Viewing cable 06SANSALVADOR2543
Title: SALVADORAN NONMAQUILA EXPORTS BOOM UNDER CAFTA-DR

IdentifierCreatedReleasedClassificationOrigin
06SANSALVADOR25432006-10-20 18:27:00 2011-08-30 01:44:00 UNCLASSIFIED Embassy San Salvador
VZCZCXRO6258
RR RUEHLMC
DE RUEHSN #2543/01 2931827
ZNR UUUUU ZZH
R 201827Z OCT 06
FM AMEMBASSY SAN SALVADOR
TO RUEHC/SECSTATE WASHDC 4095
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC
RUEHRC/USDA FAS WASHDC
UNCLAS SECTION 01 OF 02 SAN SALVADOR 002543 
 
SIPDIS 
 
STATE PASS USAID/LAC 
STATE ALSO PASS USTR 
USDOC FOR 4332/ITA/MAC/WH/MSIEGELMAN 
3134/ITA/USFCS/OIO/WH/PKESHISHIAN/BARTHUR 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EINV ES
SUBJECT: SALVADORAN NONMAQUILA EXPORTS BOOM UNDER CAFTA-DR 
 
REF: A. SAN SALVADOR 2526, B. SAN SALVADOR 2513, C. SAN SALVADOR 
2475, D. SAN SALVADOR 1719 
 
Summary 
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¶1.  Central Bank data show that nonmaquila exports were 64 percent 
higher during the first six months of CAFTA-DR than they were March 
to August 2005, increasing from $123 million to $202 million.  Much 
of that increase reflects Salvadoran exports of ethyl alcohol, 
thanks to liberal CAFTA-DR rules of origin, but exports of some 
agricultural and processed foods as well as light manufactures also 
increased.  Maquila exports have largely rebounded from difficulties 
related to CAFTA-DR's staggered entry into force, but their impact 
resulted in an overall fall in exports (including maquila) of 6 
percent for the period. End summary. 
 
Maquila Exports Suffer, Overall Exports Decline 
--------------------------------------------- -- 
¶2.  During the first six months of CAFTA-DR, Central Bank data show 
Salvadoran exports to the United States (including maquila, that is, 
apparel manufactured for export in a free trade zone using mostly 
imported components) fell by 6 percent compared to the same March 1 
- August 31 period in 2005, from $1.02 billion to $959 million.  A 
16 percent decline in maquila exports, from $898 million to $757 
million, accounted for nearly all the decrease.  Maquila exports 
suffered because El Salvador pushed for CAFTA-DR entry into force 
months ahead of its Central American peers and for several months 
could no longer source raw materials for maquilas from neighboring 
countries as it had under the Caribbean Basin Initiative. 
 
¶3.  Textile and apparel exports produced by so-called "national" 
firms, which sell locally in addition to exporting and typically use 
more local inputs, grew by 33 percent under CAFTA-DR, up to $16.2 
million from $12.1 million in March to August 2005.  Exports of 
towels, which previously faced a 9.1 percent tariff, increased 48 
percent from $3 million to $4.5 million.  U.S. Department of 
Commerce monthly data suggest Salvadoran apparel exports (including 
both maquila and national firms) have rebounded in recent months, 
and for July and August 2006 they exceeded 2005 levels for those 
months.  Ref. C described the textile and apparel sector in more 
detail. 
 
Nonmaquila Exports Grow 64 Percent 
---------------------------------- 
¶4.  Central Bank data show a much more positive picture of 
Salvadoran exports under CAFTA-DR when maquilas are excluded. 
Nonmaquila exports were 64 percent higher during the first six 
months of CAFTA-DR than they were March to August 2005, increasing 
from $123 million to $202 million.  Much of the increase in exports 
can be linked directly to skyrocketing ethanol exports, which 
increased from $5.9 to $85.4 million, made possible by liberal 
CAFTA-DR rules of origin.  Ref. B described current Salvadoran ethyl 
alcohol production capacity and plans for expansion. 
 
¶5.  During the first six months of CAFTA-DR, Salvadoran data show 
sugar exports fell by $16 million, reflecting the expiration of a 
supplemental quota that El Salvador had filled in the period March 
to August 2005. Other sectors took up the slack for sugar, in some 
cases taking direct advantage of CAFTA benefits.  Dairy exports 
nearly quadrupled, increasing from $102,000 (March - August 2005) to 
$378,000 (March - August 2006).  Cheese, which faced a range of 
tariffs before CAFTA-DR (and still faces a tariff-rate quota for 
some varieties), accounted for most of that growth.  Dairy exports 
are expected to continue to grow as local producers target 
Salvadorans living in the United States. 
 
¶6.  Other products that target Salvadorans in the United States also 
show potential, based on exports during the first six months under 
CAFTA-DR.  Cookies, pastries, and other snack foods--although in 
many cases not subject to tariffs before CAFTA-DR, showed 37 percent 
growth, increasing from about $2.2 million before CAFTA-DR to $3 
million after the agreement entered into force. Exports of tropical 
fruit juice blends--once subject to a 7.4 cents/liter 
tariff--increased 78 percent from $877,000 to $1.6 million.  Exports 
of beans, subject to a nominal tariff before CAFTA, increased from 
$2.1 million to $2.7 million. 
 
¶7.  Light manufacturing showed positive growth as well under 
CAFTA-DR, although nearly all these exports already entered the 
United States duty free before the trade agreement entered into 
force.  Exports of tools and implements tripled, increasing from 
$676,000 to $2.2 million, while exports of toys and games--some of 
which did face a tariff before CAFTA-DR--increased from $182,000 to 
$673,000, more than tripling. 
 
 
SAN SALVAD 00002543  002 OF 002 
 
 
Salvadoran Imports of U.S. Goods up 10 Percent 
--------------------------------------------- - 
¶8.  U.S. exports to El Salvador increased nearly 10 percent during 
the first six months of CAFTA-DR, from $1.3 billion to $1.5 billion, 
despite a 14 percent fall in exports of inputs for El Salvador's 
maquilas (from $559 million to $482 million).  U.S. export growth 
was balanced among most sectors.  For sensitive agricultural goods, 
U.S. producers quickly took advantage of expanded access,  though 
they were still limited by tariff-rate quotas.  For example, U.S. 
pork and beef exports grew overall from $359,000 to $1.7 million. 
Salvadoran rice imports grew only 4 percent over the period, $11.7 
million to $12.1 million, while sensitive white-corn imports grew 
only 2 percent from $6.5 million to $6.7 million.  Less sensitive 
yellow-corn imports increased from $25.7 to $32.4, a 26 percent 
jump. 
 
Comment 
------- 
¶9.  Given the size of the Salvadoran economy, the timing of 
individual orders can have a noticeable impact on the data.  Still, 
the early data suggest that Salvadoran exports are already 
benefiting from CAFTA-DR market access.  When viewed with firm-level 
information provided in Ref. D, the case is even stronger--juice 
exports are growing thanks to Del Monte's focus on the U.S. market, 
local firm Quesos Petacones is pushing cheese exports, and towel 
manufacturer Hilasal is receiving more orders for U.S. export. 
However, new investment--either greenfield or to expand existing 
capacity--will be required to take advantage of other CAFTA-DR 
opportunities.  That could take time, because both domestic and 
foreign investment have in recent years been among the lowest in the 
region, attributable in part to the worsening security situation 
here.  See Ref. D.  End comment. 
 
Barclay