By Nigel Cory
Even before the Trans-Pacific Partnership (TPP) trade agreement is completed by negotiators, foreign and domestic companies with stakes in Vietnam’s garment sector have begun making investments as if the TPP was already in force. These moves suggest how much the business community expects Vietnam’s garment industry to benefit from the trade agreement.
One of the provisions in the TPP, known as the “yarn forward” rule, requires a member country that exports apparel to other TPP markets to use textile that is either made locally or imported from other TPP member countries. While Vietnam is one of the world’s top garment manufacturers, it has until now sourced about 88 percent of its textiles from China and South Korea, with Vietnamese factories cutting and sewing the fabric in the final stage of production prior to exporting finished garments. Signing on to the TPP means that Vietnamese garment exporters will technically no longer be able to import their materials from China if they hope to benefit from lower tariffs under the TPP.
The yarn forward requirement was put in place in part to protect U.S. yarn and textile producers, which have lobbied the U.S. government to maintain stringent rules of origins as part of the TPP. Meanwhile, U.S. retailers have argued that textiles and garments are part of the global supply network like so many other goods and should not be burdened by such provisions.
Vietnam’s apparel industry has for some time been concerned that it will have trouble complying with the rules of origin in the TPP, given that this would require the textile industry make significant capital and technological investments up front. Vietnamese negotiators had pushed for a “cut and sew” rule of origin which, as its name suggests, only requires that final cutting and sewing takes place in a TPP member country.
However, as the TPP negotiations near conclusion, both domestic and foreign businesses have begun making upstream investments in Vietnam to take advantage of the preferential treatment that Vietnamese garment exporters will potentially enjoy under the agreement. This means that not only will Vietnam’s garment sector gain preferential access to the U.S. market, it will also be able to capture greater added value in the supply chain. If the TPP goes into effect, Vietnam expects tariffs on its garment exports to the United States to eventually drop to near zero from the current 17 percent.
Vinatex, Vietnam’s largest textile company, in February signed an agreement with Japanese trading firm Itochu to invest in several projects in dyeing and materials production in Vietnam. Vinatex has announced plans to invest more than $714 million to upgrade and expand its supply chain, including in weaving and dying operations, in an effort to meet TPP requirements. In April, Vinatex inked a $12 million deal with Japanese partner Toms Limited to build a textile-dyeing-garment complex in central Vietnam.
Other foreign investors have followed suit. South Korea’s Dong-IL Corp. has begun building a $52 million yarn factory in southern Vietnam, while Taiwan’s Forever Glorious has announced plans for a $50 million weaving-dyeing-garment factory. Meanwhile, several Chinese textile companies, such as Esqual Group and Jiangsu Yulun Textile Group, have either opened or are in the process of building large textile plants in Vietnam.
It remains to be seen how U.S. and Vietnamese negotiators will finally decide to settle the issue of yarn forward. Even with massive upstream investments underway, Vietnam’s apparel industry will not immediately be able to cope with the TPP’s requirements should the rules of origin be too stringent. The outcome of these negotiations is crucial for Vietnam’s apparel and textile sector, which last year earned over $20 billion from garment export exports. The sector employs about 2.5 million people working in 6,000 factories.
The main loser from Vietnam’s preferential access under the TPP would likely be China, which currently controls around 35 percent of the U.S apparel market. Vietnam’s garment exports, in contrast, account for only nine percent of the U.S. market. China’s dominance in this market, based on its low production costs, has been eroded in recent years by rising labor, land, and regulatory costs. The TPP would accelerate the shifts already underway in the global supply chain, as businesses have increasingly moved out of China to Vietnam and elsewhere in search of lower production costs and, when possible, better preferential access to the large U.S. market.
Studies show that Vietnam is likely to be one of the biggest winners from the TPP. Modelling shows that the TPP would help Vietnam’s apparel and footwear exports reach $165 billion by 2025; without the TPP, this figure would have been $113 billion.
The changes that Vietnam is expected to implement within the TPP are significant and challenging. Vietnam will have to undertake some difficult domestic reforms to meet the TPP’s intellectual property rules and labor and environmental standards. However, the moves by foreign and domestic companies to invest in or expand operations in Vietnam gives the government an early indication of the benefits that could be derived from painful domestic reforms as the ambitious trade agreement is being finalized.