
  Other LDCs that were not major exporters had
  lower tax equivalence, limiting ability to lower
  prices in post-quota era without loss of
  profitability.
• China Safeguards Due to this forecast, safeguard
  clause was added to Chinas accession to WTO
  which allowed member states to adopt temporary
  quotas for up to 12 months on Chinese textiles
  apparel in cases of import surges. Safeguard
  lasts through Dec. 31, 2008.

9
The Post MFA Global Textile and Apparel Industry

• US imports of Chinese origin woven apparel (H.S.
  Chapter 62) increased from US 6.6B in 2004 to
  US 10.2B in 2005 (US Dept. of Commerce). In May
  2005 US enacted safeguard clause quotas and in
  November US China entered bilateral agreement
  adopting quotas on 34 product categories in
  effect through 2008. (see Table 1 US Imports of
  Select Chinese Apparel)
• Bangladesh, India, Cambodia and Indonesia
  experienced increase in exports to USA while
  other smaller apparel exports namely Nepal, Lao
  PDR and several nations in Sub-saharan Africa
  lost market share. (UNDP Report/Adhikari,
  Ratnakar and Yamamoto 2005)
• 60 of Nepalese apparel factories closed in 2005
  (UNDP 2005)
• Six of Lesothos 50 apparel manufacturers closed
  in late 2004 just prior to MFA phase-out.
• Apparel exports to the US from Lesotho and
  Swaziland declined in most categories in 2005.
  (US Dept. of Commerce) despite duty free
  unilateral trade preferences granted to
  sub-saharan Africa under the African Growth and
  Opportunity Act (AGOA) which had propelled the
  regional industry since 2000.
• Mexicos exports of apparel to the US declined
  from 6.6B in 2004 to 6B in 2005.
• Conclusion Chinas post MFA export gains prior
  to quotas came at expense of Mexico, Sub-Saharan
  Africa and other smaller suppliers.

10
The Shift in US Trade Policy Towards RTAs

• Regionalism Dates to early 1980s when US adopted
  unilateral preferences scheme known as Caribbean
  Basin Initiative
• CBI Allowed for production sharing under HS
  807/9802 reduced tariffs on imports of Caribbean
  sewn apparel from MFN on export price to tariff
  only applied to value added performed in region.
• CBI Amended in 1986 as 807 amended to 807a
  allowing for quota free shipments (Guaranteed
  Access Levels or GALs) on exports to USA of
  apparel sewn in Dominican Republic, Honduras, El
  Salvador, Guatemala, Costa Rica and
  Jamaicaprovided such apparel was manufactured
  with US origin fabric.
• 1988US extended 807a preferences to Mexico under
  special regime
• 2000CBI amended (now called the Caribbean Basin
  Economic Recovery Act) to allow for full duty
  free entry of Caribbean sewn apparel made with US
  origin fabric. 2000 CBERA in effect gave
  Caribbean Central America NAFTA parity.
• Rationale for US Regional Policy 1) Increase US
  Agricultural Exports, 2) Support regional
  governments on the path to democracy and 3)
  Provide regional garment manufacturers and their
  US fabric suppliers a critical competitive
  advantage relative to Asian suppliers (USTR 2005)

11
Rules of Origin Rationale and Implementation

• Rationale Ensure against trade deflection
  (situation in which an FTA member could evade
  domestic tariffs by importing third party
  products through the member of the FTA that has
  the lowest tariff.)
• ROOs Only necessary for FTAs not Customs
  Unions
• FTAs Each member has their own external tariff
  for non-members
• Customs Unions All members of the union maintain
  the same external tariff
• Textile and Apparel ROOs Tend to be process
  based (certain manufacturing processes must be
  performed in-union for final product to be
  considered of-origin within the union
• Within NAFTA, US adopted triple transformation
  yarn forward origin rules. As general rule US has
  adopted yarn forward in recent FTAs, however
  numerous exceptions have been lobbied into
  agreements on product-by-product basis leading to
  litigious morass of origin rules.
• Example Eight different origin rules for
  womens brassieres among the USs eight different
  preferential agreements (Qureshi Grynberg 2005)

