Global Logistics-May 2008

The allure of Central America and the Caribbean as a New World for exploration beguiled 16th-century European traders eager to exploit its wealth of natural resources and labor. Today, the region is attracting colonization of a new order and under its own terms—and U.S. trading partners are equally captivated.

As China sourcing becomes more complicated, adventurous businesses need only look southward, beyond Mexico even, to an emerging group of countries ripe for picking—as well as sorting, distributing, manufacturing, and other value-added logistics activities.

Historically a strong exporter of agricultural products and natural resources, recent economic growth in Middle America—the region comprised of Mexico, the countries of Central America, and the West Indies—has principally tracked the course of U.S. demand for alternative offshore manufacturing and outsourcing locations.

Maturing inter-America trade policies—notably The Dominican Republic-Central America Free Trade Agreement (DR-CAFTA) and the Caribbean Basin Trade Partnership Act (CBTPA)—and the promise of bringing sourcing and manufacturing activities closer to home to increase reliability and responsiveness has placed Middle American markets squarely in the scope of U.S. businesses.

As an example, the U.S. apparel industry is taking measured steps, threading countries such as Guatemala, Nicaragua, and Honduras into its broader supply chain fabric.

This sourcing shift occurs as U.S. consumers spend more money on clothing and the apparel manufacturing industry loses more market share to offshore interests.

Much of this manufacturing activity has been pushed offshore to Asia-Pacific countries where mass production capacity and cheap labor weigh favorably in reducing direct manufacturing costs. But growing pockets of textile and clothing production within Middle America reflect an emerging trend in the U.S. clothing industry.

Retailers face increased pressures to have product in stores, and lengthening supply chains compounded by rising transportation costs, threaten timeliness, efficiency, and economy.

Retailers and manufacturers are looking to create better balance in their supply chains by weighing the costs and benefits of sacrificing cheaper labor against shorter transport times, therefore creating more latitude in their supply chains, observes Mike Todaro, managing director of the American Apparel Producers’ Network, an Atlanta-based non-profit business network of more than 600 apparel companies.

Sourcing decisions generally depend on “whether it’s a nickel cheaper down the road,” he notes. Even so, businesses need to consider both the direct and indirect costs of their location choices.

For example, what is the actual benefit of moving production farther inland in China to tap cheaper labor when you have to consider additional transportation and warehousing costs, varying provincial rules and regulations, and less quality control and assurance visibility?

At some point, hidden costs begin to shift the economic balance from labor to location. In this regard, Middle America holds a distinct advantage over Asia.

“The primary advantage of Central America is its proximity to the U.S. market,” says Jose Luis Perales, senior program associate at the Woodrow Wilson International Center for Scholars, Washington, D.C.

“Realistically it cannot compete with China and other Asian countries on labor cost. It will always be a zero sum game—cost versus time to market.”


The ongoing development of the apparel sector in Central American and Caribbean countries subtly serves as a stepping stone to growth and expansion in other industries.

“Apparel is generally an entry-level manufacturing industry for small nations. Labor chases low-cost industry, so the learning curve is short,” Todaro says.

Some maquila manufacturing sectors in El Salvador and Costa Rica, for example, are developing more sophisticated niches and empowering economic development.

“Costa Rica has a favorable business environment, good labor, and political and social stability; El Salvador has the right policies in place; and the Dominican Republic has successful maquila producers,” Perales says.

The maquila phenomenon, however, poses some obstacles to sustained economic growth. Industrial development in Central America and the Caribbean is largely differentiated by domestic industries wholly supporting local demand and maquilas importing raw materials, then exporting finished product.

“The maquila, in some regards, operates as a separate country. It is more integrated with foreign than domestic demand patterns,” says Perales.

One consequence of this progression is that countries essentially create two economies that exist and evolve independent of each other. The Dominican Republic’s export sector is profitable, for example, but domestic industries are hurting. If and when exports take a southward turn, the rest of the economy suffers, says Perales.

As a result, not building links between maquila and domestic industries can be risky because it has a negative influence on attracting foreign investment.

“Policy is the one factor that can build these links and attract business and foreign direct investment,” Perales explains. “It’s not about having lax regulations; it’s about having good regulations that tie together management, labor, standards, and training. It’s about creating a fertile and accommodating environment that can embrace foreign companies and their best practices.”

On the plus side, though, he sees domestic industries in the Dominican Republic, Honduras, and Guatemala beginning to develop export capabilities that will help diversify and stabilize economic growth.


Trade legislation is also leveling the playing field. “Currently, nothing in South America makes sense for U.S. apparel companies. That might change with legislation. But there is a significant volume of trade with Central America and the Caribbean,” says Todaro.

The ratification of DR-CAFTA in 2005, which added the Dominican Republic to the existing free trade agreement between the United States, Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua, also promises to expand economic ties, facilitate cross-border trade, and further incentivize U.S. businesses to invest and locate in the region.

CAFTA gave Central American nations a lifeline to survive the China phenomenon, not compete with it, notes Perales. Its impact has otherwise been negligible as countries continue to adapt and evolve their operating procedures to meet the agreement’s requirements.

“Apparel and accessories firms report that CAFTA has slowed delivery time because of the additional origin certification now required for the import of apparel to the U.S. market,” according to a recent report by the International Food Policy Research Institute (IFPRI).

Similar difficulties integrating maquila-centric economies into more coherent self-supporting networks have further muted the trade agreement’s early potential. At the same time, these shortcomings raise the stakes for governments to enact trade policies that leverage the region’s collective potential as a value-added logistics location.

“Increased Central American integration would also improve delivery times in the region because the various processes involved in apparel production are spread among different countries,” the IFPRI report adds.

“Within each country, cooperation among existing maquilas could help the sector obtain higher numbers of full-package orders. By spreading the order among several firms, as a group they could achieve the delivery time demanded by the U.S. retailer and continue producing previously scheduled orders.”

This type of specialization has yet to evolve to the extent it has in Asia, but the tide appears to be turning as U.S. businesses reconsider global sourcing options and Central American and Caribbean countries realize that surviving China may not be their end game.

For Todaro, the area’s reckoning is clear: “The competition is the Far East, so these countries must compete as the New South,” he says.

Olympic Bypass Takes Off

The recent implementation of a new air route over China, designated B208, will reduce air traffic congestion during the Beijing Olympics and arguably have airfreight shippers breathing a little easier.

The Olympic Bypass routing will alleviate air traffic delays and congestion, as flights from Europe to Shanghai, Guangzhou, and Hong Kong will no longer have to redirect through Beijing.

“The Olympic Bypass is the result of numerous discussions we have had with the Chinese authorities since 2006,” says Giovanni Bisignani, director general and CEO of the International Air Transport Association. “By shortening the route 60 nautical miles, we will save about 91,000 tons of CO2 annually.”

While introduced to counter Olympic-related congestion, this is the latest in a series of major permanent improvements to China’s air traffic management infrastructure.