TPP would add another $1.9bn in US apparel imports above the baseline forecast for 2032

TPP would add another $1.9bn in US apparel imports above the baseline forecast for 2032

A long-awaited report on the likely impact of the Trans-Pacific Partnership (TPP) has confirmed the agreement is likely to lead to a rise in US apparel imports – and that Vietnam would be the biggest beneficiary.

The just-released research estimates US demand for both imported and domestically produced apparel would increase over a baseline projection for 2032 that does not include TPP. Specifically, it suggests US imports of textiles would rise 1.6% or $869m above this baseline, and imports of apparel would rise 1.4% or $1.9bn. In contrast, US exports would go up by just 0.3% or $10m.

The investigation by the US International Trade Commission (USITC) was requested by the US Trade Representative last November, and looks at the effects of the TPP trade deal agreed between the US and Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.

The report, 'Trans-Pacific Partnership Agreement: Likely Impact on the US Economy and on Specific Industry Sectors', also says imports of apparel would be expected to grow most significantly from Vietnam, the second-largest supplier to the US.

The projected increase from Vietnam would likely in part be offset by a decline in apparel shipments from non-TPP partners, particularly China, the largest US apparel supplier. According to the model, US imports of apparel from non-TPP partners would decline by 5.1% or $5.5bn compared with the 2032 baseline.

The results also indicate that US output and employment in the apparel sector would increase slightly – by 1.0% and 0.9% respectively – over the 2032 projected baseline.

High-end, niche products, replenishment or quick turnaround products, and other items that generally do not compete with imports are among the types of products being produced domestically. Examples include those that require customised, often smaller orders, such as sports team uniforms, test market products or reorders, and fast-fashion items.

Estimates for textiles point to TPP lifting US exports by 1.3% or $257m above the baseline estimate. Output and employment in the textiles sector are each expected to be 0.4% lower compared with the 2032 baseline.

Trade with TPP countries

US exports of textiles and apparel to TPP countries totalled $7.9bn in 2015, and accounted for 54% of the total – with textiles taking up most of this value (81% or $6.4bn). Within the TPP countries, current free trade agreement partners Mexico and Canada accounted for the vast majority (94%) of US textile and apparel exports in 2015. Japan was the largest destination for US exports to non-FTA TPP countries.

Conversely, US imports of textiles and apparel from TPP countries were worth $19.9bn in 2015, making up 17% of the US textile and apparel import total of $118.5bn. Most of this value was due to apparel (82% or $16.3bn).

Within TPP countries, Vietnam had the largest share of US textile and apparel imports ($11.1bn or 56% of TPP imports), nearly all of which consisted of apparel. The current FTA partners accounted for 39% or $7.7bn of US textile and apparel imports from TPP partner countries in 2015.

Under the provisions of the TPP, all textile and apparel duties will eventually be eliminated – with over 70% of US tariffs dropped immediately the deal comes into force. These lines accounted for about 28% of dutiable imports from TPP countries in 2015.

Some of the top apparel import categories from Vietnam, such as certain cotton and manmade fibre sweaters, manmade fibre dresses, and manmade fibre water-resistant anoraks (jackets), would be free of duty upon the TPP's entry into force (EIF).

The duty rates for an additional 7% of the 8-digit textile and apparel subheadings – such as certain cotton yarns and baby garments – would be phased out in equal stages over five years.

But for most of the remaining textile and apparel items, which accounted for about 69% of dutiable imports in 2015, the duty rate would be cut by 35% or 50% on EIF and then remain in place for 10 to 12 years. The products considered most sensitive to imports from TPP countries, particularly Vietnam, received the longer staging, including T-shirts and cotton and manmade fibre knit pants (10 years) and cotton and manmade fibre trousers and men's wool suits (12 years).

A few items have an additional duty reduction of 15% on 1 January of year six.

US exporters already have duty-free market access to six of the TPP parties under existing US FTAs. For the non-FTA TPP countries, most of the duties would go to zero upon EIF.