12
Potential Solutions to the Morass of Origin Rules

• Rules of origin amount to little more than a
  policy of trade diversionaryexporting of
  protectionism. (Krueger 1999, p. 113)
• Eliminate rules of origin in PTAs where third
  country tariff schedules among members are
  minimal. And eliminate all rules of origin for
  the member of the FTA that has the lowest
  external tariff (Panagariya 1999).
• Encourage existing FTAs to deepen integration by
  moving towards adoption of customs unions, thus
  eliminating need for origin rules (Schott 2005).
• Adopt Policy of CumulationA policy whereby raw
  materials from a wide range of countries are
  counted as having originated within the FTA.
• Canada has adopted the most liberal policy of
  cumulation in its free trade agreements allowing
  for global cumulation.
• US has adopted limited form of cumulation within
  CAFTA, allowing for raw material sourcing from
  Canada and Mexico subject to a set annual quota.
  (see box 1 Rules of Origin Under the US-CAFTA/DR
  FTA)

13
Assessing Evidence Methods Data Collection

• Will Central Americas export oriented apparel
  industry be able to compete with China in a post
  MFA era? How will the rules of origin impact
  Central Americas competitiveness in apparel
  exports to the USA? Will CAFTA protect US
  domestic textile interests by providing a
  captured market for US textile manufacturers?
• Methodology
• Derive (from existing statistical sources) per
  unit price data for Central Americas imports of
  specific raw material/fabric types and exports of
  finished apparel over a sixteen year period
  between 1989-2005.
• Compare Central Americas export prices for
  specific leading apparel products at the H.S.
  10-digit level relative to Chinas exports of
  same products.
• Compare CAFTA tariff preference on qualifying
  apparel relative to sourcing third country
  non-qualifying raw materials and subjecting
  exports to MFN.
• Evaluate per unit costs of US origin fabrics
  relative to global suppliers in order to assess
  whether CAFTA will provide a captured market for
  the US textile industry.

14
Data Sources and Collection

• Primary Data Sources
• US Department of Commerce, Office of Textiles and
  Apparel (OTEXA) Major Shippers Report.
  http//www.otexa.ita.doc.gov.
• Central American Common Market (Secretaria
  Integracion Economica Centroamericana (SIECA)
  http//www.sieca.org.gt.
• USDOC OTEXA Major Shippers Report
• Detailed compilation of US import statistics
  based on harmonized tariff codes at most
  disaggregated 10-digit level. Database can be
  sorted by country, region or product and includes
  historical data from 1989-latest quarterly
  figures.
• Database for US imports of textile and apparel
  from CAFTA included 2953 line items. In limiting
  the database for this study to Chapter 62-woven
  apparel database reduced to 928 line items.
• Product specific data related to import volumes
  and values are collected at total aggregate
  levels, necessitating manual insertion of
  formulas and some data transformation to derive
  per unit volumes.
• Secretaria Integracion Economica Centroamericana
  (SIECA)
• Compiled by Guatemala secretariat of CACM with
  trade statistics disaggretated to H.S. 8-digit
  level. Unlike OTEXA data is not provided in Excel
  format, necessitating cumbersome copy and paste
  process.

15
Study Limitations

• Study is limited to woven (as opposed to knit)
  apparel. Why?
• While knitwear comprises a significant portion
  of Central American apparel production and
  output, the region has a well established knitted
  textile industry, thus insulating this niche from
  possible adverse trade diversionary effects
  directly tied to rules of origin. Because this
  study focuses on impact of ROOs on Central
  American (CAFTA) competitiveness limiting
  analysis to the import dependent woven sector
  seemed most appropriate.
• More Longitudinal Data is Needed Despite the
  fact that US Trade preferences to Caribbean and
  Central American nations dates to the mid-1980s,
  any type of longitudinal dataset analyzing CAFTA
  trade will require a waiting period of five to
  ten more years due to reality that CAFTA
  implementation and the MFA phase-out is only post
  2005.
• Nevertheless, an analysis based on 2005 data
  collected in the newly liberalized textile and
  apparel sector seems appropriate to provide an
  initial preliminary assessment of the hypothesis
  of this study.

