Speed to market: China threatens Central America's biggest industry, textiles, but the isthmus has a secret weapon--it's much closer to the world's No. 1 customer, the United States.

As the fabric rolls off the machines in a Salvadoran textile shop, it's pretty clear who the customer is: The tell-tale black-and-white stripes are bound to be sewn up into team jerseys for legendary Italian football club Juventus, to be sold all over the world and used by the team's own players. Until now, Partex, which also makes clothing for top global brands like Nike, Adidas and Reebok, has seen significant growth since coming to El Salvador 11 years ago. Nevertheless, 2005 could be the year things change.

Quotas on some textile industry products started coming off two years ago, but in 2005 countries like China will have no restrictions at all on selling its products to the world's biggest buyer, the United States. According to the U.S. International Textile Association, since China joined the World Trade Organization (WTO) in 2001, exports of textiles and clothes from the Asian behemoth to the United States have doubled to US$11.60 billion, while sales from Central America have remained nearly flat.

The China phenomenon is a serious threat to Central America, and everyone in the region knows it, particularly in textile producers like Honduras, El Salvador and Guatemala, the three biggest textile exporters in the region, in that order. Honduras now has 6% of the U.S. clothing market--it's the No. 3 clothes exporter to the United States, after China and Mexico--selling products worth $2.50 billion a year, according to the Asociacion Hondurena de Maquiladores (AHM), the country's manufacturing association. El Salvador exports $1.70 billion in manufactured goods, 57% of the country's sales abroad, according to El Salvador's Economy Ministry.

The countries of Central America are fully aware of what's coming and have been preparing for several years, industry executives say. Despite the arrival of a competitor like China, sure to increase the competition for U.S. export sales, the region has an advantage: It's very close to the world's biggest market. "We are focusing on the subject of speed to market; that is an advantage that Asia will never have," says Juan Carlos Zighelboim, president of Partex.

The fact that Central America is close to the United States is key to the clothing business--especially considering the United States' high purchasing power, and where seasonal and fashion changes play such a big role in the market. While China can delay up to six months to deliver an order, Central American producers can be ready in as little as four to eight weeks. According to Zighelboim, U.S. clothing imports total $62 billion annually, of which an estimated 40%-$25 billion--is affected by changes in the seasons or fashion trends.

Discounts. For example, while Central American producers are between 10% and 20% more expensive than Chinese factories, half of Asian products are out of the market because they are behind on fashion and have to discount from 30% to 50%. Accordingly, Central American clothing makers are inarguably the most important providers for U.S. customers, says Zighelboim. "We are going to focus on our products that best penetrate that segment and stop focusing on what has to go to Asia, like the production of T-shirts," he says.

For instance, once a soccer team wins a major game, its jerseys tend to become quickly fashionable, so putting products on the street fast is very important. The last time Brazil's national team won the Copa America soccer championship in Latin America, its jerseys were in huge demand. The same happened with the Portuguese team as it worked its way through the semifinals at the last European Cup. (It finished second, after Greece.)

Spanish textile company Inditex, which makes clothing for the Spanish retail chain Zara and manufactures most of its products in Spain, Portugal and Turkey, is a good example of this strategy at the global level. Norman Garcia, the Honduran minister of industry and trade, says Inditex is the third-largest clothing chain in the world and competes in large part on its ability to react to fashion trends. "They deliver clothing two times a week to all their stores," he says. "It's clear that logistics is the key."

According to Jesus Canahuati, president of the Honduran manufacturer's association AHM and one of the textile industry's key executives--his brother is Mario Canahuati, Honduran ambassador to the United States--China is a potential problem, one that is making the business more efficient and forcing it to increase both the range of products it sells and the raw materials it consumes. That is, the pressure is forcing companies in Honduras to invest in creating textile mills and complementary businesses--such as cardboard, thread, labels and stamped fabrics, among others--in order to integrate the chain of production. "That way we can be a one-stop shop for the client," says Canahuati, whose company Elcatex sells to retail giants like Wal-Mart, Kmart, Target, Gap and Sears. China will impact most the business of clothing assembly, he says, which is the 30% of Honduras textile production that is not integrated and depends on fabric from other countries.

