A slower rise in Vietnam wages is one of the benefits seen now that the TPP is dead

A slower rise in Vietnam wages is one of the benefits seen now that the TPP is dead

Vietnam's clothing and textile industry has been assessing the impact of losing a huge anticipated garment export boost under the Trans-Pacific Partnership (TPP) now that US president-elect Donald Trump has promised to sign an executive order pulling out of the 12-nation trade deal.

Vietnamese garment exports would have eventually earned duty-free treatment in the US under the deal, compared to a current average of 11% and a high of up to 32% for some categories. This had prompted the World Bank to issue a now-meaningless forecast that Vietnam's textile and garment exports to the US and Japan under the TPP would have played a major role in lifting Vietnam's GDP by 10% by 2030.

The run-up to the TPP's completion in October 2015 had been accompanied by a massive foreign investment inflow into Vietnam's upstream textile sector to satisfy the TPP's "yarn forward" rules of origin (ROO). During 2015, the Vietnam textile and garment sector had received a record US$2bn in foreign direct investment (FDI), according to the Vietnam Textile and Apparel Association (VITAS).

Whereas these mostly Japanese, Chinese, South Korean and Taiwanese investors now seem to have placed their bets on the wrong horse, the Vietnamese garment sector itself does not necessarily count itself as being among the losers in the TPP story.

"Wages will increase at a slower rate now that the TPP is dead, which is good for us, as the pre-TPP hype had been pushing them up greatly at our expense," Chris Walker, marketing manager at Thai Son SP Garment Factory in Ho Chi Minh City, told just-style.

"Anyone who buys from Vietnam will still have to factor in the duty rate, so it will be business as usual," he adds.

Last month US president-elect Donald Trump said he will take steps to withdraw from the proposed Trans-Pacific Partnership (TPP) free trade deal on his first day in the White House in January.

Trump to pull US from TPP on first day in office

But Vietnamese Prime Minister Nguyen Xuan Phuc emphasised that with or without the TPP deal Vietnam remains committed to further opening up its economy to the world. Vietnam has already signed 12 free-trade agreements, and Phuc's comments echoed those by Vietnam's trade minister Vu Huy Hoang, who said the textiles, seafood and footwear sectors would still remain competitive without the TPP.

Upgraded value chain

Experts with a close eye on the Vietnamese textile and garment sectors concur.

According to Tomoo Kikuchi, senior research fellow at the National University of Singapore's Centre on Asia and Globalisation, the considerable amount of investment by foreign multinationals in the upstream supply chain triggered by the TPP's yarn-forward rule is also an effort to upgrade the value chain in Vietnam.

Kikuchi expects this trend to continue. "The rules of origin gave the industry an incentive and thus momentum to invest in upstream textiles, which is a natural thing to do when labour cost rises.

"Sure, no TPP is disappointing, but whether that will slow down the trend I am not sure," he adds.

Achim Haug, Hong Kong-based chief representative of Germany Trade & Invest, a government agency assisting FDI in Vietnam, points out that Vietnam's structural advantages for the export-oriented manufacturing sector remain high, "so that investors will keep coming with or without TPP."

Among these advantages are Vietnam's wage levels being one-third lower than in neighbouring China, a relatively good infrastructure, political stability, and a young and motivated workforce.

"Particular opportunities also arise from the free-trade agreement between Vietnam and the European Union, which has been signed and is now awaiting ratification in the EU," Haug says. "We hope for quick clarity on this, so that the agreement can come into effect in 2018 as planned."

Whereas the US has been the top market for Vietnam's textile and garment products with US$10bn in 2015, shipments to Europe in the same period were significantly lower at nearly US$3bn.

But unlike the TPP with its strict yarn-forward rule, the Vietnam-EU FTA comes with a generous "fabric-forward" ROO. This means Vietnamese garment makers will be able to perpetuate their reliance on cheaper Chinese yarn, thereby safeguarding their profit margins. The EU agreed to remove all import tariffs on Vietnam's textile and garment products within seven years.

"Disappointed but not devastated"

Meanwhile, Julia Hughes, president of the United States Fashion Industry Association (USFIA), concedes that many in the US fashion industry are disappointed because they were looking forward approval of the TPP by the US Congress during the "lame duck session" before Trump's inauguration in January. 

Even before Trump's most recent anti-TPP tirade, congressional leaders from both parties had clarified that they will not bring the trade deal forward.

"We are disappointed but not devastated because our members knew that zero tariffs would not have been in effect as soon as next year, meaning no one had done pricing or had placed orders based on TPP," Hughes explains.

"But ironically, even as Vietnam has no TPP, it got all the foreign investment and the EU deal. By contrast, the TPP's death is a clear loss for US fashion brands, not least in their competition for global space with their EU competitors," she adds.

Nevertheless, Hughes believes there are some reasons to be cautiously optimistic. According to her, the Trump administration will over time see these economic realities, with the Trump family's business interest in apparel in general, and the fact that daughter Ivanka Trump has her own apparel and footwear line in particular, likely to emerge as helpful factors.

And with currently 97% of all apparel sold in the US being imported, she sees no way that the bulk of production could be brought back to America, especially not if his core political pledge is to cut down the number of immigrant visas.

"Trump talked about crafting bilateral FTAs, so why not one with Vietnam?" Hughes says.