16
Data Analysis US Textile Apparel Imports

• Between 1989-2005 US total imports of textiles
  and apparel increased from US 26B to US 89B (US
  Dept. of Commerce, Major Shippers Report)
• Between 1989-2005 US total imports from Central
  American CAFTA member countries increased from
  1.3 to US 9.3B (US DOC)
• CAFTAs major growth period took place between
  1990 1997 with growth increasing at decreasing
  rate after 1997 and stagnating since 2000. (see
  chart 2)
• Chart 3 Shows changes in export volumes of
  CAFTAs leading apparel exports to the USA,
  1989-2005.
• Note dramatic increase in exports of womens
  brasseries between 1994 1995 (possibly due to
  Fruit of the Looms shift of production from
  USA?)
• High growth rates between 1994-1999 in mens
  bottom weights also noted. This growth parallels
  growth in Mexicos output of these same products
  during this time period (Gereffi, Martinez and
  Bair 2002)
• Chart 4 Shows changes in per unit prices of
  CAFTAs leading apparel exports. With the
  exception of mens man made fiber shirts, cotton
  trousers and very cheap mens/boys underwear a
  clear pattern of increasing then falling prices.

17
Can CAFTA Compete with China Post MFA?

• Rule If LDPchina lt LDPcafta then no preference
  exists
• (Based on China freight cost gt CAFTA freight by
  4/pc)
• Therefore, with MFN 17 5(freightinsurance)
  , if FOBCAFTA gt FOBCHINA by 22 than no
  preference exists and CAFTA is uncompetitive.
  (see table 3)
• Womens Brassieres A key niche of the Central
  American industry throughout the 1990s but has
  been decimated by rapidly expanding Chinese
  production and exports. China Exports grew from
  zero in 1994 to 331M by 2005. Chinas per unit
  FOB export price for womens brassieres (table
  3) was 2.41 relative to CAFTA 77 higher at
  4.25 per piece. CAFTA Uncompetitive

18
Can CAFTA Compete with China Post MFA?

• Womens Cotton Pants Chinese exports grew
  modestly prior to 2000 followed by a surge in
  2005. Despite Chinas growth, CAFTA origin
  products maintained a slight 13 per unit price
  competitive edge as CAFTA FOB prices in 2005 were
  4.75/piece relative to 5.48 for Chinese goods
• Analysis Per unit price edge should have
  provided competitive edge to CAFTA, but as noted
  in Chart 4 exports which increased from 2001-04
  from 3.3M to 3.9M drew back to 3M in 2005
  during Chinas export surge. CAFTA is competitive
• Womens Blue Denim Pants Chinese exports up
  from 27M in 2004 to 149M in 2005 (445 gain).
  During same time period imports from Central
  America (CAFTA) increased from 152M to 158M,
  despite slightly lower volume. CAFTAs denim
  exports achieved despite stiff price competition
  from China at 7.20/piece relative to 8.97 for
  Central American denim wear.
• Analysis Regional nature of just-in-time denim
  production for US market seems to be influencing
  sourcing decisions favoring CAFTA despite stiff
  Chinese competition. CAFTA is competitive

19
Can CAFTA Compete with China Post MFA?

• Mens Cotton Pants Chinese exports experienced
  steady declines (in value) between 1999 2003
  falling from 93M to 39.8M before rebounding to
  55M in 2004. 2005 exports more than doubled to
  116M. Over same period, Central American exports
  increased with CBERA preferences, peaking in
  2000. Chinese goods held 28 per unit price
  advantage in 2005 at 5.81/piece relative to
  CAFTAs 7.44.
• Overall Analysis of CAFTAs Apparel
  Competitivness vis a vis China
• Central America held lower per unit price for
  only four products in 2005 and the two items in
  which Central America held on to a significant
  price advantage (in bold below) were both very
  low priced commodities
• Womens synthetic pants (33) Per unit price
  in 2005 _at_ 3.47/pc
• Mens underwear (18) Per unit price in 2005 _at_
  1.13/piece
• Womens cotton pants ( 13)
• Mens denim pants (5)
• Conclusion Bleak prospects for CAFTA Assuming
  same quality with exception of specific niches
  (mens/womens denim, womens cotton pants mens
  underwear pattern of falling prices and volumes
  is likely to continue. Chinese LDP lt CAFTA LDP by
  25 for most categories rendering CAFTA
  uncompetitive despite preferences.

