The Haitian Economy and the HOPE Act
Released: 2010-06-24T00:00:00

Haiti's economic, political, and social development has been on a slow track since the transition from dictatorship to democracy began in the mid-1980s. The devastating earthquake of January 12, 2010, was a major setback to what little progress had already been made. Haiti struggled with providing basic needs even prior to the catastrophe, but currently is without the physical, political, and economic infrastructure to provide adequately for its citizens. As the massive humanitarian relief effort continues, planning for Haiti's economic reconstruction and development is also underway. The transition from disaster relief to a national redevelopment strategy is essential, and by all accounts, must be comprehensive, directed at all sectors of the economy, and guided by the Haitian government in cooperation with the United Nations and other international assistance organizations.

The U.S. Congress has long taken a comprehensive view of aid to Haiti, annually appropriating funds in support of security, humanitarian relief, and development assistance. Yet, the Haitian economy even before the earthquake had experienced extremely slow growth in output, employment, and productivity. One important step that reflects the nexus of congressional interest and Haitian need is the HOPE Act. In December 2006, the 109 th Congress passed the Haitian Hemispheric Opportunity through Partnership Encouragement Act of 2006 (HOPE I) to assist Haiti with expanding its apparel trade as a way to help stimulate economic growth and employment. The act included special rules for the duty-free treatment of select U.S. apparel imports from Haiti, particularly those made from less expensive third-country inputs, provided Haiti met rules of origin and eligibility criteria that require making progress on worker rights, poverty reduction, and anti-corruption measures.

Early assessments of the effectiveness of HOPE I, however, were disappointing and the 110 th Congress responded in 2008 by amending it with HOPE II. HOPE II extended the preferences for 10 years, expanded coverage of duty-free treatment to more apparel products, and simplified the rules of origin to make them easier to use. The act also included a new requirement to ensure that participating apparel firms comply with internationally recognized core labor standards and submit to regular inspection by the United Nations International Labor Organization (ILO).

In the aftermath of the earthquake, congressional interest again turned to amending the HOPE Act to increase incentives for investors. The Haiti Economic Lift Program (HELP) Act of 2010 ( P.L. 111-171 ) was introduced in the House and Senate on April 28, 2010. It passed in the House on May 5, 2010 and in the Senate the following day with strong bipartisan support. The HELP Act extended the Caribbean Basin Trade Partnership Act (CBTPA) and the HOPE Act through September 30, 2020. It further enhanced those HOPE Act trade preferences that appeared to have demonstrated the greatest effect in promoting Haitian apparel exports, particularly the least restrictive of those that allow use of lower-cost apparel inputs sourced from anywhere in the world. These provisions give Haitian firms a competitive advantage in the U.S. market, which is intended to attract long-term investment to Haiti's primary export industry. This report analyzes the evolution of the HOPE Act as it relates to U.S. trade policy, the Haitian economy, and post-earthquake reconstruction efforts.

Political and Social Challenges to Haitian Development

A discussion of Haiti's current social and political situation is now clouded by the massive destruction caused by the January 2010 earthquake. By all accounts Haiti struggles to provide basic services and is in need of massive amounts of international aid. President Préval continues to govern, meeting with his cabinet ministers and helping to coordinate international relief efforts, but the extension of emergency presidential powers and delays in holding local and national elections have emboldened political opposition. This situation exacerbates Haiti's social and political problems deeply rooted in the country's historical development patterns.

Haiti occupies the western third of Hispaniola, a Caribbean island it shares with the Dominican Republic (see Figure 1 ). Haiti has endured a long post-colonial history of poverty, political repression, and underdevelopment, a trend that continues to challenge the sustainability of Haiti's fragile political stability. Since the end of the Duvalier dictatorship in 1986, Haiti has struggled to institutionalize democracy, and so far has been unable to overcome a legacy of weak governance, economic inequality, and social unrest. The presidency has alternated largely between Jean-Bertrand Aristide and René Préval, both of whom struggled to establish a broadly accepted government, in part for the lack of progress in changing the legacy of inequality in Haitian society. President Préval's second administration, begun in 2006, initially sparked a ray of hope among the masses, but his government has since been marred by decisions that have weakened his support and raised doubts about fledgling institutional democracy. The earthquake has worsened an already difficult political situation.

The post-dictatorial political system is new, fragile, and in many ways, susceptible to criticism that it has failed to establish a fully functioning government. After four years into his second non-consecutive term, Préval's leadership, vision, and strategy to address long-standing poverty and unemployment have come under question. The transitory terms of his prime ministers, along with delays in holding Senate elections, and in initiating widely supported constitutional reform (particularly to amend a repetitive, expensive, and so far unworkable electoral system) have compromised the government's legitimacy. The multiparty system, rather than consolidating politics, may be slipping further into factional partisanship, leading to low voter turnout, evidence for some of the failure to promote a "political culture of participation." Multiple observers note that the government bureaucracy suffers from a historic endemic corruption, acting to enrich itself while failing to delivery basic services to the Haitian people.

Political tensions emerged once again during the Senate runoff elections that took place on June 21, 2009. The dominant party of President Préval gained 5 of the 11 seats, but the numbers mask a broader discontent within Haitian society. Turnout was exceedingly poor, estimated at 10% or less of registered voters, and scattered violence marred any overall sense of a society exercising its democratic privileges, not to mention the cancellation of voting in one province. The elections took place amid serious protests by medical students after classes failed to resume, and by society as a whole over an emotional debate on raising the minimum wage, which congress eventually passed and President Préval signed into law. Some constituents have questioned Préval's commitment to the populist platform that helped bring him to power as he pursues a pragmatic middle path to governance.

In the wake of the current disaster, Préval's leadership is being fully tested, in part by electoral politics. Elections have been interrupted by the earthquake and as of May 8, 2010, terms for the National Assembly and one-third of the Senate have expired, but not before parliament extended Préval's mandate until May 11, 2011. It also appears as though the presidential and parliamentary elections scheduled for November 2010 may be delayed, in part from lack of presidential action. Taken together, these actions have caused additional friction in an already highly stressed society and have also led to congressional calls for President Préval to expedite efforts to set a firm election date.

Haiti's uneven social structure lies at the heart of its state of recurring crisis. Haitian society has small middle and working classes, and is dominated by the chasm between a tiny minority of wealthy elite and the impoverished masses, the latter of which have little power or participation in governing. Politics since the transition to democracy in 1986 has not altered this precarious relationship. The highly skewed distribution of power and resources, and the underlying fear it generates, have made the transition to democracy difficult. Haiti's political future appears tenuous as long as entrenched economic and social patterns remain unchanged.

