Cushioning Their Fall

Struggling Southern textile producers have for decades been fierce advocates for protection from cheap imports. But faced with sharply rising imports from China, a growing number of those firms are throwing their support behind a trade pact with Central America that would reduce trade barriers.

These producers, which have closed dozens of factories and shed tens of thousands of jobs in recent years, have concluded that the proposed Dominican Republic-Central American Free Trade Agreement, commonly known as CAFTA, is key to their survival.

That’s because the agreement would make it easier for U.S. apparel firms to produce their goods in Central America, where costs are lower, and then import them back into the United States duty-free. That would give them a cost advantage over Chinese goods that are charged duties.

The agreement also would help American textile producers because of a requirement that most of those Central American clothing imports contain U.S.-made materials, such as yarn or fabric.

Without CAFTA, these supporters conclude, China’s lower-cost advantages would be so huge that they would wipe out much of Central America’s textile and apparel industry -- taking out even more of the American textile sector with it.

“We’ve got to go for it,” said Keith Crisco, president of Asheboro Elastics Corp., a North Carolina producer of elastic products and specialty fabrics, who plans to testify in favor of the pact at a Senate hearing this week. “The situation is painful, but this particular choice is easy.”

American apparel firms, which have been moving production offshore for decades, have historically been big backers of trade pacts.

But this unexpected backing from the textile industry, which makes the materials that apparel makers use to assemble into finished clothing, could be good news for the Bush administration. The White House needs the support of textile-dependent Southern states to win congressional approval of the pact, the administration’s top trade priority.

President Bush contends that CAFTA would bring economic and political stability to the region and be a key building block in his plan to create a free trade zone across the hemisphere. The agreement would lower tariffs for industrial and farm goods and strengthen investment laws and intellectual property protections.

CAFTA supporters, including U.S. apparel importers and some major fabric and material suppliers, hope the agreement will be brought to Congress for a vote before Memorial Day.

They say Central America’s apparel makers, which are a primary source of hard currency and more than 400,000 jobs, need quick action to stay in the game. Since January, a number of factories in the region have closed, victims of the removal of global textile and apparel quotas that restrained exports from China and other large producers.

U.S. imports of Chinese apparel and textiles, measured in volume, jumped 63% during the first three months of 2005, compared with the same period the previous year, according to an analysis of U.S. government data released Friday by the American Manufacturing Trade Action Coalition.

Imports from CAFTA countries plummeted during that period: underwear, down 13%; dressing gowns, 14%; man-made-fiber trousers, 5%. Mexico was hit even harder, with exports to the United States of cotton and man-made-fiber shirts, underwear, bras and dressing gowns all showing double-digit declines.

“To be extremely blunt, if the CAFTA bill doesn’t pass, the ability of the countries in the region to survive as a significant supplier ... is significantly threatened,” said Ted Sattler, a group executive vice president at Phillips-Van Heusen Corp., the world’s largest shirt supplier and producer of the Van Heusen, Izod and Calvin Klein labels.

But opponents in the textile industry say the pact would do little to blunt China’s inroads into the U.S. market and would accelerate the job loss and environmental degradation that began more than a decade ago with the North American Free Trade Agreement. The struggling American textile industry has lost at least 14 plants and 7,300 jobs since the beginning of the year, according to industry data.

If the Bush administration doesn’t move quickly to impose restraints on popular Chinese-made goods, textile industry executives said, they will file petitions to force government action, possibly as soon as this week.

These opponents -- along with those who contend that the Central American pact lacks labor and environmental protections and would hurt U.S. sugar growers-- are threatening to derail it. Last week, Rep. Jane Harman (D-Venice) joined a growing list of Democrats, and a few Republicans, that have announced their opposition.

“This whole CAFTA thing has been a farce,” said Roger Chastain, chief executive of Mount Vernon Mills Inc., a Greenville, S.C.-based textile firm. “It’s an outsourcing agreement, for lack of a better word.”

Mount Vernon Mills reflects the complexities of an increasingly globalized U.S. economy. Although Chastain produces all his denim and other fabric in 16 plants across the South, he sells a substantial portion of it to Central American factories that assemble finished clothing for U.S. customers.

The basis for such a back-and-forth process comes from the Caribbean Basin Initiative, a program the U.S. government launched in the early 1980s to stimulate growth in the Caribbean and Central American region and give U.S. apparel producers access to low-cost labor. That program was expanded in 2000.