20
Assessing the Protectionist Impact of CAFTA Rules
of Origin

• CAFTA ROOs Yarn forward (see box 1)
• Rule If US/Regional textile suppliers Worlds
  low cost producers (US producers have an absolute
  advantage) then yarn forward rule of origin does
  not serve to capture a market for the domestic US
  textile industry.
• Therefore The key to understanding the extent
  to which origin rules capture a market for the US
  textile industry requires analysis of per unit
  prices for Central Americas textile imports, US
  relative to other suppliers.
• Rule If PFChina (1.44) lt PFUSA then opt-out of
  CAFTA and source China.
• Based on current CAFTA fabric import duty of 10
  US MFN on apparel of 16.9
• Assumption(s) a) fabric 50 of apparel
  production cost (industry standard) and b) same
  quality.
• PF FOB fabric price
• Charts 7-14 Analysis of all major categories
  (at H.S. 4-digit level) of woven textile fabrics

21
The Protectionist Impact of CAFTA ROOs

• Chart 7 Woven Light Weight Cotton Fabrics (H.S.
  5208)
• Guatemala served as the low cost supplier to
  CAFTA in 2005 with per unit cost of US 2.77/kg
• Guatemalan supply US 1.3 Million out of total
  CAFTA imports of 22M indicating Guatemalan
  industry has limited capacities.
• 2nd lowest cost supplier China _at_ US 4.18/kg
• US imports priced at 6.44/kg (54 higher than
  China in 2005)
• Analysis
• From mid-1990s until 2004, US textile industry
  served as worlds low price supplier to Central
  America.
• If local textile industry can increase capacities
  and maintain position as the worlds low cost
  supplier in this cotton category, regional
  competitiveness in light weight cotton apparel
  may be maintained.
• US based Cone Mills, the worlds leading denim
  manufacturer announced in May 2004 intention to
  build new greenfield denim plant in Guatemala
  expected to employ 700 and produce 30 million
  yards.
• Decision Source China or Guatemala

22
The Protectionist Impact of CAFTA ROOs

• Chart 8 Woven Heavy Weight Cotton Fabrics (H.S.
  5209)
• Brazil Lowest cost high volume supplier in 2005
  _at_ US 4.18/kg. Brazil supplied about 25 of
  regions volume.
• Wide range of global suppliers selling small
  volumes into Central America at world price of
  3.14/kg. ROW supplied 19 of regional
  requirements by volume in 2005
• US price of 4.65/kg relatively competitive with
  Brazil
• Chinas price of 6.28/kg 26 higher than US
• US was leading supplier in 2005 (both in quantity
  and value)
• Analysis
• Given that 25 of regional requirements were of
  Brazilian origin an additional 19 from ROW, it
  appears as if regional apparel manufacturers are
  willing to forego CBERA/CAFTA origin
  requirements, opting to source fabric from third
  countries and export to the USA at the MFN rate
  instead of duty free. (note in table 5 the CACM
  does not impose an external tariff on denim
  fabrics).
• Decision Source USA

23
The Protectionist Impact of CAFTA ROOs

• Chart 9 Woven Light Wt. Cotton Blended w/MMF
  (H.S. 5210)
• Panama worlds low per unit price in 2005, but
  small volume _at_ 216,000 kgs.
• US has historically the low cost supplier.
  Consistently below China and ROW in all years
  with exception of 2005.
• China fabrics entered at 5.83/kg in 2005
  slightly lower than US at
• 6.07/kg. China was leading supplier in volume
  2M kgs.
• Analysis Given freight costs, US textile
  industry remains highly competitive.
• Decision Source USA
• Chart 10 Woven Heavy Wt. Cotton Blended w/ MMF
  (H.S. 5211)
• US textile industry highly competitive in this
  niche with exception in 2005
• China lowest cost supplier in 2005 at US
  2.22/kg, a large 151 lower than US price of
  5.57/kg.
• USA leading supplier in volume _at_ 257,000 kgs
  out of total regional requirements of 788,000
  kgs.
• Analysis Historically the US has been
  competitive in this niche. And despite Chinas
  overwheming price leadership role in 2005, US
  maintained a leading supplier position indicating
  CBERA/CAFTA preferences are not key variables to
  maintaining a market in this niche.
• Decision Source China

24
The Protectionist Impact of CAFTA ROOs

• Chart 11 Woven Fabrics of Synthetic Fibers (H.S.
  5512)
• China did not enter into production until 1997
• China has served as the low cost supplier since
  2003 at 3.72/kg
• China exported 1.1 million to Central America in
  2005 out of Central Americas total imports of
  3.2M.
• US was the leading supplier in volume terms in
  2005 despite a per unit FOB price of 7.76/kg
  relative to 3.72/kg for China.
• Panama supplied approximately 15 of regional
  imports at highly competitive per unit price
  equal to China at 3.73/kg.
• Chart 12 Woven fabrics of Synthetic Fibers blend
  w/ct (H.S. 5513)
• Chinas per unit price in 2005 was 2.05/kg
  relative to 4.05/kg for US fabric
• Total regional imports of 3.4M Kgs with US
  maintaining lead supplier position exporting 900
  thousand Kgs relative to Chinas 600 th Kgs.
• Guatemala 2nd leading volume supplier in 2005 at
  3.93/kg.