Research on the sustainability of young democracies suggests that Haiti occupies the category of highly vulnerable countries. Initial conditions that correlate with a reversal of democracy include poor economic performance overall, low per capita income, highly skewed income and asset distribution, and weak political institutions that have difficulty enforcing checks and balances on executive power. The Préval government is feeling the pressures that poor economic performance places on governments, compounded by the effects of the earthquake. Strong support from the international community will need to be effective in alleviating suffering and providing hope to help rebuild political as well as economic momentum.

Prior to the earthquake, security was reportedly improving, although it remained a persistent problem, rooted in the history of violence stemming from political and economic inequality. It manifested in the often random violence of gangs and paramilitary groups. Security is currently being enforced by the United Nations Stabilization Mission in Haiti (MINUSTAH), but relief efforts also include the addition of U.S. and U.N. troops. Despite some concerns with sovereignty issues, there is no doubt that the current situation requires a strong foreign military presence for the foreseeable future. The ability of MINUSTAH to handle a possible escalation of social upheaval is an important question given the country's desperate situation, although the temporary deployment of U.S. forces has helped maintain stability.

Economic Background

Even prior to the earthquake, economic growth and development was hindered within this often marginally functional political and social landscape. Internally, many doubted that the Haitian government could deliver on changing the day-to-day conditions of a population immersed in poverty. Externally, vast amounts of foreign aid expose the challenge of development in a country devoid of the basic cornerstones of growth. The restoration of growth remains the primary economic goal and is a necessary condition for development. The post-earthquake challenge involves nearly the wholesale reconstruction of an economy. Even if Haiti can emerge from the earthquake's devastation and policies can be designed and resources brought to bear, igniting a sustainable growth trend will not provide the foundation for long-term political and social stability if it cannot begin to address the underlying extreme social inequality.

Macroeconomic Performance and Policy Responses

Haiti's dismal economic growth trend epitomizes its long-term development paralysis. From 1960 to 2000, annual average per capita income growth was actually -0.7%, by far the worst performance in the Western Hemisphere. Growth was achieved briefly in the 1970s, led by export-oriented assembly industries, but Haiti experienced a prolonged economic downturn in the 1980s, as did most countries in the region, leading to social and political unrest that ultimately contributed to the overthrow of the Duvalier dictatorship in 1986.

In 1991, following an interim government, Aristide emerged briefly as the first elected president, only to be deposed by a military coup within a few months. To force the return of the democratically elected government, the United States and other countries responded with a trade embargo under the auspices of the Organization of the American States (OAS) and the United Nations (UN). Although its success in changing political behavior has been questioned, its economic effects were concrete and devastating. Haiti was already experiencing a decline in output, employment, and income, but the trend mushroomed during the 1991-1994 embargo. The embargo targeted fuel imports (not food, but supplies were delayed), and all exports. Overall, by 1994, per capita income had fallen by 30% in three years and unemployment peaked at 75%.

Sector effects were highly pronounced. Employment in the assembly manufacturing industry (e.g., apparel, electronics, sporting goods), centered in Port-au-Prince, fell by over 80%, shedding 32,000 jobs. One estimate of the multiplier effect suggests that the embargo eliminated some 200,000 jobs in the formal sector. Most assembly plants closed permanently, with only apparel rebounding slightly in the aftermath of the embargo. The inability to import agricultural inputs such as fertilizers and seeds, or to export agricultural goods, had similarly devastating effects on that sector's production. In addition, because oil imports were blocked, there was a sudden increase in the use of charcoal, accelerating the ecologically destructive trends in deforestation and soil erosion, further damaging agricultural production.

Trade was renewed in 1995, but economic growth oscillated for the next decade, hampered by recession, flooding, and ongoing political turmoil. In the post-embargo period, annual GDP growth for the decade ending 2006 averaged only 1.1%, lower than Haiti's 1.4% average population growth rate. This trend is a recipe for perpetuating chronic unemployment, poverty, and emigration pressures in a country like Haiti that cannot absorb most new entrants into the work force. As seen in Figure 2 , Haiti's economic growth has generally lagged badly compared to Latin America and the Caribbean (LAC) as a whole, a region that is itself known for its poor long-term growth record. Growth has been positive since 2005, but averaged only slightly more than 2.0% per year. There are many domestic and international issues facing Haiti, but sustainability of its long-term growth is at the core of its development challenge (see data in Appendix ).

Haiti is the poorest country in the region. Over 70% of the population lives on less than $2 per day. Inequality is extreme; Haiti has the most highly skewed income patterns in the Americas, with nearly half of the nation's earnings going to the top 10% of the income distribution, while the bottom 10% earns less than 1% of national income. Inflation has made matters worse, causing real wages to fall by half from 2000 to 2008, despite a major adjustment in 2003 (see data in Appendix ). The 2009 global recession although painful, helped arrest inflation, allowing real interest rates to fall along with food and energy prices. Employment opportunities are few, with 80% of workers operating in the informal sector.

The 2009 debate over increasing the minimum wage produced protests and political conflagration, an outrage that attests to the importance that the Haitian people place on the need for policy responses to address persistent poverty. There is little doubt that failure to adjust the minimum wage in line with inflation had deeply eroded the purchasing power of most Haitians. The Haitian Congress proposed to more than double the minimum wage across the board from the equivalent of $1.80 to $5.00 per day. There was disagreement among President Préval's advisors on supporting this level of increase because employers argued that such large cost increases could force worker layoffs and potentially bankrupt some firms, particularly small and medium-sized businesses.

As a compromise, President Préval agreed to a minimum wage of $5.00 per day for workers in all sectors except apparel, who received an adjustment to $3.25, with the law requiring parity within a few years. Apparel manufacturers argued that fully trained and efficient apparel sewers already earned in excess of the new minimum wage in any case. The real marginal cost of the raise was associated with increased expenses for training, vacation, and other paid absences. Shortly after the wage increase took effect, there were reported employment responses. Two prominent employment sectors, retail gasoline and private security, both reported employment decreases as adjustments to high wage costs. Gasoline stations, for example, reduced or eliminated afternoon-evening shifts, a time when retail sales tended to diminish. Whether this employment trend will continue over the long run is unknown and perhaps irrelevant in the short run given current conditions.