To gain support of U.S. textile firms and organized labor for the initiative, Washington established complex rules governing the level of U.S. content required in Caribbean and Central American goods for them to qualify for duty-free status. The objective was to ensure that at least some of the yarn or fabric -- or part of the production process -- originated in the United States.

Those trade rules significantly boosted U.S. imports of T-shirts, pants and underwear from Central America and turned that region’s factories into the second-largest customer for U.S. yarn and fabric, behind Mexico.

But Chastain fears that the latest trade agreement -- which covers the Dominican Republic, Nicaragua, Honduras, El Salvador, Guatemala and Costa Rica -- would undermine his business in that region. That’s because factories in the region successfully lobbied for the right to use limited amounts of fabric or yarn from Canada or Mexico in their products and still get duty-free status.

U.S. manufacturers also worry that Chinese fabric will be smuggled in through Mexico’s porous borders and illegally used in duty-free products made in Central America.

“That’s just a back door for the Chinese,” said Jim Chesnutt, chief executive of National Spinning Co., a North Carolina yarn producer that has closed three mills in recent years.

But Jack Ouellette, president and chief executive of American Textile Co., the nation’s leading supplier of pillow and mattress covers, said he needed more flexibility to keep sourcing from Central America.

The company imports pillow shells from El Salvador and China and stuffs and packages them at the firm’s factory near Pittsburgh. Although the shells cost less in China, Ouellette can make smaller quantities at the Salvadoran factory and fill replacement orders faster. But to keep costs down, he uses non-U.S. fabric, which means paying duties of as much as 12% on those products.

If CAFTA passes, American Textile could cut costs by using regionally produced fabric containing U.S. yarn to manufacture the pillow shells and not pay duties. But if the trade deal doesn’t go through, he said, the cost pressures might force him to shift more pillow orders to China. That would mean fewer jobs in El Salvador as well as in the U.S. textile mills supplying the factory. “Without CAFTA, the probability that China is going to win becomes greater,” said the chief executive, who employs 90 people at his facility in Duquesne, Pa.

Companies such as Phillips-Van Heusen and Jockey International Inc. face similar predicaments.

Producing in countries that are just a few days away by ship makes it easier to respond when customers demand quick replenishment of hot-selling designs or colors. Importers can produce replacement orders in Central America and have them on store shelves in the United States in a couple of weeks, compared with more than a month if the goods are made in China and transported by ship.

U.S. executives said they couldn’t afford to depend too heavily on China, given the threat that import restraints will be imposed. Using North American suppliers also offers some insurance against other unexpected problems, such as the outbreak of severe acute respiratory syndrome two years ago that restricted travel and shut factories.

But Mark Jaeger, senior vice president at Jockey International, said his firm’s business in Central America was restricted by complex rules that create bureaucratic headaches and raise costs, such as an annual cap on the number of colored T-shirts that can be imported duty-free.

Jockey produces and cuts fabric at its factories in North Carolina and Georgia and ships the pieces to plants in Honduras and Costa Rica for assembly and packaging. But Jaeger said Jockey was prohibited from selling the goods from those factories into the local market, a restriction that would change if CAFTA passes.

“Ironically, you have the largest producer of underwear in the world in San Pedro Sula, but you will not find those bras in the local shops,” he said, speaking of the industrial city in Honduras where Jockey’s facility is located.

The tensions over CAFTA’s future have spread throughout the industry, from yarn spinners and dyers to elastic makers. Asheboro Elastics counts many of America’s leading apparel firms, including Jockey and Fruit of the Loom, among its customers. The company produces its goods in North Carolina, but 75% of its elastic for underwear waistbands is shipped to factories in Central America, the Caribbean and Mexico for final assembly.

If CAFTA passes, Asheboro is considering putting a factory in Honduras to supply that region. But Crisco, the company’s chief executive, said he would still need his U.S. factories to produce specialty products and supply Mexico and other markets. The firm recently expanded into the mattress business, betting that the market for such a bulky product is less likely to face competition from China.

Like many others in the textile industry, Crisco believes that the biggest challenge to his firm’s future comes from China. If his customers moved production across the Pacific, he would have a much tougher time competing for their business against Asian suppliers that benefit from lower costs and shorter lead times.

As a result, Crisco said, the future for his business will be tough, even with CAFTA:

“I guess if you pass CAFTA, your business is going to go down 10%. But by the way, if you don’t pass CAFTA, your business is going to go down 50%. I want my business to go up. But that may not be an option.”