25
The Protectionist Impact of CAFTA ROOs

• Woven Heavy Weight Fabrics of Syn fibers w/cotton
  (H.S. 5514)
• Total Central American imports amounted to 6M in
  2005. Of this very small volume, China served as
  the low cost supplier with per unit price of
  2.29/kg.
• US export price in 2005 was 5.21/kg
• China, USA, El Salvador and Panama all supplied
  similar volumes between 230 and 300 thousand
  Kgs.
• Regional supplier Panama relatively price
  competitive at 2.59/kg. El Salvador supplied at
  very high per unit price of 7.60/kg.
• Analysis of Charts 11-13 Synthetic Fiber Fabrics
• China has obtained dominant low cost supplier
  position in all categories of synthetic fiber
  fabrics.
• US maintains leading volume position despite
  relatively high per unit costs, but because China
  holds significant per unit price advantage in all
  categories, US exports do not appear to be a
  result of preference based trade diversion, but
  rather due to other non-price related variables.
  
• Decision Source China

26
Conclusion The US Textile Industrys Cotton Niche

• Have the rules of origin embedded into regional
  trade agreements with Central America served to
  divert trade in favor of US textile industry?
• Contrary to popular press, analysis in this paper
  shows US textile industry has held its position
  as a price competitive global supplier of
  majority cotton based textile fabrics.
• Even in post MFA era, US exported heavy weight
  cotton fabrics (H.S. 5209) at a lower per unit
  price than China.
• In light weight cotton fabrics (H.S. 5208) US
  industry held its own with per unit price
  slightly above China.
• Assuming US can maintain its position as globally
  competitive supplier in a climate of price
  repression, this paper rejects the hypothesis
  that regional preferential trade is serving to
  export protectionism in cotton based fabrics.
• With the exception of H.S. 5208, the preferential
  duties of CBERA/CAFTA are not having a role in
  protecting and providing a captured market for
  the US textile industry in the cotton niche of
  the industry.

27
Conclusion Chinas Dominance in MMF Fabrics

• Since late 1980s China has maintained dominant
  low cost supplier position to Central America for
  majority man made fiber fabrics.
• Analysis of trade patterns reveals US holding
  onto leading volume supplier despite
  uncompetitive prices.
• With the ability to source China origin fabrics
  at less than half the cost of US fabrics, the
  savings of a 17 MFN tariff by qualifying for
  CAFTA duty free status can be more than offset by
  sourcing raw materials out of China.
• Assuming same quality, given the major price
  differential between US and China origin fabrics,
  one would expect a change in sourcing patterns
  towards non-CAFTA qualifying textiles. Variables
  other than CBERA/CAFTA tariff preferences,
  perhaps lead time (see Abernathy, Volpe and Weil
  2004) are responsible for continued sourcing of
  high priced US origin fabrics

28
Preferential Trade in an Era of Global
Liberalization?

• Multilateral liberalization in the global textile
  apparel industry increasingly competitive
  global industry w/ sourcing patterns defined by
  cost of production/price related variables.
• Despite US objective of using CAFTA to capture a
  market for its textile industry, multilateral
  liberalization is exposing winners and loosers in
  terms of cost/price and overwhelming
  protectionist objectives. (example the US
  man-made fiber niche).
• Emergence of regional textile suppliers as a
  direct by-product of preferential trade is
  providing export opportunities to the C. American
  textile industry.
• Growth of C. American textile industry and new
  FDI is positive for job creation and economic
  growth.
• Central American apparel manufacturers will have
  to forge specialization in denim and cotton
  bottoms which use raw materials that can be
  sourced from the US and regional textile
  suppliers at competitive prices.
• With exception of limited niches, the US-Central
  American partnership will find it hard to compete
  with Chinese and Asian suppliers in the post MFA
  apparel chain characterized by price compression
  Darwinian realities.