To address the need for a strategic industrial development plan, President Préval established a Presidential Commission on Competitiveness in 2009. Its primary goal was to enact a development strategy based on improving productivity, diversifying the economy, and creating new employment opportunities in the short term. This ambitious plan envisioned the creation of 500,000 jobs within three years by targeting key industries in agriculture, services, and manufacturing sectors that could be started up or expanded relatively quickly. Specifically, the plan calls for investment in five "growth clusters" (fruits and tubers, animal husbandry, tourism, garment production, and business process outsourcing), with additional resources committed to "support sectors" such as infrastructure, finance, information technology, education, and enhanced business climate.

While the plan is bold, history suggests it will not be easy to achieve. It does, nonetheless, reflect a serious effort to present a comprehensive analytical approach that covers both short-term and long-term development goals. Success in the short term is critical if any progress is to be made in reducing poverty and related social unrest. It will be an important plan to monitor, not only as a gauge of Haiti's economic success, but because it will likely raise expectations that problems can begin to be addressed in the near future, which may entail a higher degree of political risk. Most importantly, it may provide the basis for Haiti's emergence from the economic catastrophe it currently faces, including an assessment of the Haitian government's role in planning and bringing about redevelopment.

Despite these plans, Haiti's growth trend has suffered from the global downturn, which reduced remittances, exports, and public revenue, presenting a risk to Haiti's economic recovery program. Projections of average annual rates of growth are only between 1% and 2%. To consolidate what little gains have been made in reinvigorating growth, Haiti will have to address a core area of domestic policy, the lack of productivity growth.

Persistently low or negative productivity is the result of negligible investment in private enterprise, as well as human and social capital such as education, health care, and infrastructure. It is pronounced in the agricultural sector, where primitive methods and ancient equipment perpetuate low yields, lack of growth in cultivated land, and inadequate food supplies, much of this because of the sector's "decapitalization" during the 1991-1994 trade embargo. Investment in manufacturing has also been sparse, jeopardizing prospects for longer-term growth. Improvements in public administration, especially those that might address widely perceived problems of crime, corruption, and bureaucratic efficiency, along with private sector gains, could provide the basis for progress under the Préval development plan. A critical reconstruction question for both the public and private sectors is whether to rebuild as quickly as possible to meet immediate needs, or invest the additional time and money to rebuild at higher standards.

Sector Issues

Slow growth is also an obvious constraint at the sector level. Agricultural production represents 30% of GDP and employs up to 70% of the work force, mostly dedicated to subsistence farming. Output has stagnated for decades and declined for five years in a row until expanding by 3.0% in 2007. Agricultural growth is limited by the small amount of arable land, overuse of soil, and poor irrigation. It is also constrained by poor rural infrastructure, destructive agricultural practices, and frequent hurricanes and other natural disasters. Rice, sugar, and coffee are produced at a fraction of levels achieved decades earlier. Haiti currently produces little of these traditional exports, and output of staples has long been insufficient to meet domestic food needs. Haiti, therefore, must import large amounts of food stuffs. Rising international prices of basic foods exposed Haiti's vulnerability to price shocks and its limited ability to feed itself, as seen in the food riots that occurred in April 2008. The subsequent collapse in commodity prices, although a problem for much of the region, helped alleviate some of Haiti's import bill, at least in the short run.

Manufacturing constitutes only 7.6% of GDP and has shown no growth over the past decade until recently. It, nonetheless, is the major foreign exchange earner and holds out some promise for employment growth. Manufacturing is dominated by food processing (47.2%) and apparel assembly (21.1%). Construction and public works account for another 7.7% of GDP and grew by 6.3% over the last two years. These trends reflect recent, new public sector investment and provide one option for employment growth of low-skilled workers. The services sector constitutes 51% of GDP and is led by restaurant and hotel industries, which together account for 27% of GDP. It grew by nearly 6% in 2007. Tourism is not a major factor, but core ingredients of a tourist industry are present in Haiti, should confidence return in Haiti's ability to maintain political and economic stability.

Foreign Trade and Investment

Haiti has a historically unhealthy dependence on foreign commerce and finance, from the colonial days of the sugar trade to the current assistance provided by developed countries. Total trade (exports plus imports) equals 60% of GDP, but the trade imbalance is large with a deficit equal to 33% of GDP. Haiti is in a difficult position because slow growth in output and exports means that it must rely on foreign sources for basic commodities such as food and oil, as well as manufactured and capital goods. The problem is often made worse by deteriorating terms of trade, when prices of oil and other commodity imports rise relative to prices of Haiti's exports.

Haiti's trade relationship with the world is dominated by the United States, with which it ran a $494 million deficit in 2008. Haiti exports primarily apparel, which accounts for 75%-80% of foreign exchange earnings and for 92% of total exports to the United States. Cacao, mangoes, and coffee compose the small basket (4%) of agricultural exports. In 2008, the United States accounted for 78.2% of Haiti's exports followed in order of magnitude by the European Union (7.4%), Thailand (3.6%), and Canada (3.3%)—see Figure 3 . The United States also accounted for 53.5% of Haiti's imports followed by Latin America (11.6%), the European Union (8.8%), and China (7.1%).

A return to economic growth is critical to finance the trade deficit in the long run. In the near term, however, there is no alternative to relying on foreign sources of income, principally remittances, foreign aid, and grants. Transfers finance Haiti's fiscal and current account deficits, but they are a poor substitute for production and export-driven financing. They promote long-term dependency and create technical problems, such as exchange rate appreciation that exacerbates Haiti's structural trade deficit, with no concomitant growth in productivity or output that is typically associated with an export-driven exchange rate appreciation. These transfers, so necessary for Haiti's short-term survival, are dependent on the fortunes of expatriate citizens and the generosity of foreign governments, diminishing Haiti's control over the future of its economic well-being.

Haiti has a poorly diversified export sector, overly dependent on one type of product and a single foreign market, a strategy that has so far shown little lasting positive effect on long-term development. The risk to this export structure became increasingly clear with the U.S. economic downturn, which reduced demand for Haitian goods (falling 7.5% year-over-year). As the Commission on Competitiveness notes, reliance on U.S. trade preferences for apparel exports represents a long-term opportunity, but only if the sector can be expanded into greater value-added activities and other sectors of the economy begin to contribute more to growth in output and exports.

