TPP has yet to be passed, but its impact could be far-reaching

TPP has yet to be passed, but its impact could be far-reaching

Vietnam’s apparel sector is set to receive a major boost from the signing of a Trans-Pacific Partnership (TPP) trade deal, although the extent and immediacy of any benefits will depend on the fine print of the agreement. But the negative effects on other apparel manufacturing countries could reverberate well beyond Asia.

In its "Trans-Pacific Partnership (TPP) – Winners and Losers" report, Standard Chartered Bank charts the impact of any future TPP deal on the apparel industries of Vietnam (a TPP signatory), plus Bangladesh and Sri Lanka (non-TPP participants).

The multilateral TPP trade pact, led by the US and involving 12 Pacific Rim countries accounting for 40% of global GDP, is currently being negotiated, and is likely to come into effect in 2015.

"The TPP agreement on apparel has the potential to reshape the industry, as it involves the US – the single largest consumer of apparel globally – and Vietnam, the third largest emerging market apparel supplier after China and Bangladesh," the report notes.

"Preferential access to the US apparel market will give Vietnam an advantage over other Asian manufacturers."

But the report says that the extent of this advantage will depend on the detail of the deal: specifically, how tightly the Rules Of Origin (ROO) requirements currently being negotiated between the US and Vietnam are drawn.

Crucially, much will depend on how much of the production process must take place in a TPP country to qualify for preferential access to the US market.

Flexible ROO requirements – for instance, a deal with "single transformation" requirements requiring only assembly of the final product to be done in a TPP country to qualify for preferential access to the US – would have an "immediate benefit" for Vietnam, the report says.

In particular, it would allow Vietnam’s apparel manufacturers the flexibility to purchase raw materials from a variety of sources and at the lowest cost.

In this scenario, Standard Chartered predicts, Vietnam could overtake Bangladesh in terms of global apparel export market share by the year 2024, bringing its market share up to 11% from the current figure of 4%.

Meanwhile, Bangladesh’s market share would move up only slightly, by two percentage points, to around 7% – while Sri Lanka’s would decline from the current figure of 1%.

The negative effects on other apparel manufacturing countries would reverberate well beyond Asia, however: the report says such a deal would also impact Central American apparel manufacturers which are currently subject to the "triple transformation" rules under the NAFTA and CAFTA-DR agreements in order to gain access to the US.

Should the TPP agreement include more stringent ROO requirements, however, then the benefits to Vietnam would take longer to manifest themselves, since it would first require further development of the country’s textile industry.

The foundations for this development are already being laid, the report notes, with a wave of foreign investment in Vietnam’s textile industry already beginning, ahead of any TPP deal.

In the third possible scenario – where no TPP deal at all is finalised – the report predicts that Bangladesh and Vietnam would stand neck-and-neck by 2024, each with an approximate 7% share of global apparel exports, while Sri Lanka’s share would remain stable.

"To prepare for a potential loss of competitiveness relative to Vietnam, Bangladesh and Sri Lanka will need to take pre-emptive action," the report recommends, suggesting a number of steps which the countries could take.

For Bangladesh, it should in the short term focus on capturing more of China’s current market share with European Union (EU) customers.

Compliance with global safety and labour norms would help Bangladesh to achieve this, the report suggests, since it would help to ensure continued access to EU GSP (Generalised System of Preferences) benefits, even after graduating from LDC (Least Developed Country) status.

The report adds that Bangladesh should also work to regain GSP privileges with the US.

In the longer term, the country should work to improve the skills of its labour force, allowing Bangladesh to move up the value chain into higher-margin segments of the apparel industry.

Sri Lanka’s major advantage, the report suggests, is its well-qualified labour force, which should allow the country to move up the value chain more swiftly than Bangladesh.

Standard Chartered notes that the "provision of unique design services and products, further mechanisation and effective branding" could help Sri Lanka to retain market share.

But the country would also benefit from strengthening its trading position with so-called "non-traditional" markets, including the Middle East, India and China.