Let's face it, when American firms look at the world map for sourcing opportunities, Central America doesn't usually land at the top of the list, even more so if the firm doesn't have an interest in apparel. But that's beginning to change, particularly as the Central American Free Trade Agreement (CAFTA), and democracy, continues to gain traction.

Part of the problem is perception, acknowledges Juan Carlos Pereira, executive director of the foreign investment agency ProNicaragua. "Central America today versus Central America during the 1980s is quite different. Previously, the region was considered dangerous-full of civil conflict and fighting. But we've had 15 years of democracy now and we're maturing very fast. We're still fighting, but it's not about war, it's about commerce. Central America is in the game now in terms of trade and investment. It's still a very poor region and we have a ways to go, but it's truly an interesting place to do business."

U.S. garment manufacturers have had a presence in Central America for years, taking advantage not only of low labor costs, but of the region's close proximity to the United States. These factors remain a major draw, says Pereira, despite the mad rush to China along with the recent elimination of global textile quotas. "Large retailers tell us that China is important to them, yet they don't want to put all their eggs in one basket. They need options in order to diversify their production and they want quicker response times. This is critical for replenishment in fashion-oriented sectors."

Pereira says, "Moving goods from a factory in Managua to the U.S. takes between 4 and 6 days, and that includes an average 3-day transit at sea," which is considerably less than the total transit time for ocean cargo shipped from Asia to the U.S. He adds, "Honduras and Costa Rica have the largest ports on the Atlantic side and Nicaragua has one of the largest ports on the Pacific side," referring to Honduras' Puerto Cortes, Puerto Limon in Costa Rica, and the Port of Corinto in Nicaragua.

Progress is also being made on the formation of the Central American Customs Union, which may be in place by the year's end. "For commerce, it essentially means that the borders between Central American countries will be eliminated. We already have a free trade agreement within Central America, but we're going one step further and creating a customs union. Currently, the four countries in negotiations are El Salvador, Guatemala, Honduras, and Nicaragua. We're hoping that Costa Rica will also join us."

Creating a one-stop shop for apparel manufacturers

While Central American countries have relied on preferential trade agreements to attract U.S. apparel manufacturers, the CAFTA promises to take production to a whole new level. "It provides the missing link," says Pereira. "In the old days, we were just an 807 [referring to the nickname for a trade preference program, especially prevalent within the apparel manufacturing sector, which uses American-made fabric in garments that are assembled in a foreign country, then re-imported into the U.S. at a reduced duty rate]. We basically took U.S. fabric, sewed it into a garment in Central America, then shipped it back. We didn't have the developed supply chain in our region. But with CAFTA, we're able to make the yarn here, the fabric, make the garment and ship it duty-free to the U.S. That will allow us to develop more vertical integration and to be more competitive and actually provide that quick response that we need to deliver. It's critical for us. We may have the physical proximity, but if we don't have the supplier base, the textile base here, we're going to have a hard time giving the customer what they want-basically, a one-stop shop in Central America for their product that they can get very quickly."

A report commissioned by the American Apparel and Footwear Association backs that up. It states: "Typically, the modern apparel industry in a country or region will evolve toward the production of higher valued, more complex garments, and will diversify into a broader range of products. In addition, an industry will expand upstream into the production of fabrics, yarns, accessories, and logistical support. Eventually, a vertically integrated, robust and diverse industry is achieved. By and large, the evolution and maturation of the Central American industry has failed to occur because companies have relied upon restrictive U.S. trade preferences and not the development of robust supply chain for competitive advantages."

Diversifying the Central American economy

Outside of apparel, Central American countries are starting to attract attention from other manufacturing sectors. "In Nicaragua, we're focusing on three sectors for new investment and growth. One of the areas is light manufacturing, which includes apparel. However, we also are looking at two other areas within light manufacturing: medical products assembly, which includes products like IVs and other medical products that require labor intensive assembly, and auto parts assembly, for goods like wire harnesses. For example, in Nicaragua we have a Mexican-Japanese joint venture that's supplying Ford Motor with wire harnesses, and in Honduras, Lear Corporation has established operations for wire harness assembly."

Meanwhile, a recent trade mission to Central America was a real success for several Northwest Florida companies, says Curt Cultice of the U.S. Department of Commerce. Executives from Oren International, a Pensacola niche-marketing paper products company, and Infinity Optical Alignment of Navarre Beach, were two of the participants. Both companies made in-roads to Costa Rica's leading demand sector-the paper industry.

The Commerce Department provides a wealth of information for U.S. firms interested in exploring business opportunities in Central America, advises Cultice. A few highlights include:

• Costa Rica: The 1998 opening of Intel Corporation's US$ 300 million microprocessor facility was a milestone in the country's transition to high-technology industry and was followed by large new investments by Abbott Laboratories and Procter and Gamble. The services sector is 55% of GDP.

• El Salvador: The country currently has 17 free trade zones and more than 200 individual factories that enjoy free zone status. El Salvador is also the largest cell phone market in Central America with nearly a million subscribers.

• Guatemala: U.S. products and services enjoy high name recognition in Guatemala, and U.S. firms have a good reputation in the Guatemalan marketplace. As a result, almost half of all Guatemalan imports come from the United States.

• Honduras: There are a number of strong prospects for exports of goods and services to Honduras, including: franchising; food processing; auto parts and service equipment; safety and security equipment; computers and peripherals; computer services; telecommunications; textiles and equipment; and electric power generation equipment. The country is the third largest exporter of apparel and textile products to the U.S. market behind Mexico and China.

• Nicaragua was one of the first sixteen countries identified as a candidate for economic assistance under the Millennium Challenge Account, in recognition of the government's commitment to transparency, economic reform, and human investment.

ProNicaragua's Pereira notes that the services sector is also important to the region's growth. "This includes data processing, call centers-functions that fall into the business process outsourcing category. We have a lot of highly educated university students that we can put to work, particularly for U.S. companies that are looking for near-shore opportunities in their outsourcing strategy."

In fact, it's not just the U.S. that's moving quickly into the outsourcing arena, explains Pereira. "Even companies in Mexico are now starting to outsource to call centers in Central America, which may be surprising to some folks in the U.S. Either way you view it, outsourcing is a reality. On one hand, there will be job losses, but on the other hand, employment will grow in areas of high-value and value-added operations. Therefore, places like Central America will start doing the lower-level stuff. It's really a division of labor issue.