The full study is available HERE.
Executive Summary:
This study offers valuable input and practical policy recommendations from U.S. apparel companies’ perspectives regarding expanding U.S. apparel sourcing from CAFTA-DR members. For the study, we consulted executives at 27 leading U.S.-based apparel companies (note: 85% report having annual revenues exceeding $500 million; over 95% have been sourcing apparel from the CAFTA-DR region for more than ten years).
The results confirm that expanding U.S. apparel sourcing from CAFTA-DR could be the best chance to effectively create more jobs in Central America and solve the root causes of migration there. To achieve this goal, we need to focus on four areas:
First, improve CAFTA-DR’s apparel production capacity and diversify its product offers.
- As many as 92 percent of respondents report currently sourcing apparel from CAFTA-DR members.
- Highly consistent with the macro trade statistics, the vast majority of respondents (i.e., 60 percent) place less than 10 percent of their company’s total sourcing orders with CAFTA-DR members.
- Whereas respondents rate CAFTA-DR members overall competitive in terms of “speed to market,” they express concerns about CAFTA-DR countries’ limited production capacity in making various products. As a result, U.S. companies primarily source basic fashion items like T-shirts and sweaters from the region. These products also face growing price competition with many alternative sourcing destinations.
- Improving CAFTA-DR’s production capacity and diversifying product offers would encourage U.S. apparel companies to move more sourcing orders from Asia to the region permanently.
Second, practically solve the bottleneck of limited textile raw material supply within CAFTA-DR and do NOT worsen the problem.
- The limited textile raw material supply within CAFTA-DR is a primary contributing factor behind the region’s stagnated apparel export volume and a lack of product diversification.
- Notably, respondents say for their apparel imports from CAFTA-DR members, only 42.9% of fabrics, 40.0% of sewing threads, and 23.8% of accessories (such as trims and labels) can be sourced from within the CAFTA-DR area (including the United States). CAFTA-DR’s textile raw material supply problem could worsen as the U.S. textile industry switches to making more technical textiles and less so for apparel-related fabrics and textile accessories.
- Maintaining the status quo or simply calling for making the CAFTA-DR apparel supply chain more “vertical” will NOT automatically increase the sourcing volume. Instead, allowing CAFTA-DR garment producers to access needed textile raw materials at a competitive price will be essential to encourage more U.S. apparel sourcing from the region.
Third, encourage more utilization of CAFTA-DR for apparel sourcing.
- CAFTA-DR plays a critical role in promoting U.S. apparel sourcing from the region. Nearly 90 percent of respondents say the duty-free benefits provided by CAFTA-DR encourage their apparel sourcing from the region.
- The limited textile supply within CAFTA-DR, especially fabrics and textile accessories, often makes it impossible for U.S. companies to source apparel from the region while fully complying with the strict “yarn-forward” rules of origin. As a result, consistent with the official trade statistics, around 31 percent of respondents say they sometimes have to forgo the CAFTA-DR duty-free benefits when sourcing from the region.
- Respondents say the exceptions to the “yarn-forward” rules of origin, including “short supply,” “cumulation,” and “cut and assemble” rules, provide necessary flexibilities supporting respondents’ apparel sourcing from CAFTA-DR members. Around one-third of respondents utilize at least one of these three exceptions when sourcing from CAFTA-DR members when the products are short of meeting the strict “yarn-forward” rules of origin. It is misleading to call these exceptions “loopholes.”
Fourth, leverage expanded apparel sourcing to incentivize more investments in the CAFTA-DR region’s production and infrastructure.
- U.S. apparel companies are interested in investing in CAFTA-DR to strengthen the region’s sourcing and production capacity. Nearly half of respondents explicitly say they will make investments, including “building factories or expanding sourcing or manufacturing capacities” in the CAFTA-DR region through 2026.
- CAFTA-DR will be better positioned to attract long-term investments in its textile and apparel industry with a sound and expanded apparel sourcing volume.
Additional resources:
FASH455 Global Apparel & Textile Trade and Sourcing 