Vietnams export potential for apparel could be more limited than anticipated

Vietnam's export potential for apparel could be more limited than anticipated

Vietnam's clothing exports have surged over the past decade, and the country is widely seen as the 'next China' for apparel sourcing. But despite optimism for further expansion under the upcoming CPTPP and EVFTA trade pacts, buyers should instead prepare for limited growth, according to an analysis by Dr Sheng Lu, associate professor at the Department of Fashion and Apparel Studies at the University of Delaware.

In 2017, around 14.4% of US apparel imports came from Vietnam, up from 8.2% in 2010. Over the same period, Vietnam's shipments to the European Union (EU) also increased by as much as 131.2%, compared with growth of 28.2% in the EU's total apparel imports.

Most industry professionals and analysts hold an even more optimistic view on Vietnam's export potential for apparel in the years ahead, largely because of its membership in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the EU-Vietnam Free Trade Agreement (EVFTA).

These two free trade agreements, likely to be implemented in 2018, will make Vietnam one of the few leading clothing exporters that can enjoy duty-free access to both the EU and Japan markets, which together accounted for nearly 40% of the world's apparel imports.

However, with a population less than 100m, a key question to ask is: How much more can Vietnam's apparel exports grow after the implementation of the CPTPP and EVFTA?

Export impact

Theoretically, the implementation of the CPTPP and EVFTA could affect Vietnam's apparel exports in two ways:

  • On the one hand, the two trade agreements may help expand Vietnam's apparel exports to other CPTPP and EVFTA members, particularly EU and Japan.
  • However, on the other hand, the CPTPP and EVFTA could intensify competition for resources, such as labour, between the apparel industry and other export-oriented sectors in Vietnam – which may also try to expand their production and exports by taking advantage of the two trade agreements.

The apparel industry offers one of the least competitive wages of all the country's manufacturing sectors. A recent study by the International Labour Organization (ILO) shows garment workers in Vietnam earn around US$248 per month, much lower than the  US$583 per month national average.

The dilemma facing Vietnamese garment factories is that not increasing the wage will make it harder to attract and retain workers. However, a wage hike would also make Vietnam's apparel exports less price-competitive in an already competitive market.

Quantitative analysis

To explore the potential impact of the CPTPP and EVFTA on Vietnam's apparel exports further, I conducted a preliminary quantitative analysis based on the Global Trade Analysis Project (GTAP) model.

Data came from the latest GTAP9 database, which covers trade, employment and production in 57 sectors in 140 countries. Specifically, I estimated the following two scenarios:

  • Scenario 1 assumes tariff rates are reduced from their 2015 level to zero only for textile and apparel traded between CPTPP and EVFTA members.
  • Scenario 2 assumes tariff rates are reduced from their 2015 level to zero for all products traded between CPTPP and EVFTA members.

Three findings are of note.

First, the results suggest the CPTPP and EVFTA overall will help Vietnam's apparel exports grow, but in a limited way. Specifically, Vietnam's annual apparel exports will be able to increase by around $3.098bn and $2.750bn in Scenario 1 and Scenario 2 respectively, compared with the base year level in 2015.

Notably, over 92% of the expanded exports will go to other CPTPP and EVFTA members because of the trade creation effect of the two agreements.

Second, the results confirm competition for labour will intensify between the apparel industry and other sectors after the implementation of the CPTPP and EVFTA. Interestingly, though, the apparel industry will account for a higher percentage of total employment in Vietnam (4.1%) when the tariff elimination under the CPTPP and EVFTA applies only to the textile and apparel sector (Scenario 1).

However, when the tariff elimination applies to all sectors (Scenario 2), the apparel industry will account for only 3.5% of total employment in Vietnam, down from 4.0% in the base year level.

Correspondingly, Vietnam's apparel exports will grow less in Scenario 2 than in Scenario 1 when other sectors in the economy also try to take advantage of the trade creation effect of the CPTPP and EVFTA.

Third, the results suggest US fashion brands and retailers currently sourcing from Vietnam may have to compete for orders with their counterparts in the EU and Japan after the two trade deals are implemented.

Particularly in Scenario 2, when the tariff reduction applies to all sectors, the value of Vietnam's annual apparel exports to the US will decline slightly (by US$0.3m) compared with the base year level in 2015.

This result challenges the popular view that Vietnam can become the 'next China' for apparel sourcing and reminds us that Vietnam's export potential for apparel could be more limited than anticipated.

To sum up, while the implementation of CPTPP and EVFTA is exciting news for fashion brands and apparel retailers sourcing from Vietnam, maintaining a relatively diverse sourcing base will continue to be a wiser choice for companies.

It also increases the urgency for the US textile and apparel industry to strategically push for free trade agreements with leading sourcing destinations – including rejoining the Trans-Pacific Partnership (TPP) – to level the playing field for winning sourcing partners.