Rules of origin

Similar to most other US trade agreements, TPP would apply yarn-forward rules of origin (ROO) to most textile and apparel goods. For example, in order for a garment to qualify for preferential treatment, production of specified yarns and fabrics used in the garment, as well as the cutting and sewing, must occur in the US and/or other TPP countries.

Notable exceptions include bras and certain baby garments; for these products, fabrics must be cut or knit to shape and sewn in the TPP countries in order to qualify.

There is also a cut-and-sew tariff shift rule for apparel made from certain fabrics, including coated or impregnated fabrics and silk fabrics. The agreement also requires that cotton, manmade fibre filament, and manmade staple fibre sewing thread is used in all apparel and made-up textile articles, and that narrow elastic fabrics used in all apparel be "formed and finished" in the TPP countries.

A notable flexibility to the yarn-forward rule is the "short supply" list, which allows the use of certain inputs used in textile and apparel products that are considered to be in short supply in the TPP countries.

For countries with existing agreements, partners could use either the TPP or existing ROOs when exporting to the United States. There might be some advantage to using TPP ROOs for apparel if manufacturers spread different steps of production across multiple or new TPP partners.

Another element to the trade pact is the Earned Import Allowance Program (EIAP) for Vietnam, which would authorise certain woven cotton pants and other bottoms assembled in Vietnam to enter the US free of duty under specific conditions if they are made from certain US cotton fabrics, or fabrics originating from another TPP country, or from any origin provided it qualifies for preferential treatment under the agreement.

Without the EIAP, TPP-originating cotton bottoms would be subject to a yarn-forward rule of origin and the pants would not be free of duty until 1 January of year 13.

Comments submitted to the investigation suggest that the long duty staging would limit the use of the agreement for imports by US apparel brands and retailers.

Gap Inc indicated that even though duties on products subject to the longer duty staging (10–12 years) will be reduced by at least a 35% on day one of the agreement, this would not be enough to encourage increased imports under the agreement.

However, there may be some incentive to increase imports of apparel products that have high duties, such as synthetic apparel, which would see a 50% tariff cut.

The report notes, however, that over the long run there are significant duty savings to be realised for products that meet the ROOs. In 2015, dutiable imports of textiles and apparel from TPP countries totalled $12.3bn, with an estimated trade-weighted average duty of 17.7% ad valorem.

Duties would be eliminated on EIF on tariff lines representing about $3.5bn in dutiable imports from all TPP countries in 2015, with a trade-weighted average duty of 12.6% ad valorem.

The apparel products seen as most likely to experience the largest initial increases under the TPP are those products that are duty free on EIF and have a cut-and-sew rule of origin or are able to use the "short supply" flexibilities to use non- originating inputs.

This includes certain cotton and manmade fibre sweaters, men's and boys' cotton dress shirts, women's and girls' manmade fibre dresses, baby garments, brassieres, apparel made with coated fabrics, and certain water-resistant jackets.

Earlier this month the National Retail Federation (NRF) set out its case for the Trans-Pacific Partnership (TPP) trade deal, pointing to its potential to lower sourcing costs and improve labour and environmental standards.

US retailers set out potential benefits of TPP

While a report published earlier this year suggested delay or failure to implement the Trans-Pacific Partnership trade deal could cost US exporters around US$94bn.

TPP delay or failure could cost US exporters $94bn

just-style has also taken a close look at the tariff phase-out schedule for textiles and apparel under the TPP, describing it as far more complicated than in any existing US free trade agreements.

How TPP will change US textile and apparel tariffs

Click on the following links for more findings from the report 'Trans-Pacific Partnership Agreement: Likely Impact on the US Economy and on Specific Industry Sectors':

Yarn-forward rules may weigh on Vietnam's TPP potential

Labour may limit Malaysia TPP apparel shipments

Footwear to see "significant" gains from TPP