Central America Gains Trade Edge Over Asia with Tariff Exemptions
A series of tariff exemptions has provided Central America with a notable trade advantage over its Asian competitors. Garment manufacturers in the region now benefit from significant duty reductions, while sugar exporters face a U.S. market where Brazilian competitors are subject to a 25% tariff.
This change represents a significant shift from the previous year when a 10% duty on the region’s exports diminished the benefits of the Dominican Republic-Central America Free Trade Agreement (CAFTA-DR). Relief arrived incrementally, with each new tariff regime expanding Central America’s exemptions.
Gradual Relief and Expanding Exemptions
In November 2023, the U.S. reached agreements with Guatemala and El Salvador, reinstating duty-free treatment for eligible apparel and exempting 237 agricultural product categories, including coffee, bananas, and various tropical fruits.
In February, the U.S. Supreme Court invalidated the original tariff regime. Its replacement, a 15% surcharge, exempted qualifying textiles and apparel from all six CAFTA-DR countries. By July, this surcharge was superseded by new Section 301 tariffs targeting 60 economies due to forced-labor concerns.
The exemption for qualifying CAFTA-DR textiles and apparel remained intact, preserving a substantial tariff advantage for Central American suppliers. This advantage varies by product category but remains significant.
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Tariff Advantages and Market Shifts
Vietnamese apparel now faces a combined tariff of approximately 29%, while qualifying Central American garments enjoy a zero tariff. Chinese manufacturers face an average rate of about 36.5%, including their existing 7.5% Section 301 tariff and additional fees.
This results in a tariff advantage of roughly 25 to 35 percentage points for qualifying Central American apparel over its major Asian competitors. Sheng Lu, an associate professor at the University of Delaware, suggests this gap may prompt U.S. fashion companies to explore more sourcing opportunities in the Western Hemisphere.
Established manufacturers like Gildan Activewear and Fruit of the Loom, with facilities in Honduras, are well-positioned to handle additional orders. Local suppliers such as Elcatex Group and Kattan Group also provide products to major brands like Calvin Klein and IZOD.
Central American sugar producers gain an additional advantage from the 25% tariff on Brazilian goods, although U.S. quotas restrict further sugar market entry. Costa Rica’s exports to the U.S. include substantial volumes of coffee, bananas, and pineapples, in addition to its prominent medical device industry.