Haiti's trade dependence is most pronounced on the import side. Haiti imports manufactured goods, machinery, transportation equipment, raw materials, energy, and food. It is unable to produce most of these needs and will be a large net importer for the indefinite future. Haiti's vulnerability became acute over the last decade with the rise in food and energy prices, which had a huge budgetary effect. From 2002 to 2007, the value of food and energy imports rose 57% and 159% respectively, even as volume declined slightly. In 2008, petroleum accounted for 25%-30% of total imports. This trend points to two fundamental problems. First, higher commodity prices make food and energy imports more expensive, decreasing Haitian purchasing power. Second, to compensate, there is a compounding substitution effect, in which other goods must be given up to spend more on food and energy. This effect may be seen in the decline of imports of manufactured goods, which fell by 37% from 2002 to 2007.

Foreign direct investment (FDI) in Haiti has been historically very low. Net FDI inflows ranged from $4 million in 2000 to $14 million in 2004, and then spiked to $160 million in 2006, before falling to $30 million in 2008. The large increase appears to be related to an investment boost in construction and tourist industries, which seems to be limited in duration. Construction activity in the public and private sector has expanded briskly, but FDI inflows were not expected to continue at this recent higher level. One approach to attracting FDI to Haiti rests on reinvigorating the apparel industry, a strategy that the U.S. Congress supports with the HOPE Act.

Apparel Production in Haiti

Although agriculture is the single most important sector of the Haitian economy for both jobs and output, apparel assembly is the core export industry and one promising source of employment growth in the formal sector. Apparel production is a globally competitive industry that often relies on a multi-country chain of production. Fiber, yarn, and fabric production is capital intensive and provides the opportunity for the greatest value added. Garment assembly, by contrast, is highly labor intensive, offering thinner profit margins. Assembly factories are far less expensive to build than textile mills and location of production is often a secondary consideration to levels of vertical integration and global networks, use of technology, ability to demonstrate socially responsible production, and overall cost containment. The attraction of apparel assembly is the relatively low levels of investment and skills required to operate this entry-level segment of the industry. It not only provides opportunity for quick job growth, but also for advancement into the higher value-added work as investment, experience, contacts, and labor skills progress.

Haiti is a prime candidate for redeveloping the apparel exporting industry because assembly requires an abundance of low-skill labor, but relies on relatively simple technology and small capital investment. Therefore, production naturally gravitates toward locations with low labor costs. Although Haiti's labor costs are not as low as those in some Asian countries, they are the lowest in the region, allowing Haiti to niche into apparel assembly. As shall be discussed, at the margin, U.S. trade preferences and relatively relaxed rules of origin can provide a critical benefit.

The fortunes of the apparel sector to date, however, have paralleled the broader trends of the economy, which have been subject to tremendous social and political turbulence. Historically, the apparel heyday in Haiti lasted from the 1960s through the end of the Duvalier dictatorship in 1986. The troubled transition to democracy, including the 1991 military coup and trade embargo that followed, caused a massive downturn in production for years. Since 1994, the Haiti apparel industry has entered into a slow and tentative period of rebuilding.

At its peak in the 1980s, Haitian apparel industry sources estimate that the number of jobs ranged upward of 100,000. The 1991-1994 trade embargo effectively closed apparel operations, causing employment to fall to near zero for a short time, as many apparel manufacturers apparently left Haiti for Honduras and other sites in the region. In its rebuilding, Haitian apparel firms estimate that employment more than doubled to 27,000 since the original HOPE legislation passed in 2006.

Firm-level apparel output data are not readily available, but because over 90% of apparel production is exported to the United States, U.S. import data can serve as a reasonable proxy for production trends. Figure 4 shows the trend of U.S. imports of Haitian apparel by volume. Note that imports were falling in the tumultuous aftermath of the Duvalier dictatorship, hitting bottom during the 1991-1994 trade embargo. With a temporary return to relative political calm, U.S. imports (again as a reflection of output) rose, but declined again after 2000 as production was lost to competition and continuing political uncertainty kept investors at bay.

Growth renewed after 2002 with industry restructuring. By 2006, a new downturn is noticeable, likely related to two events that occurred at that time: the end of global textile quotas put in place under the World Trade Organization (WTO) Agreement on Textiles and Clothing (ATC), and implementation of the Dominican Republic-Central America-United States Free Trade Agreement (CAFTA-DR), which shifted regional U.S. tariff preferences for apparel in favor of Central America. The downturn continued into 2008, likely reflecting the effects of the global financial crisis, but returned to growth in 2009.

Haiti's apparel industry faces many challenges. Domestically, the lack of industrial space, the high cost of capital and utilities, and poor infrastructure top the list. Externally, highly efficient competitors both in the region and in Asia will continue to challenge Haiti's low-cost export strategy. The required use of higher-cost U.S. inputs (e.g., yarns, fabrics, components) for duty-tree entry into the United States has also been a problem, much of it addressed in the HOPE II and HELP Acts (see " HOPE II " and " The HELP Act "). To improve its competitiveness, the industry underwent major restructuring after 2000. Where it once had been a relatively diversified producer, the industry as a whole adopted a leaner, low-cost business model based on high-volume production that could take advantage of Haiti's low-skill labor pool. Haiti was able to rebuild the industry based on this strategy and can compete at the low end of the U.S. apparel market based on its low wages, quality products, and proximity to the United States, consistent with Haiti's stage of development.

For the most part, Haiti's production is still limited mostly to simple knits and some woven products. The mix is shifting, however, toward greater production of more complicated woven goods (e.g., khaki pants), which rose from 12.6% of apparel exports to the United States in 2007 to 18.6% in 2009. Knits (e.g., t-shirts and sweatshirts) fell from 87.4% of apparel exports to the United States, to 74.4% over the same two years. Haiti's top five apparel products account for 90% of U.S. apparel imports from the country. As may be seen in Table 1 , for these articles, Haiti's primary competition is Central America, the Dominican Republic, and Southeast Asia (ASEAN), even more so than China, with the exception of articles produced from man-made fibers. Mexico, Bangladesh, and other countries are also important competitors for some items.

