Free Trade Theory And The Importance Of DR-CAFTA For Russel Brands And Honduras

DR-CAFTA and the Benefits for Russel Brands

Discuss about the International Business for Dominican Republic Central American.

According to the free trade theory, retailers should be able to import clothing from the most efficient country based on its cost affectivity, and regardless of where they are located in the globe (Feenstra 2015). Russel Brands is a leading manufacturer of sportswear, and its competitors include Nike, Adidas, Zara and Benetton. The company however does not have a loyal customer base due to which it is unable to charge premium prices for its product. Hence to cut cost, the company considered contracting Kangwei from China to manufacture and market the product in that region. With the passage of Dominican Republic Central American Free Trade Agreement (DR-CAFTA) in 2005, the barriers between USA and six Latin American countries, this offered several benefits to Russel Brands. Firstly, this allowed trade tariffs to be virtually eliminated to the trade republic, and thus enabled Russel Brands to source the raw materials in Central America, manufacture the fabric in United States, and send the fabric to Honduras for assembly and the completed garments can then be re-exported to USA for distribution and sales (Estevadeordal and Talvi 2016). Doing so allowed the process of procuring raw materials and the production of the finish product to be done in close proximity to the markets in US. Without the DR-CAFTA and with the Multi Fiber Agreement (MFA) in Central America, China was taking over the market, with its cheap products, which was made possible due to the lower wages paid to Chinese Textile workers and the lower value of the Chinese currency, which artificially reduced the price of its products (Chaudhary 2011). The market share of Chinese companies before DR CAFTA also increased significantly across many sectors of the textile industry, such as their share of finished clothing products, sock manufacturing and apparel markets. Thus, allowing free trade to take its natural course would have resulted in China taking over significant shares of these markets, and seriously jeopardized the sustenance of the Textile Industries in the western hemisphere (Nimon and Beghin 2017). While DR-CAFTA actually allowed the western companies to hold on to the market, and enable manufacture, assembly and marketing of their products at a cheaper price than its competitors. This proves that DR-CAFTA was pivotal for the success of these organizations, without which they would have to depend on China manufacture and market their goods. Moreover, DR-CAFTA also enabled the company to retain control over the process of assembly and distribution of the finished products, which was also advantageous (Cavusgil et al. 2014). Thus I believe that DR-CAFTA should not be rescinded.

The Advantages for Honduras due to DR-CAFTA

DR-CAFTA provided several advantages to the firms and the people of Honduras. The Multi Fiber Agreement (MFA) that imposed strict import quotas and shielded the Latin American countries from international competition in the textile market. This caused a market gap which was promptly filled by Chinese companies and hence impacting producers from Central America. Honduras is a nation with severe economic stress, and a population of about 7 million, and a per capita GDP of just USD 4,500 and 65% of the population is below the poverty line. The growth of the country’s economy is majorly dependant on the US economy (Cavusgil et al. 2014). Thus with DR CAFTA, helped the firms in Honduras, by helping them to establish their presence in the US market, exporting more than two thirds of its products there, and importing 50% of its import from US (Meyer 2015). The growth in the economy also helped the Honduran Government to create a large cluster of apparel firms, to keep up with the demand in the supply of textile products. The apparel sector in Honduras also employs more than 110,000 people accounting for almost 30% of the total industrial employment in the nation, which is a significant boon to the nation’s already struggling economy. The Honduran Government also incentivized firms in the country to invest in the apparel sector by offering attractive tax packages, exempting the firms from income tax, value added tax and other duties (Harris 2017). Moreover, the strategic location of the nation allows textile manufacturers to transport their merchandise to Puerto Cortes, which is the biggest port in Central America in less than 30 minutes, from where it takes on 22 hours for the merchandise to reach Miami. This reduces the transit time for the merchandise by several weeks if it were transported from China (Pisani 2017). This has allowed both the businesses and the firms to significantly cut down the costs of its logistics. The Honduran Government is also using the economic growth to develop a university for Textile and Apparels, in order to train future managers and supervisors, and thus help to counter competition from the Chinese market (Cavusgil et al 2014). This also is beneficial to the nation, by creating more job opportunities and a prospect for further growth in the Honduran presence in the western market. This also supports the fact that free trade should be extended further through Latin America via the proposed Free Trade Area of the Americas, and thus promote development in more Latin American nations and their economies (Villareal and Fergusson 2017).

