Lecture presented at Techtextil-Symposium North America 2006

Many companies venture into the international market through exporting or joint ventures only to find the experience unprofitable and, as a result, are discouraged from further investment of time and money. Giving up on the international arena is, and will be, very costly to companies, and, indeed, to the American economy—especially on the threshold of realizing a Western Hemispheric free trade area.

Some of the Basic Lessons of Participation in the International Market

At the risk of sounding “preachy”, several points of departure are in order. What is meant by “points of departure”? Simply this: The international marketplace is different from the domestic market environment in one broad and significant way: It is relatively unfamiliar. What guides activities and investment in the U.S. domestic market do not necessarily hold in an international market context. Therefore, there are certain critical points of departure that differentiate international markets from the U.S. domestic market:

Planning - entry, survival, and growth in international markets require careful, explicit planning. In domestic markets much “planning” and plan implementation is reduced to simply carrying out what you customarily do from long years of experience. By contrast, successful development of international markets requires that nothing be taken for granted, and therefore explicit, detailed forward planning and market research are a prerequisite.

Acculturation—When you intend to do business in Rome…, it is good to find out how the Romans do business. Developing business abroad means dealing with a culture whose manner of communication and negotiation, whose customary manager-subordinate relations, and whose marketing appeal are significantly different from the “American style”. Business school texts are replete with case studies of win-win situations that became lose-lose disasters because of cultural differences.

Resources—International business development is a long-term undertaking and requires significant resources of time, money, and, particularly, management talent. Therefore, a successful international enterprise requires a realistic assessment of needed resources in all these areas.

Time—Special mention should be made of the time factor. Transposing American expectations to foreign markets with regard to the speed of negotiations, plant construction, meeting sales goals, and so on, is likely to meet with frustration for many reasons. Impatience precedes costly blunders.

Overarching the whole investment and operating process is the presence of government and the attendant issues related to environmental regulations, currency stability and exchange rates, trade barriers, and legal codes pertaining to business. In the case of emerging economies, government relations are especially critical, as most of these economies have specific development goals that are given priority. It pays to know these priorities and to cater to them as much as possible.

There are literally hundreds of potential markets and manufacturing locations when you envision your business operating in a global context. Rapidly industrializing emerging economies offer some of the best opportunities for expansion in the area of industrial and technical textiles. Choosing among these economies is a function of many variables, but certainly one of the needed analyses is an assessment of the economic performance and stage of development of individual regions or countries. In addition, it is important to assess the support of international financial community, in particular the World Bank and the International Monetary Fund, and the relative emphasis placed on the country or region by U.S. foreign and economic policy.

The focus of this discussion is on Latin America and the countries that make up the Central American Free Trade Area, or CAFTA.

Opportunities in the Emerging Hemispheric Free Trade Area

In the Western Hemisphere a new free trade area, building on NAFTA and the recently approved Central American Free Trade Area, is emerging. It will add a population of nearly 300 million to a hemispheric free trade area, doubling the size of the current free trade bloc. With it comes a rationalization of the competitive environment, including tariff reductions and elimination of non-tariff trade barriers, coordinated intra-regional monetary and fiscal policies, and, generally, far more stable markets and economies. The growth of industry and commercial enterprise in this vast region will generate significant potential for technical textiles. The time is at hand to position a stake in this market.

There are three critical reasons to consider trade and investment in Latin America and in the CAFTA nations in particular:

1. There is considerable focus on this area from the standpoint of U.S. economic and diplomatic policy;
2. The area has active support of the World Bank and the International Monetary Fund;
3. The region has made solid progress in terms of economic growth and industrialization.

The first two points are important because both imply that strong efforts are underway at the highest levels to assure a business-friendly environment, to include relatively free markets, financial—particularly currency—stability, and rule of law in the observance and enforcement of contracts and intellectual property rights.

The third item, relating to economic growth and industrialization, are critical because market development in technical and industrial textiles is highly dependent on industrialization and modernization.