Rejuvenating Haiti's apparel assembly industry has been criticized as a growth strategy for its lack of development potential and vulnerability to rapidly changing market conditions. Nonetheless, it has survived as a niche production strategy in a highly competitive industry, even diversifying its product line. Supporters of the sector argue that given Haiti's limited options for rebuilding its economy in the short term, the apparel sector offers one relatively quick response to chronically high unemployment. Apparel assembly has also allowed manufacturing to remain in Haiti that might otherwise have migrated to Asia or Central America, and the industry has recently begun to diversity production. Haiti's apparel industry relies entirely on foreign producers for yarns and fabrics. Fabric is sourced primarily from the United States, the Dominican Republic, and Asia, in approximately equal proportions. Apparel factories produce for a wide variety of firms including Hanes (U.S.), Gildan (Canadian), Wilbes (South Korean), and Grupo M (Dominican), who contract for many well-known U.S. brand names.

Haitian apparel production is concentrated in Port-au-Prince, where it is located largely in two free trade zones situated near airport and port facilities. In addition, in 2003, Grupo M began a mutually beneficial apparel co-production arrangement in Ouanaminthe, on the northern border with the Dominican Republic (see Figure 1 , Map of Haiti, p. 2). The plant is located in a relatively new foreign trade zone (Compagnie Development Industriel—CODEVI). Grupo M, the only Dominican company operating a co-production plant, provides management training and guidance, and plans to turn operation of the facility over fully to Haitian managers. It has also worked with the Haitian government in providing the necessary infrastructure investment, including water and electricity, the excess of which is made available to the surrounding community. Selection and training of Haitian workers is rigorous and the jobs are highly coveted. Production was unaffected by the January 2010 earthquake.

Evaluating Haiti's Competitiveness

Haiti has a competitive advantage in apparel based on its relatively low labor costs, proximity to the U.S. market, and a niche strategy based on mass-produced articles. This niche relies largely on simple assembly operations (sewing and some cutting), has few style changes over time, accommodates slightly longer lead times, and has relatively predictable demand schedules. Location of production is often not a critical decision factor for many buyers, but proximity to the U.S. market has proven to be an important benefit for Haiti. There are, however, significant productivity problems, with some firms operating barely at the margin of profitability. A survey of apparel buyers ranked Haiti as "favorable" on price and overall product quality, but pointed to the need to (1) improve training for apparel workers and middle management, (2) overcome a poor image for political stability, (3) develop better infrastructure, and (4) compensate for a lack of production in "apparel infrastructure" such as thread, linings, and fabric.

Haiti compares less favorably on costs of electricity, construction, and overall operation. While rent on industrial space is low, buildings are fully depreciated and given high construction costs and the need to rebuild, future rent costs could rise significantly, cutting into apparel firm profitability. Public investment in transport, utility, and modern customs facilities is also needed to support a more competitive apparel sector.

There are some key challenges to Haitian apparel competitiveness. One is producer concerns over losing a major cost advantage because of the large 2009 minimum wage increase. Apparel managers note that even though fully trained workers already earn more than the new minimum wage, raising the minimum wage can reduce the worker production incentives. Second, to remain competitive, firms will need investment to move toward higher value-added "full package" production, an increasingly standard requirement of U.S. buyers. Full packaging production involves a wide range of skills that include product design, materials sourcing, logistics, manufacture of the entire finished product, packaging, and delivering the final good to the retailer. Full packaging requires advanced financial, managerial, sewing, and other operational capabilities not yet widely available in Haiti.

Third, few believe that investors are willing to make large capital commitments necessary to construct fabric mills in Haiti. Many view Haiti as politically and socially unstable and unattractive because of high construction, capital, and utility costs. Still, the key to Haiti's long-term apparel production development is moving up the value-added chain toward full package operations. This process can also be done incrementally, as managerial and worker skills improve allowing for additional work in printing, finishing, washing, and other stages of apparel production. The United States Agency for International Development (USAID) has let a long-term contract to help Haiti apparel producers develop these skills, and includes funding construction training centers to develop the managerial expertise and other skills necessary to move toward full package production.

Effects and Implications of the 2010 Earthquake

The earthquake that rocked Haiti on January 12, 2010, did untold damage to the country, including a significant loss of life and property. The world has responded with an unprecedented humanitarian relief effort. While Haiti grapples with stabilizing a catastrophic situation, the apparel sector is also struggling to regain its previous production capacity as soon as possible. Although buyers are reportedly willing to stay with Haiti, its best chance at retaining apparel customers and future investment rests with a quick return to full production.

Estimates from Haiti indicate that earthquake damage to firms was serious, uneven, but not as severe as it might have been. Of the 23 plants operating in late 2009, the earthquake completely destroyed one, and seriously damaged four others. Currently 19 are fully operational, two are being relocated, and two are closed. Employment attendance rates have returned to levels seen prior to the earthquake, but with fewer factories operating, total employment has fallen from 26,600 to 23,300. Monthly apparel exports declined 43% from $58.2 million in February 2009 to $33.1 million in February 2010. Many factories are still in need of cleaning, repair, renovation, and equipment.

Estimates of rebuilding costs for the industry have risen to $38 million to refurbish damaged buildings, replace machinery, and train new employees, among other costs. Others suggest that to the extent that the Haitian apparel firms elect to rebuild at new and higher standards, which would be in line with the broad strategic vision for the sector's long-term development, perhaps twice as much investment capital would be needed. As noted above, construction costs are high in Haiti because most materials must be imported. A key to successful reconstruction will be the availability of affordable financing. The need for immediate and swift reconstruction raises a host of policy questions regarding the use of international aid for providing affordable financing such as grants, subsidized loans, loan guarantees, or other incentives that would entice private investors to take on the risk of rebuilding in Haiti. Congress took one important step by modifying HOPE Act tariff preferences and rules of origin to further enhance U.S. market access for Haitian apparel exports.

The Haiti HOPE Act

Congress first provided trade preferences to the Caribbean region in the Caribbean Basin Economic Recovery Act (CBERA) of 1983—often referred to as the Caribbean Basin Initiative. The preferences did not, however, cover textile or apparel goods. In 2000, Congress passed the Caribbean Basin Trade Partnership Act (CBTPA), which provided additional incentives on a temporary basis to select U.S. imports of textile and apparel articles assembled or knit-to-shape by firms in designated beneficiary countries. In general, to qualify for the tariff preferences, the articles had to be made from inputs produced in the United States or the region. The HOPE Act, as amended, builds on this precedent, providing additional benefits exclusively for Haitian apparel exports as a way to support growth and development in Haiti.

