The TPP trade pact and Silk Road will be significant to global trade when complete

The TPP trade pact and Silk Road will be significant to global trade when complete

The two initiatives with the potential to reshape the global sourcing landscape are also mired in uncertainty. The Trans-Pacific Partnership (TPP) free trade pact is still a long way from ratification, while details remain patchy on China's One Belt One Road initiative. So what do apparel brands, retailers and manufacturers make of their possible impact? 

The US-led Trans-Pacific Partnership (TPP) free trade pact was signed last month after more than five years of negotiations, but ratification – if it happens – is likely to take at least another two years. To add to the uncertainty, the deal is currently stalled in Congress until after the November elections. The trade pact involves 12 nations, covers 40% of the world economy, and links $28.1trn of global GDP.

China's One Belt One Road (OBOR) initiative, meanwhile, was launched by President Xi Jinping in 2013 as a platform to connect China by road and sea routes with some 60 countries across South-East, Central and South Asia, Europe, the Middle East and North Africa, together accounting for 60% of the world's population and a collective GDP equivalent to 33% of the world's wealth. But few actual projects have been completed and specifics remain sketchy.

Uncertainty

All of which creates an element of doubt as far as the capabilities of each is concerned. The TPP is yet to be concluded while the One Belt One Road, albeit a much younger initiative, is yet to gain any real momentum. 

Christian Ewert, director general of the Foreign Trade Association, which represents European and international retailers, importers and brand companies, last week told attendees at Hong Kong's Prime Source Forum that he believes the impact of One Belt One Road may depend on how the reality of TPP sets in. 

"There is a keen interest from our side to look into what is happening in terms of the mass market where consumer goods are concerned. But there is a bit of a worry when you look at producing countries. What is the potential impact for countries like China, Bangladesh, Pakistan and Sri Lanka that are not part the TPP?"

Nonetheless, he points to the opportunities likely to be seen from the lowering of tariffs between TPP countries, and the development of infrastructure to facilitate trade through the OBOR. 

"Benefits, in this context, probably would be tremendous for Vietnam, just to mention one," he explains. "And on the other side, when you look at the benefits of TPP for non-participating countries, there is expected to be a reduction in barriers to trade."

Industry opinion

Alex Young, CEO of Taiwanese yarn, woven fabric and garment manufacturer TexRay Industrial Co, has weighed up the benefits of both. The TPP trade pact, he believes, will allow the company to maintain a better service for its customers. 

"It is the importer that saves the duties, so it's very attractive to my customers, it can help them improve their retail price and be more competitive. For me the costs are the same, but I maintain a level of trust with my buyer, and if I can help them be more competitive then great."

The OBOR initiative, he says, has the potential to cut transportation time to Germany from 40 days to 15. However, he issues a warning: "By improving the logistics, yes it helps retailers in terms of time to market. But eventually, if the product is not the right quality or not up to standard, all of this is useless."

Robert Sinclair, COO of LF Sourcing, offers a similar view: that it boils down to the "capability and reliability of a manufacturer to its customers."

But he also highlights the significance of OBOR should it be completed. "In the US in the 50s, Eisenhower signed off on the Interstate Highways Act. The ramifications of that to the US economy is, in many respects, an economic phenomenon. For every $1 they invested in the highways that linked east with west, north with south, the return was $6. Over a 40-year period, it was in excess of $1 trillion of cost savings. The first ten years saw a 30% productivity gain, and the next ten years was 25%. But even as we speak, the US interstate highway infrastructure is one of the most significant contributors to the economy."

Another aspect is the growing middle class in developing countries, with both initiatives ultimately providing for a "huge consumer market that is going to connect one end of the globe to the other". 

"There is a lot of significance to what is happening and it's exciting," he says. "It's only now that the CEOs of brands and retailers in Europe and North America are really starting to recognise the significance and importance of supply chains and global trade. Before, it really wasn't on their radar and now it's one of the most exciting areas of our industry."

Indeed, US retailers such as Sears Holdings have been paying close attention to the progress of the TPP, the deal likely to have the largest impact on its business given it sources 15-20% of its apparel, accessories and footwear out of Vietnam. 

"It's already a competitive environment so the duty savings would be a huge benefit for the US," says Jay Burdett, MD of Sears Holdings Global Sourcing. "But we're not holding our breath as to it happening this year, next year or the following year. Even when it eventually does get signed and agreed, it may not be in the format it's in now.

"TPP really is the thing that's most on our mind, but it's not what drives our decision-making right now. We're negotiating every season, we don't think too far ahead."

Conversely, the OBOR initiative, Burdett says, isn't on the radar at all from a US retail point of view. 

"For China it's maybe a little bit of concept verses practical reality; not a lot of things are happening with it. But China thinks in five, ten, 15-year increments. The US attention span is a year or two in advance, we just don't think that far ahead. And that really exemplifies the difference. Eventually though it will be something exceptional."

Realistic expectations

For all the excitement, however, the expectations of both initiatives need to be realistic, as those at the Forum were keen to point out. And, in the meantime, it's business as usual.

TexRay's Young explains: "We cannot wait for these future agreements. Business has to go on. We invested in Vietnam because of a better choice for our customers."

The company already operates a garment factory in Binh Duong province, and began construction on a second plant in Long An at the end of last year. The first 20 garment production lines are due to start in August, with another 18 lines added in the second stage. The total production of the factory will be 80,000 dozen a month. TexRay says a third factory "is already on schedule.".

LF Sourcing's Sinclair adds: "The TPP isn't new; it's a football that has been kicked around quite literally for the last several years and quite realistically probably will be for the next few years. So we can pontificate and speculate all we want – but we have business at hand and we have to get on with it."

TPP trade pact in "milestone" signing by 12 nations

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