Senior Investment Advisor
Other countries simply haven't been able to compete with China on cost. Consider Mexico, for example. In 2003, it lost over 200 manufacturing companies to China, despite the fact it takes products 45 days to arrive in stores from overseas versus a week or less from Mexico.
But there is an alternative to sourcing from China. Central America combines the cost benefits of China with the proximity of Mexico, which is why it is fast becoming an option for a number of manufacturers in this hemisphere. Banana and coffee plantations in Central America are being replaced by manufacturing parks that make industrial products, ranging from microchips and electronic switches to textiles and apparel. Nicaragua alone experienced a growth in manufacturing exports of nearly 35% during 2003, and as of October 2004, had surpassed the 20% mark for the year.
Such explosive growth in Nicaragua, a country of just 5.3 million people, has many manufacturers dubbing it "the China of the Americas." A respected labor force and solid environmental and copyright legislation have further bolstered its position. Just as David versus Goliath, Nicaragua is well armed for "battle" against China with the U.S.-Dominican Republic Central American Free Trade Agreement (DR-Cafta), legislation the U.S. Congress is expected to ratify in early 2005.
DR-Cafta, also known as Cafta, will serve as a catalyst in ramping-up Central American manufacturing. The agreement will as well tighten commercial relations between the U.S. and the region, the largest consumer of U.S. products, after Mexico. Furthermore, DR-Cafta will pave the way for Central America investment by foreign companies seeking duty-free access to U.S. markets, in particular apparel manufacturers.
Nicaragua obtained a special preference within the DR-Cafta agreement that allows apparel manufacturers to source fabrics anywhere in the world, while finished product enters the U.S. duty free. The agreement caps the fabric volume under this special treatment at 100 million square meter equivalent per year for five years and then phases it out by 20% annually over the next five years. Practically speaking, this means that for the next 10 years, current and future apparel manufacturers established in Nicaragua can purchase raw components anywhere they consider economically feasible and still enjoy the duty-free benefits into the U.S. for their end products. As a result, Asian raw materials suddenly become fair play for zero tariffs into the U.S., conditioned on Nicaraguan manufacturing.
This special treatment, also known as trade preference levels or TPLs, is driving American, European, and ironically Asian companies' interest in Nicaragua. Companies already established in other Central American countries, in search of a piece of the TPL pie, are scouting the terrain and looking at expanding into Nicaraguan soil or moving their operations into the country all together.
China may well remain the Mecca of manufacturing, but Nicaragua could soon become the Mecca of response manufacturing. It's not just about low-cost production anymore. It is also about quick delivery, something China will always struggle with.
ProNicaragua is a public-private institution supporting foreign investors and U.S. businesses seeking offshore opportunities in Nicaragua (www.pronicaragua.org).