The HOPE Act, as amended, offers duty-free treatment for U.S. apparel imports from Haiti under rules of origin that allow for more flexible sourcing of materials than those offered to Caribbean countries under the CBTPA. The critical difference is that under the CBTPA, select apparel goods receive duty-free treatment if assembled or knit-to-shape from inputs that use U.S. and in some cases regional fabrics , provided they are made from U.S. yarn . Under provisions in the HOPE Act, as amended, duty-free treatment is extended to apparel articles if wholly assembled or knit-to-shape in Haiti from materials (yarns, fabric, and components) sourced from any country . In some cases there are few restrictions; in others, a minimum portion of the garment's materials must be produced by U.S. firms or those in a country that is party to a U.S. unilateral preferential trade arrangement or a free trade agreement (FTA). Because the HOPE Act allows for the use of non-U.S. fabric and other apparel inputs, Congress sought detailed input from the U.S. textile and apparel industries. The United States is the dominant market for Haitian apparel and therefore the economic benefit of the preferences is potentially significant for enhancing investment, output, and employment in that sector. The legislative development of the HOPE Act follows.

HOPE I

In December 2006, the 109 th Congress passed the Haitian Hemispheric Opportunity through Partnership Encouragement Act of 2006 (HOPE I) as an amendment to the Caribbean Basin Economic Recovery Act (CBERA— P.L. 98-67 ). Now referred to as HOPE I, the act provided special rules for the duty-free treatment of select apparel imports from Haiti made from third-country yarns and fabrics, provided Haiti met rules of origin and eligibility criteria. To be eligible, Haiti had to make progress toward establishing a market economy, the rule of law, the elimination of barriers to U.S. trade and investment, policies to reduce poverty, a system to combat corruption, and protection of internationally recognized worker rights.

The act required that all eligible exports be shipped directly from Haiti. It also established an overall cap on total qualified apparel imports equal to 1%-2% of total U.S. apparel imports. It included a short supply rule that allowed duty-free treatment of goods made from fabrics found to be in "short supply," as defined in all other preference arrangements and FTAs of the United States, and gave preferences to wire harness automotive imports.

At the heart of HOPE I were two new rules of origin allowing for duty-free entry of Haitian apparel goods. First, quotas were established for apparel articles made from inputs that meet the value-added content requirement in which 50%-60% of value added must come from firms in the United States or from firms in countries that are a party to a U.S. FTA or are beneficiary countries under a unilateral preference arrangement. There were no restrictions on the source of the remaining inputs. Second, an additional quota or trade preference level (TPL) of 50 million square meter equivalents (SMEs) was established for duty-free treatment of woven apparel that did not have to meet the 50%-60% value-added rule (allowing all inputs for these articles to be sourced from anywhere in the world).

Despite these new trade rules favoring Haitian apparel producers, HOPE I soon came under criticism for being ineffective. In 2007, the first year of operation, only 3% of U.S. imports of Haitian apparel entered under HOPE I, the rest still entering duty free under the CBTPA. There were five major criticisms of HOPE I:

The three-year program was too short to attract new investment. The 50% value added rule was too high, greatly limiting its use. The TPL for woven articles was too small and did not include knit articles, which constitute 80% of Haitian apparel exports. The requirement for direct shipping from Haiti was cumbersome and costly since apparel finishing had to be done in the Dominican Republic, with the articles shipped back to Haiti for export to the United States. The overall cap on imports was too small.

In addition, some U.S. textile producers objected to the preferences, contending that because they permitted use of third-party fabrics and other inputs, they were effectively displacing textile jobs in the United States and the Caribbean with those in Asia. U.S. producers also argued that the rules of origin were vague and difficult to enforce, and that the tariff preferences could result in diverting apparel production to Haiti from countries in the region that had apparel trade preferences in other agreements with the United States.

HOPE II

Because early assessments of the effectiveness of HOPE I were critical of its progress in stimulating foreign investment in the apparel sector, and given that Haiti's economic and social conditions were deteriorating rapidly in early 2008, the 110 th Congress amended the HOPE Act with passage of the Hemispheric Opportunity through Partnership Encouragement Act of 2008. It became known as HOPE II, and both houses of Congress agreed quickly on bill language without formal hearings, expediting the legislative process, but to the chagrin of some Members.

Tariff Preferences and Rules of Origin

As with HOPE I, duty-free treatment was provided to apparel articles wholly assembled or knit-to-shape in Haiti. The specific rules of origin determined the amount of third party inputs that could be used in the manufacturing process and still receive duty-free treatment. Congress made three broad design changes to the HOPE Act:

It extended all tariff preferences from a period of 3 to 10 years ending September 30, 2018. It allowed direct shipment of final goods from either Haiti or the Dominican Republic. It clarified the quantitative limitation (cap) rules to ensure that (1) articles subject to a specific cap do not count toward the overall value-added cap, (2) articles subject to one cap do not count toward another cap, and (3) HOPE benefits are understood to be extended in addition to any other benefits conveyed under the Caribbean Basin Initiative.

Amended rules of origin allowed for more liberal application of duty-free treatment for imports of Haitian apparel regardless of the source of inputs (yarns, fabrics, components). The most notable changes were

An increase in the annual TPL to 70 million SMEs for select woven apparel imports without regard to source of inputs. The addition of a new TPL of 70 million SMEs annually for knit apparel without regard to source of inputs, with some exclusions. The addition of a new uncapped "3-for-1" earned import allowance (EIA). It allowed producers to claim a credit for the export of apparel articles made from qualifying inputs that can be used in exchange for exporting articles duty-free made from non-qualifying inputs in a 3-for-1 ratio. Qualifying woven fabric must be wholly formed in the United States from yarns wholly formed in the United States. Qualifying knit fabric and knit-to-shape components must be wholly formed or knit-to-shape in the United States or any country or combination thereof that is a party to a U.S. free trade agreement or a beneficiary country under a unilateral preference arrangement, from yarns wholly formed in the United States. Continuation of the value-added rule through 2012, but the overall cap on eligible apparel articles was frozen at 1.25% of total U.S. apparel imports. A new uncapped duty-free rule for brassieres, selected women's and girls' sleepwear, luggage, and handbags wholly assembled or knit-to-shape in Haiti. The statute also clarifies that the "short supply" rule, or benefits given for the use of non-U.S. fabric and yarns not available in commercial quantities, is uncapped and expanded to include all fabric and yarns in short supply lists in other U.S. preference arrangements and FTAs.

