Trans-Pacific Partnership Agreement shakes up retail industry – Vietnam to be on the winning side

Vietnam will likely sign the Trans-Pacific Partnership Agreement (TPP) in 2015. The TPP Free Trade Agreement (FTA) between the United States (US) and 12 Pacific Rim countries, together accounting for 40 percent of world GDP, is expected to heavily impact on the worldwide apparel industry. In any scenario Vietnam will be on the winning side at expense of
non-TPP countries such as Bangladesh and Sri Lanka. To what extend Vietnam will profit from the TPP, however, depends on how stringent rules of origin (ROO) will be.

The US, desiring to protect its domestic textile industry and pressured by the textile lobby which would like to avoid increasing competition from cheap non-TPP textile manufacturing countries, is pushing for strict ROO or ‘yarn forward’ rules. In this case all stages of production from yarn spinning to cutting and sewing of the finished article would have to take place in a TPP country.

Vietnam on the other hand favors the ‘cut and sew’ rule which would only require the cutting and sewing of the finished article to take place in a TPP country and allow manufactures to source at low costs outside the TPP area.

Vietnam would profit considerably more from the latter scenario as it´s young apparel industry sources only about 12 percent internally and around 3 percent from TPP countries. Thus, as further development of the local textile industry would only happen with some delay, just about 15 percent of Vietnam´s apparel exports would profit directly from the TPP in case of a ‘yarn forward rule’. If the TPP countries and the US manage to agree on a ‘cut and sew’ regulation, however, not only would a considerable part of Vietnam´s apparel exports profit, but Vietnam would gain advantage over Central American apparel manufacturers, like Mexico, and other Asian Apparel manufacturers excluded from the TPP such as Bangladesh, Sri Lanka, Indonesia and the Philippines.  

In case of a ‘cut and sew” agreement reduced-tariff access to the US – the single largest consumer of apparel globally – could boost Vietnam´s global apparel export market share by 7 percent in the next 10 years, allowing it to overtake Bangladesh as second biggest apparel exporter behind China. Bangladesh and Sri Lanka would likely see exports to their largest single-country apparel export market declining. Central American manufacturers would also feel the impact as their sourcing is subject to higher local labor costs and ‘yarn forward’ rules under NAFTA.

Should the US insist on ‘yarn forward’ rules under the TPP agreement, benefits for Vietnam´s apparel industry will set in slowly but certainly. Foreign investment in the spinning, weaving and dying sectors has already accelerated in anticipation of the TPP, led by investors from China, Japan and Hong Kong. Such a scenario would give Bangladesh time to intensify relations with Europe where it enjoys preferential treatment as a least developed country (LDC) and Sri Lanka to shift its attention to more high-skilled niches such as swim-wear. Initially the Central American supply chain would remain competitive, but rising labor costs will force it´s decline in the long-term.

‘Yarn forward’ or ‘cut and sew’, being the TPP nation with the biggest global apparel market share, Vietnam will clearly be on the winning side.

Read the original paper here