Through free-trade agreements Honduras has managed to get to the U.S. market without paying import tariffs, which on some products gives it a 16% advantage against Chinese production. If the U.S. Central America Free Trade Agreement (CAFTA) is approved, Canahuati says, Central American producers will have an edge in all products it exports. Nevertheless, experts note that such deals also undermine CAFTA's aim since free trade in general is reducing restrictions on products from countries all over the globe.

Beyond the risk that Latin American exporters might lose their standing in the U.S. market, there is also the danger that their own domestic markets will be inundated with cheaper Chinese goods. Some, however, believe that CAFTA could well attract Asian investors to the region. "In some board room of a Korean textile company they should be discussing the possibility of putting a plant in the region" says Zighelboim.

Industrial. More than 12 years ago, Raja B. Rajan, a U.S. businessman originally from India, was traveling through Latin America looking for a place to put a plant for a Pennsylvania company he worked for, when he tripped into San Pedro Sula, the industrial center of Honduras and a place he felt he could grow. The city was fast becoming a textile-producing cluster.

Rajan says that while Honduras is not the cheapest producer, not even in this hemisphere--Haiti and Nicaragua are cheaper--the country has strengths, such as being close to markets, good infrastructure and a nearby port, Puerto Cortes, the main deepwater port for the region in the Caribbean.

Aside from strategies that allowed for quicker export, Central America's governments are conscious that they should have a regionally integrated textile sector, known in the industry as the "full package" Central America needs to have the capacity to produce the raw materials and cloth all the way through production to buckles, buttons and packaging systems.

The region has to work to attract investments and technology, says Yolanda de Gavidia, the economy minister of El Salvador. Since much of the fabric used in textile mills are not produced domestically, people should be trained in design and financing should be facilitated through government investment funds. "We see that integration has to be a combined strategy for Central America. For example, we cannot and do not want to compete with the cost of labor in Nicaragua, which is 30% cheaper than our own" she says. "But we can complement it. We can have specialized operations in each of the countries." El Salvador could be an excellent distribution and corporate operations center, she says, because of its airport and because its telecommunications network is the cheapest in the region.

During the administration of U.S. President Bill Clinton, the idea of creating a Western trade bloc was born: the Free Trade Area of the Americas. At the time, China was not a big threat since it was not a member of the WTO. Then everything changed. Convinced that capitalism would slow the spread of communism, and because China was a huge opportunity for so many companies, the United States pressured China to join the global trade body.

China has one of the lowest labor costs in the world--although experts agree that that cost will rise quickly as productivity levels rise--but many accuse the country of using trade strategies that keep other countries from competing. One such practice involves providing large subsidies to exporters; financing loans that never need to be repaid; that China artificially undervalues its currency; and that the government is unconcerned with meeting environmental regulations. "The general sentiment among Western Hemisphere business executives when they think of China is that they are competing against an entire country," says James Borneman, editor of the trade journal Textile World.

Overproduction. Experts agree that the main countries that will be affected by the coming revolution will be Turkey and Chinas neighbors, like Bangladesh, which has filed complaints against China before the WTO to extend trade quotas that protected Bangladesh from Chinese overproduction.

Central America's business leaders meanwhile think a regional trade bloc is the key to keeping the industry healthy. According to trade experts, CAFTA is a necessity because if the region pays the same trade tariffs as China it will simply not be able to compete.

What is certain is that, the same as in any trade revolution, there will be winners and losers. The fact that this war was declared years ago provides a certain limited cushion for Central America's companies to concentrate on its strengths and work to make CAFTA a reality as soon as possible.

"There are a lot of people who worry about tariffs in the way they worried about the change in the millennium in 2000," Borneman says. "The reality is that things change but not in one day."

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ANDRES F. VELAZQUEZ * SAN PEDRO SULA, SAN SALVADOR