Under a yarn-forward rule, apparel made with imported textile inputs from non-TPP countries would not qualify for duty-free treatment

Under a yarn-forward rule, apparel made with imported textile inputs from non-TPP countries would not qualify for duty-free treatment

While Vietnam is likely to see some of the biggest apparel export gains from the Trans-Pacific Partnership (TPP), a new report confirms industry concerns that its shortfall in yarn and fabric production, ability to meet yarn-forward rules of origin, capacity constraints and related price effects could all weigh on its potential.

Vietnam is already the second-largest apparel supplier to the US after China, shipping around one-half of its total apparel exports – totalling $10.5bn – to the country last year.

Not surprisingly, it also has the largest share of the US apparel market of all the nations that are party to the TPP. Indeed, its apparel shipments account for around $11.1bn or 56% of TPP imports.

And with US duties on its imports totalling over $1.9bn in 2015, brands and retailers could potentially reap significant duty savings on imports from Vietnam once TPP takes effect.

But a report released this week by the US International Trade Commission (USITC) – 'Trans-Pacific Partnership Agreement: Likely Impact on the US Economy and on Specific Industry Sectors' – confirms anecdotal evidence that initial growth will likely be limited by Vietnam's inability to meet the yarn-forward rules of origin, coupled with long duty phase-outs for certain key products.

Under a yarn-forward rule, apparel manufactured with imported textile inputs from non-TPP countries would not qualify for duty-free treatment.

While Vietnam has a competitive, export-oriented apparel manufacturing industry, it lacks upstream production of textile inputs (yarn and fabric) and dyeing and finishing capabilities. Indeed, it relies so heavily on imports that estimates suggest around 88% of the yarns and fabrics used come from outside the country.

However, just 8% ($1bn) of Vietnam's imports of yarns and fabrics were from TPP partners in 2014. China is Vietnam's largest source of textile imports, followed by South Korea and Taiwan. All three are non-TPP countries.

Capacity constraints and related price effects could also moderate some of Vietnam's market access gains under TPP, the report notes.

For example, apparel manufacturing costs, as well as other indirect transportation costs, are likely to increase as a result of TPP. Wages in Vietnam grew by double-digit rates in recent years and could drive up production costs for apparel if the trend continues.

And US importers would increasingly compete with EU firms for apparel manufacturing capacity in Vietnam, given that the EU also recently concluded a free trade agreement with the Southeast Asia country.

Vietnam's ability to meet yarn-forward rules of origin

According to the USITC report, current estimates of Vietnam's domestic ability to meet a yarn-forward rule of origin for apparel vary by product or factory, and range from 12% to 20% of the products. However, for some products such as fleece and certain woven fabrics, inputs are more readily available.

Although there is some domestic textile production within Vietnam, only one-quarter of the output is currently estimated to be of export quality. The dyeing and finishing segments of the supply chain are underdeveloped, as the Vietnam government tightly controlled permits for such operations in the past. Unclear regulations have also led to a dearth of investment in this area, resulting in a bottleneck in Vietnam's supply chain.

In 2014, Vietnam's textile industry consisted of 145 yarn spinners, 401 weaving facilities, 105 knitting mills, 94 dyeing and finishing plants, and 7 nonwoven manufacturers. Anticipating yarn-forward rules under TPP, domestic and foreign firms have been investing in upstream fibre and textile capabilities in Vietnam, where TPP-related foreign direct investment (FDI) in the textiles and apparel sector is estimated to be in excess of $1bn.

Major foreign investors are from China, Hong Kong, Taiwan, and South Korea. Additionally, the Vietnam National Textile and Garment Group (Vinatex), Vietnam's largest textiles and apparel corporation and a state-owned enterprise, is investing in spinning and weaving capacity. It is likely that as this investment becomes operational, more apparel would qualify for benefits under the FTA.

Cotton yarn spinning in Vietnam has grown rapidly since 2010, driven by exports to China, its largest export market (accounting for 80-90% of Vietnam's cotton yarn exports), and investment in anticipation of TPP.

The increased demand for cotton yarn from China is due to China's domestic cotton policy. To work around restrictions, Chinese textile firms import cotton yarn instead of spinning it domestically. Chinese firms have invested significantly in yarn-spinning in Vietnam, including relocating operations to that country.

For example, Chinese company Texhong Textile has investments in Vietnam that accounted for one-quarter to one-third of Vietnam's total yarn production in 2015; much of this production is exported to China.

Statistics from the International Textile Manufacturers Federation (ITMF) indicate Vietnam's installed capacity of short-staple spinning machines (to produce cotton or cotton blend yarns) more than doubled from 1.9m spindles in 2009 to 5.1m in 2013.

Among major textile producers, Vietnam has one of the highest modernisation rates of its spinning capacity based on the share of its machinery that is less than 10 years old. Cotton consumption in Vietnam has more than tripled since 2011, indicating that Vietnam is developing its textile supply chain.

However, Vietnamese-produced yarns and fabrics are more expensive than similar goods produced in China. For example, in 2014, Vietnamese yarn was estimated to be 5-10% more expensive than similar yarn produced in China; fabrics were 5-8% more expensive.

Under TPP, however, slightly higher input costs can be offset by duty savings on US imports of finished apparel from Vietnam, which had a trade-weighted average duty of 18.5% ad valorem in 2015.

But with limited capacity for inputs to meet yarn-forward ROOs, some apparel manufacturers are concerned that increased demand for yarn would lead to higher prices for already scarce goods. Higher input costs could also moderate the ability of Vietnam's apparel producers to export under TPP in the short to medium term.

While Vietnam now needs an extra 10–12 days' lead time to import yarn and fabric inputs, in the long run, increased domestic production of yarn and fabric in Vietnam would shorten lead times. 

The long-awaited USITC report on the likely impact of the Trans-Pacific Partnership (TPP) also offers a broader view on the likely impact on US apparel and textile trade.

TPP likely to lead to rise in US apparel imports

just-style has also reported how industry executives are questioning whether Vietnam is really ready to reap the benefits that could come its way once the TPP trade deal goes live.

Is Vietnam ready to reap the benefits of TPP?

Click on the following links for more findings from the report 'Trans-Pacific Partnership Agreement: Likely Impact on the US Economy and on Specific Industry Sectors':

Footwear to see "significant" gains from TPP

Labour may limit Malaysia TPP apparel shipments