Labor Provisions

Haiti is eligible to receive preferential treatment as long as the President of the United States determines and certifies that Haiti has established or is making continual progress toward establishing protection for internationally recognized worker rights. The statute defines these as including (1) the right of association; (2) the right to organize and bargain collectively; (3) a prohibition on the use of any form of forced or compulsory labor; and (4) a minimum age for the employment of children and acceptable conditions of work with respect to minimum wages, hours of work, and occupational safety and health.

HOPE II also amended the eligibility requirements by requiring Haiti to create a new independent Labor Ombudsman's Office and to establish the Technical Assistance Improvement and Compliance Needs Assessment and Remediation (TAICNAR) Program within 16 months of enactment of the legislation. The Labor Ombudsman is to be appointed by the President of Haiti and report directly to him. The office's major functions include (1) maintaining a registry of apparel producers who may seek to use the trade preferences; (2) coordinating with government officials to create a system to ensure participation by apparel firms; (3) overseeing the TAICNAR program; and (4) receiving and directing appropriate comments to the Haitian Department of Labor and the United Nations International Labor Organization (ILO) regarding comments and complaints directed at firms participating in the program.

The TAICNAR program creates an independent factory monitoring system focused primarily on assisting factories in improving their working conditions and labor-management relations. It is based on the Better Factories Cambodia project that was negotiated as part of the terms of the 1999 U.S.-Cambodia Bilateral Textile Agreement. The ILO has since developed a Better Work Global Program in conjunction with the International Finance Corporation of the World Bank to expand use of this model. The TAICNAR program is one example, referred to by the ILO as Better Work Haiti. The ILO is given the lead because, as with the Cambodia project, Haiti lacks the resources and institutional capacity to monitor and enforce compliance with labor standards. Developing this capacity is also a goal of the TAICNAR program.

In the Better Work approach, access to the U.S. apparel market is given in exchange for sustained and verifiable improvement in factory labor conditions. The TAICNAR program employs a similar incentive system and operational structure in that Haiti's duty-free access depends in part on firms complying with core labor standards and submitting to ILO monitoring at the firm level. Although duty-free access can eventually be denied if conditions do not improve, the thrust of the program is to reinforce a positive response to improving labor conditions rather than imposing a punitive system to address noncompliance. Hence, there is emphasis on providing assistance for remediating problems. In addition, for the program to move forward, government and private sector actors in Haiti had to agree to this arrangement that empowers the ILO with operational authority. Haiti stakeholders acquiesced not only to take advantage of the trade preferences, but also to demonstrate their commitment to transparency in an admittedly difficult process of improving working conditions to levels now required of global apparel production.

HOPE II requires that the TAICNAR program assess registered apparel producers compliance with (1) core labor standards, (2) labor laws in Haiti that relate directly to core labor standards, and (3) a provision that acceptable conditions of work are maintained with respect to minimum wages, hours of work, and occupational health and safety. The ILO has the authority to conduct unannounced site visits to manufacturing facilities and confidential interviews with workers and management, provide the results of assessments to workers and management, and require actions to remediate deficiencies. The ILO must produce publicly available biennial reports on the program and biannual reports evaluating the progress of each factory in meeting these goals. Congress authorized and appropriated $10 million to the U.S. Department of Labor to finance the TAICNAR program.

Although the ILO and some independent analyses have praised the success of the Better Work approach, in Haiti it is too new to evaluate. The ILO representative arrived in June 2009 and only completed the first round of firm site visits before the earthquake interrupted the evaluation process. Review of the labor code has found it acceptable, but as was expected by some, it has been poorly enforced and many firms will be required to improve their practices and factory conditions to comply with the TAICNAR standards. In addition, enhancing Haiti's capacity to do these type of inspections and enforce labor codes is another major challenge.

Other issues have come to light with respect to the TAINCAR program. First, the relationship between the autonomous nature of the ILO's representative and the government of Haiti is somewhat ambiguous. Although the Haiti Labor Ombudsman views its office as having overall authority, the ILO does operate independently. Despite the agreement to collaborate, this relationship has raised questions in the minds of various stakeholders as to the ultimate authority on labor matters, should disagreements arise. In a related issue, another debate has surfaced as to the implication of the core labor standards listed in the HOPE II legislation. They are the same as those listed in the ILO Declaration on Fundamental Principles and Rights to Work, to which all members are obligated to uphold. The statute, however, does not reference the ILO. Without such a reference, and/or language limiting this understanding specifically to the ILO Declaration and the eight fundamental conventions that back the Declaration (as is done in the case of the Labor Chapters of recent U.S. free trade agreements), some have questioned whether a more expansive application of other ILO conventions and jurisprudence could be applied in Haiti.

The HELP Act

As part of U.S. support for Haiti's post-earthquake economic recovery, Congress passed the Haiti Economic Lift Program (HELP) Act of 2010 ( P.L. 111-171 ) in May 2010. In the HELP Act, Congress crafted amendments to the HOPE Act, targeting those preferences that had so far appeared to demonstrate the greatest promise of promoting Haitian apparel exports to the United States.

An analysis of the apparel trade data from Haiti, as seen in Table 2 , indicates that Haitian apparel producers were increasing their use of the tariff preferences, particularly after HOPE II was passed in 2008. From 2007 to 2009, the proportion of apparel entering under HOPE II grew from 3.3% to 26.9% of total apparel entering duty free under all preference programs (CBTPA and HOPE Act). Although there may have been some switching of exports entering the U.S. market from CBTPA to HOPE II, data reveal that in 2009 there was a 137% jump in the use of the woven TPL and a 41% increase in the use of the value-added rule, likely in response to HOPE II. By 2009, a small portion of apparel began to enter under the knit TPL as well, but there has been little use of other special import rules provided to Haitian apparel exports.

In addition, data not shown reflect that the statutory caps on the amount of apparel allowed to enter duty free are still far from being exceeded. For example, in 2009 Haiti filled 5.2% of its overall apparel quota, 2.1% of the knit apparel cap, and 22.8% of the woven cap. Haitian apparel producers lobbied for specific changes including extending the program to 2028, increasing the TPLs for knits and fabrics, reducing the value-added rule to 50% for five years, reducing the earned income allowance from 3-to-1 to 1-for-1, and expanding the apparel and non-apparel items that would be eligible for duty-free treatment.