Attracting Foreign Investment in Honduras and the Textile Industry

In order to keep the jobs in Honduras and also to increase the number of Jobs in the country, the Honduran Government can try to attract more foreign investments into Honduras, and increase its presence further in the Western Markets (Lefebvre 2015). The strategic position of Honduras makes the logistics of the operation quicker, compared to that of China (Ellis 2016). Honduras can use this as the selling point to get investments from more western textile and apparel industries. Giving attractive tax exempts and tax packages for firms investing in this sector have already resulted in a significant growth in that sector, and an increase in the employment in the country. The economic development has also allowed the Government to set up a university to train young professionals in managing the business, and thus gain a competitive advantage over China (Cavusgil et al. 2014). This can be considered as a step in the right direction to attract more investments. Furthermore, the Government can also try to attract other companies apart from Russel Brands, diversifying its product range and its client portfolio. The Government can also try to attract more Foreign Direct Investments (FDI) in the form of vertical investments or even conglomerate and horizontal investment (Frutos-Bencze et al. 2017). The vertical investment can allow more companies like Russel Brands to allow procurement of raw materials and the assembly of the products to Honduras, while allowing the Investors to manufacture the textile and control its distribution. A conglomerate investment can also be considered, which can allow foreign investors to invest in the textile sector, helping it to grow even further, and create more jobs and revenues. Even horizontal investment from service providers from developed countries in Honduras to set up their services in the country can help to increase the economy, and revenues.  The low cost of labor, and free trade system of the Central Americas, can be a big advantage for any company or business willing to invest in Honduras, and in the process, utilize the strategic advantages due to the close proximity of the country to the western market (Muhammad 2017). This is a significant advantage especially over the ultra competitive Chinese companies, which are already able to provide products at a much cheaper price than the western counterpart, flooding the markets with the Chinese products.

The competition Russel Brands face from other competitors like Nile, Adidas, Zara and Benetton is very steep, and the lack of a dependable loyal customer base also prevents Russel Brands from keeping premium price for its products, as is the case with big brands like Nike, Adidas, Beneton or Zara. To maintain reasonable cost of their products and in an attempt to cut their production costs, the management of Russel Brands was faced with a dilemma on whether to keep the manufacturing process to Honduras, or move everything to China. The competitors (Adidas and Nike) are already considering such a move (Cavusgil et al. 2014). However, the company must also consider the strength of their competitors compared to theirs. That is to say, Nike and Adidas are much bigger companies, with greater infrastructure, which can support its operations from China. However, the distance of China from the Western markets is still a significant challenge for them. Russel Brand’s collaboration with Honduras ensures that they have a strategically placed location for the procurement of the goods and later assembly of the products. This can be compared with Eastern Europe, where even though the labor costs are double to that of Central America and China, it has a significant advantage due to its close proximity to the EU market. Thus continuing its procurement and assembly processes in Honduras, Russel Brands can counter Chinese firms as well as their other competitor (Adidas, Nike, Benetton and Zara), by cutting the costs of the products from its quick transit, lower labor costs, free trade markets and the willingness of the Honduran Government to attract foreign investments. Maintaining relation to Honduras can also pave the way for Russel Brands to access the Central American consumer market, and thus offer prospects of global development of the brand. The company can even afford to market their products as specialized or discounted prices, owing to the fact that they are manufactured in the same continent, and hence easier to transport. Also, expanding its market base wider in Central America can also help to ensure the future success of the organization.

References:

Cavusgil, S.T., Knight, G., Riesenberger, J.R., Rammal, H.G. and Rose, E.L., 2014. International business. Pearson Australia.

Chaudhary, A., 2011. Changing structure of Indian textile industry after MFA (Multi Fiber Agreement) phase out: A global perspective. Far East Journal of Psychology and Business, 2(2), pp.1-23.

Ellis, R.E., 2016. Honduras: A Pariah State, or Innovative Solutions to Organized Crime Deserving US Support. Army War College-Strategic Studies Institute Carlisle United States.

Estevadeordal, A. and Talvi, E., 2016. Towards a New Trans-American Partnership. Brookings Institution editorial, April, 11, p.2016.

Feenstra, R.C., 2015. Advanced international trade: theory and evidence. Princeton university press.

Frutos-Bencze, D., Bukkavesa, K. and Kulvanich, N., 2017. Impact of FDI and trade on environmental quality in the CAFTA-DR region. Applied Economics Letters, 24(19), pp.1393-1398.

Harris, Z., 2017. Historical Analysis: Textile and Apparel Trade. Siegel Institute Ethics Research Scholars, 1(1), p.4.

Lefebvre, S., 2015. Honduras: IMF austerity, macroeconomic policy, and foreign investment. Center for Economic and Policy Research.

Meyer, P.J., 2015. Honduras: Background and US Relations. Congressional Research Service, 20.

Muhammad, P.M., 2017. Book Review: Labor Standards in International Supply Chains: Aligning Rights and Incentives by Daniel Berliner, Anne Regan Greenleaf, Milli Lake, Margaret Levi, and Jennifer Noveck.

Nimon, W. and Beghin, J., 2017. Ecolabels and international trade in the textile and apparel market. In Nontariff Measures and International Trade (pp. 321-326).

Pisani, M.J., 2017. 16 Three spheres of geoeconomic advantage in Central America. Advances in Geoeconomics.

Villareal, M. and Fergusson, I.F., 2017. The North American Free Trade Agreement (NAFTA).