Comment: The Trans-Pacific Partnership - Plan B
By David Birnbaum | 4 October 2012
Earlier this year, David Birnbaum suggested multi-lateral Trans-Pacific Partnership (TPP) trade talks between the US and eight Pacific Rim nations provide an opportunity to change the way US garment-related free trade agreements are negotiated. Here he outlines his alternative Plan B.
Regional free trade agreements (FTAs) are less about trade liberalisation and more about trade restriction.
The underlying idea is that the insiders will benefit at the expense of the outsiders. To be successful every insider country must show a net quantifiable benefit. This is the measure of the FTA's efficacy.
There are of course exceptions. Developed countries will sometimes offer duty-free access to developing and least-developed countries as a form of aid, which is a good and noble effort. However, acts of charity notwithstanding, if the FTA fails to provide tangible net benefits, the agreement makes no sense.
If we accept this premise, we must conclude that the current US strategy TPP garment strategy fails.
The US Trade Representative (USTR) has but a single strategy which it is trying to impose on all parties: Plan A.
Plan A is based on the yarn-forward rule: To qualify for duty-free access, the garment must meet the following standards
- Garment produced in a TPP country
- From fabric woven (or knitted) in a TPP country
- From yarn spun in a TPP country
TPP currently has nine members: Australia, Brunei, Chile, Malaysia, Peru, New Zealand, Singapore, United States, and Vietnam. Of these, only Vietnam, with a 9.5% (April 2012) market share is a major US garment supplier.
The USTR's argument is that the yarn-forward rule will lead to greater US yarn and textile exports. The yarn-forward rule worked well with NAFTA and even better with CAFTA, why not with Vietnam? The answer is that Vietnam is different.
Vietnam is in the centre of South East Asia, one of the very few regions where investment funds are plentiful and where the textile industry is considered to be a good place to invest those funds. In the 12 months ending April 2012, Vietnam garment exports totalled $8.6bn.
If the US succeeds in imposing the yarn-forward rule on TPP, everybody from China to India will rush to build spinning and weaving mills in Vietnam (or more likely Malaysia or Singapore).
Within two to three years, not only will the US textile industry be shut out of TPP, it will also face increased competition from state-of-the art regional yarn and textile producers. In this regard we should not forget that while 60% of US yarn and textile exports go to NAFTA and DR-CAFTA, the remaining 40% goes to other countries; notably China which is the US's second largest customer for yarns.
A TPP yarn-forward rule would offer no quantifiable benefit to the US and would decrease US textile exports and thus further increase unemployment.
I suggest another TPP garment strategy: Plan B.
Rather than a yarn-forward rule, TPP should offer duty-free access based on a fibre-only rule. It is very simple:
Any garment produced in a TPP country would enjoy duty-free access provided the fibre comes from a TPP country - regardless where the yarn was spun or the textiles woven (or knitted).
With a 46% market share, the US is the world's largest cotton exporter. However, that position is now in peril. In the past the US maintained its dominance by providing subsidies to cotton producers. As a result of a WTO decision (DS 267 dated 2 June 2008) banning US cotton export subsidies, that option is no longer open.
US cotton farmers now face direct competition from the other major cotton producers, notably in South Asia, while at the same time previously second-level producers in Africa and South America are increasing their efforts.
To make matters worse, cotton prices, which previously had been at record highs due to a combination of increased demand for cotton garments and China's efforts to build up a strategic raw cotton reserve, have now entered an extended period of decline.
Unless strategic efforts are made now, US cotton growers will be faced with the long-term trend of lower cotton prices combined with a lower global market share.
Plan B would reverse that trend, at no expense to the US Government or its citizens.
The United States is the world's largest importer of cotton garments with import duty rates among the highest for any product.
- The fibre-only rule would ensure an immediate and substantial increase in demand for TPP cotton by ensuring that virtually all cotton garments imported into the US would be produced of TPP cotton.
- The fibre-only rule would ensure a long-term premium for TPP cotton. The exceedingly high import duty rates for cotton garments would ensure a separate market for TPP cotton.
Plan B could offer even greater advantages, based on the implementation process.
Shipments under the fibre-only rule would have to be monitored to ensure compliance. The usual method based on Certificates of Origins (CO) requires that each shipment be examined - a long and costly process.
A more efficient method would be to license spinning mills to issue Comprehensive Certificates of Origins (CCO). Under the CCO system, qualifying mills would be able to issue CCOs without undergoing shipment inspection, provided they used TPP fibre exclusively for all shipments regardless of destination. Rather than inspecting each shipment, the mill itself would be inspected on a regular basis (eg, every three months) to ensure compliance.
Spinning is an economy of scale. A large spinning mill may cost well in excess of $100-$200m. Few spinners would build a new mill to meet CCO requirements. It would be far more cost effective to use existing facilities. As a result, to a large degree exports to non-TPP countries would also use TPP fibre.
Finally, the fibre-only rule ensures that China no longer dominates the global garment export market, by shifting away from China, the world's largest cotton grower, to other countries.
Unlike the USTR's Plan A yarn-forward-rule, which provides no tangible benefit, the Plan B fibre-only rule would provide an increasing premium market for US fibres now and for the foreseeable future.
The fibre-only rule would benefit not only the United States but also most of the other TPP members - Australia, New Zealand, Peru and Chile - all fibre exporters. It would be much better to create a system which benefits almost everyone, than imposing a system which benefits only one country - Vietnam.
Finally, FTAs, particularly those involving textiles and garments, are highly politicised. In the United States, free trade agreements are negotiated by the administration but must be approved by Congress. Already, the US Congress is complaining that the USTR is acting in secret, refusing even to give Congress an indication of US TPP negotiations.
This is an election year. Republicans are looking for every opportunity to criticise the Democratic administration.
The administration is taking a terrible and unnecessary risk. Imagine the results when the administration's USTR finally comes before Congress offering its plan A as the only strategy, a plan which not only brings less than zero benefit the US but in fact subsidises investments in Vietnam.
Imagine the reaction when Congress becomes aware that a Plan B exists, which not only brings immediate quantifiable benefits to the US but also increases cotton exports at no cost to the US taxpayer.
David Birnbaum is the author of The Birnbaum Report, a monthly newsletter for garment industry professionals. Each issue analyses in-depth US garment imports of four major products from 21 countries, as well as ancillary data such as currency fluctuations, China quota premiums and clearance rates. Click here to visit David's website.
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Comment: The Trans-Pacific Partnership - Plan B
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