U.S. Government Efforts to Foster Western Hemisphere Trade and Development

While demographics play an essential role in evaluating market potential, Latin America is of major interest to business for an additional reason: It is the focus of U.S. government trade and development policy with heavy overtones of foreign policy interest.

Currently, U.S. trade and development policy with respect to Latin America and the Caribbean (abbreviated as LAC) takes three directions:

Solidifying and progressively liberalizing existing trade and economic cooperation treaties—This includes NAFTA, the Caribbean Basin Initiative (CBI), and longstanding bilateral agreements between the United States and various countries.

Implementing or pursuing new subregional treaties, such as the Central American Free Trade Area, or CAFTA (recently ratified by the U.S. Congress and signed into law by President Bush on August 2, 2005) and the U.S.-Andean Free Trade Area (envisioned to include Colombia, Peru, Ecuador, and Bolivia).

Pursuing and consummating a series of bilateral free trade agreements with various Latin American countries, such as Panama, Colombia, and Ecuador (in the context of subregional treaties).

The World Bank is actively bolstering the U.S. efforts in implementing these treaties by encouraging physical infrastructure investment, upgrading educational systems and training, and making a determined effort to foster growth of small and mid-sized businesses throughout the region. Commenting on a recent World Bank assessment of CAFTA, World Bank President Paul Wolfowitz stated, “This agreement will help…provide the potential for increased trade and investment in the region—critical factors in boosting economic growth and reducing poverty.”

Similarly, the IMF is pursuing policies seeking to promote growth in the region—in particular encouraging increased levels of foreign direct investment, maintaining currency stability, and establishing uniform tax codes. According to IMF analysts, “…It is expected that CAFTA-DR will lead to a further synchronization between the region and the United States, owning to the likely effects on trade and financial sector linkages. This synchronization may help reduce output volatility, and facilitate the coordination and integration of macroeconomic policies in the region.” And, therefore, it should be added, lead to a more stable, more predictable economic climate.

All these policy initiatives and objectives, individually and jointly, are leading to the eventual formation of the Free Trade Area of the Americas (FTAA), encompassing all 34 major countries of Latin America. According to recent statements by E. Anthony Wayne, U.S. Assistant Secretary of State for Economic and Business Affairs, 29 out of the 34 democratic nations in the hemisphere support the formation of FTAA, although “some partners are not ready to proceed”.

Technical and industrial textiles: History of trade growth in NAFTA

There has been considerable controversy with regard to the gains and losses attributed to NAFTA.  In regard to the overall trade balance in the general category of textiles and apparel, it is fairly common knowledge that Mexico’s exports to the United States are considerably greater than U.S. exports to Mexico.  For that matter, the U.S. trade balance with Canada is also negative.  (See Figure 1, below.)

Figure 1: U.S. Trade Balance in Textiles and Apparel
 With NAFTA Partners, 2000-2005 ($Millions)

                                    Source: U.S. Department of Commerce

It should be noted that if apparel products are taken out of the equation, the U.S. balance of trade is decidedly positive.  Thus, to a large degree, NAFTA has lived up to what it was supposed to do; that is, among other things, provide a market for U.S. textile and fabrics in the low wage economy of Mexico—and provide for Mexico access to the huge U.S. apparel market. 

Unfortunately, the world is larger than the United States and Mexico.  The declining negative balance trend line seen in Figure 1 is largely the result, not of increased exports to Mexico, but the diversion from Mexican imports to China and other Asian apparel manufacturers.

Technical and industrial textiles have a positive trade balance

In the categories of textiles where technical and industrial applications are dominant, or at least have a significant share, U.S. exports both to Mexico and Canada, individually, are significantly higher than imports.  See Tables 1 and 2, and Figure 2.

