International Business Report: DR-CAFTA, Honduras, and Russel Brands

This report provides a comprehensive analysis of the Dominican Republic-Central American Free Trade Agreement (DR-CAFTA) and its effects on international business, particularly focusing on the sportswear manufacturer Russel Brands and its operations in Honduras. The report begins by examining the free trade theory and how DR-CAFTA enables companies to optimize their supply chains and production costs. It details the benefits DR-CAFTA offered to Russel Brands, such as reduced tariffs and streamlined manufacturing processes, allowing the company to compete with rivals like Nike and Adidas. The report also discusses the positive impacts of DR-CAFTA on Honduras, including economic growth, job creation in the apparel sector, and the strategic advantages of its geographical location. Furthermore, it addresses the challenges Russel Brands faces in a competitive market and suggests strategies the Honduran government could employ to attract foreign investment, diversify its economic activities, and maintain its competitive edge. The report concludes by highlighting the importance of DR-CAFTA for the long-term success of both Russel Brands and the Honduran economy, as well as the benefits of free trade in general.

Running head: International Business
International Business
Name of the Student
Name of the University
Author Note

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Contents
Answer 1:...................................................................................................................................2
Answer 2:...................................................................................................................................3
Answer 3:...................................................................................................................................4
Answer 4:...................................................................................................................................5
References:.................................................................................................................................7

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Answer 1:
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

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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.
Answer 2:
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

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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).
Answer 3:
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

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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.
Answer 4:
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

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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.

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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.

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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).