Legislative Changes

The 111 th Congress examined carefully the HOPE Act trade rules to determine which could be enhanced that would make the most significant and timely contribution to Haiti's economic recovery. It did so in consultation with the U.S. apparel industry, with key, but not all, apparel stakeholders supporting the final bill.

CBTPA and HOPE Act Extended

The HELP Act extends both the Caribbean Basin Trade Partnership Act (CBTPA) and the HOPE Act through September 30, 2020. Together, the relevant trade preference rules give current producers and would-be investors assurance that enhanced U.S. market access for Haitian apparel will be available for the next decade. This change is important for any calculation of long-term return on investment, a critical element in the decision to invest and operate in Haiti.

Value-Added Rule Softened

To receive duty-free treatment under HOPE II, 55% (rising to 60%) of the value of the exported product had to be made from inputs and processes from Haiti, the United States, or a country in an FTA or unilateral preferences arrangement with the United States. Third-country inputs could not exceed 45% of the value of the apparel article. Yarn and fabric constitute the largest cost of apparel, typically 60% of the total product cost, and nearly all the material cost. Therefore, under this rule, the opportunity for Haitian producers to use lower-cost third country fabric was limited because its use would have exceeded the 45% threshold. In other words, most Haitian garment producers do not have the value to add to take full advantage of this rule. Congress responded by extending the 50% threshold though December 20, 2015, the 55% threshold to December 20 2017, and the 60% threshold through December 20, 2018, providing more time for Haitian producers to move up the value-added chain.

Woven TPL Rule Increased

HOPE II expanded the woven apparel TPL to 70 million SMEs. It was an attractive incentive, easy to use, and for many producers, both foreign and Haitian, small and large, a primary reason for locating and investing in Haiti. Production of woven articles is expanding and because woven articles are more labor intensive than knit articles, they provide a greater employment impact than knits. Producers responded to the incentive, with exports of woven articles to the United States expanding by 79% from 2007 to 2009. Although estimates vary, according to some producers, the 70 million SME cap could be exceeded sometime in 2011 or 2012, although the earthquake may have changed this time frame. Congress decided to allow this cap to grow to 200 million SMEs. To accommodate concerns of U.S. industry that higher TPLs would diminish use of U.S. fabric and other inputs, this new threshold will only be allowed once Haitian producers have exported at least 52 million SMEs. For a select group of woven apparel articles, the threshold would remain at 70 million SMEs to safeguard sensitive U.S. import-competing products, a critical factor in obtaining U.S. industry support.

Knit TPL Rule Increased

The 70 million SME knit TPL added in HOPE II functions differently than the woven TPL. For example, t-shirts, the largest knit export, are excluded because of a linked preference provided under CBTPA. Industry sources speculate that because of the t-shirt exclusion, knit exports from Haiti are unlikely to exceed the TPL in the near future. Effectively, HOPE II tightened the Haiti knit assembly relationship in an already existing integrated U.S.-Caribbean production process supported by CBTPA. Knit exports to the United States have grown only by 3% from 2007 to 2009, but these products already represented 80% of apparel exports. The HELP Act increases the knit TPL to 200 SMEs subject to the same 52 million SME trigger, but lists exceptions for sensitive products, as with the woven rule, which may not exceed an 85 million SME threshold.

3-for-1 Earned Import Credit Reduced

This rule potentially benefits mostly those factories that are able to produce large volumes of articles, in this case mostly t-shirts, that use fabric from yarn made in the United States. Potentially, some contractors in the Dominican Republic and Haiti are able to make large runs of cotton t-shirts exported duty-free to the United States under CBTPA (supporting U.S. yarn manufacturers). These same firms then use the earned import credits to produce other articles (mostly t-shirts) assembled from fabric not made from U.S. yarns (cotton or synthetic fabric from Asia or elsewhere), which enter duty-free under HOPE II. The rule has been criticized by Haitian industry representatives as being too complicated and difficult to use. To date it has not been used, largely because apparel articles made from third country inputs enter duty free under the knit and woven TPLs. It may not be used significantly until such a time as these TPLs are exceeded, but Congress reduced the 3-for-1 rule to 2-for-1, thereby requiring less U.S. fabric and yarn before third-country alternatives may be sourced.

Apparel Subject to Certain Assembly Rules and Wire Harnesses

Certain listed apparel articles that are wholly assembled or knit-to-shape in Haiti and imported directly into the United States from Haiti or the Dominican Republic may enter duty-free regardless of the country source of fabric, yarn, components, or other inputs. This rule originated with brassieres and was expanded under HOPE II. It was further expanded significantly to include various types of garments determined in conjunction with U.S. industry input. In addition, the HELP Act extended duty-free treatment for automobile wire harnesses for an additional five years.

Transshipment and Customs Provisions Amended

The HELP Act requires U.S. Customs and Border Protection (CBP) to verify that apparel articles imported under the TPLs are not transshipped illegally into the United States. CBP is also to evaluate Haiti's customs requirements and set out a plan to improve their capabilities. The HELP Act authorizes appropriations of $100,000 to help meet the immediate customs infrastructure needs of Haiti and $750,000 for fiscal years 2011 through 2020 to maintain support for the Haitian customs initiative.

Outlook

The Haitian apparel industry benefits from a comparative advantage that rests on low-wage production and proximity to the U.S. market, augmented by flexible trade preferences created by the U.S. Congress in the HOPE Act, as amended. Because the United States is the primary market for Haitian apparel exports, these "uniquely" generous trade preferences based largely on duty-free treatment for apparel articles made with third-country inputs, especially fabric, are expected to lead to increased foreign investment in apparel manufacturing. Job growth and production increases in the apparel industry since HOPE I was passed in 2006 are early indicators that the strategy may have been taking hold before the earthquake occurred.

In the aftermath of the January 12, 2010 earthquake, the apparel industry faces a number of problems in returning to full production, including damaged factories, a devastated work force, and interrupted finance and logistical capabilities. Congress has chosen to respond to Haiti's needs by amending the HOPE Act to enhance even further market access for Haitian apparel and other exports. Two important considerations guided congressional action in addition to a broad-based concern over Haiti's economic and social problems. First, legislation appeared to focus on enhancing those preference rules that have so far shown the most promise for promoting investment, production, and apparel exports. Second, Congress, in amending the preference rules, openly considered the possible negative effects on U.S. producers and workers. In so doing, Congress sought to achieve a policy coherence that attempts to balance domestic and foreign policy considerations.

Appendix. Haiti: Selected Economic Indicators