Table 1

U.S. and Mexico:  Exports vs. Imports of Technical and Industrial Textile
Categories*, 2004 And Year-To-Date 2005 ($Millions)

	2004			2005 Year-to-Date
	Exports	Imports	Balance	Exports	Imports	Balance
Broadwoven Fabrics	1,275	218	1,057	1,115	218	897
Coated Fabrics	465	38	427	407	36	371
Nonwovens	233	57	176	254	57	197
Narrow Fabrics	214	53	161	208	62	146
Ropes & Cordage	44	50	-6	42	57	-15
Tire Cord	14	21	-7	18	21	-3
Other	9	106	-97	7	97	-90
Total	2,254	543	1,711	2,051	548	1,503

Source:  U.S. Department of Commerce.  Products grouped by NAIC categories.
* Not all textiles in these categories are classified as technical or industrial.

Table 2

U.S. and Canada:  Exports vs. Imports of Technical and Industrial Textile
Categories*, 2004 and Year-To-Date 2005 ($Millions)

Source:  U.S. Department of Commerce.  Products grouped by NAIC categories.
* Not all textiles in these categories are classified as technical or industrial.

Figure 2:  U.S. Exports & Imports with Mexico for Technical/Industrial
For Textile Categories, 2004 and 2005 YTD

Trade in technical and industrial textiles with CAFTA-DR

The recently concluded treaty with Central American nations and the Dominican Republic, expanding the western hemisphere free trade area southward to the doorstep of South America, shows a very large favorable trade balance for technical and industrial textiles with the CAFTA nations. (See Table 3, below.)  Although the export market is about one-half the size of Mexico’s, it is virtually equal to that of Canada.  Export figures for the 2001-2005 have been very consistent, at or exceeding those of last two years, and have been a considerable improvement over the previous five year period.  On the other hand, the low levels of imports from CAFTA-DR indicate the underdeveloped nature of the region’s technical and industrial textile industry.

Table 3

U.S. and CAFTA-DR:  Exports vs. Imports of Technical and Industrial
Textile Categories*, 2004 and 2005 ($Millions)

Source:  U.S. Department of Commerce.  Products grouped by NAIC categories.
* Not all textiles in these categories are classified as technical or industrial.

Economies of CAFTA-DR have shown sustained growth

Are the CAFTA-DR economies a trade and investment opportunity for technical and industrial textile manufacturers?  The trade figures above suggest that is the case. Two additional important indicators support this view:

• According to IMF data, Central American countries have recorded an average annual compounded growth in real GDP of 4.0% over the 1991-2003 period.  The Dominican Republic’s real growth has been 5.1% during the same period.  What this means is that CAFTA-DR has increased GDP over this 13 year period by about 70%.

• The stock of foreign direct investment in the region from the United States has stayed at the $4.0-$5.0 billion level during the 1999-2002 period, the latest available data from the IMP.  While this is substantially lower than Mexico, as a percent of GDP it is higher.

A decision to mount a sales effort in the CAFTA-DR region or to invest in plant and equipment must, of course, be based on a much more specific analysis of market conditions and prospective return on investment.  Moreover, it is critical to make an assessment of internal resources that may or may not be available for foreign expansion.  All too often the excuse for not initiating international market development is that there are simply not enough resources to handle problems at home and take on a distant and unfamiliar effort abroad.

Cost-efficient entry into foreign markets

The complaint just mentioned is hardly without merit—it is almost always exactly on target.  Therefore, it becomes highly cost efficient to work with consultants that temporarily fill the gap in management resources.  The consulting team should include experience with corporate planning and development, market research, finance, human resources, and information technology.  These five areas of expertise are complementary requirements in any domestically-based company, and the situation is little different when extrapolated to the international business arena.  These resources do not, of course, have to be deployed at the same time, but can be called upon as needed.

At the same time developing business in international markets cannot occur without top management’s commitment to the project.  While consultants may become a “shadow management”, they cannot take the place of top management, and, must, in most cases, work closely with their counterparts in the client firm.

In summary, technical textile firms have a clear opportunity to exploit a newly developing market in the CAFTA-DR region.  A foothold there could not only lead to a region-wide sales expansion but serve, as well, as jumping off point to the rest of the South American market.  International markets do not, as a general rule, conform to the expectations and performance metrics of the U.S. domestic market, but such obstacles are surmountable with careful planning and implementation—and a large dose of patience and persistence.