Asian apparel suppliers to the US have good reason to be on edge

Asian apparel suppliers to the US have good reason to be on edge

As US President Donald Trump has been wasting no time carrying out his campaign pledges to undo long-standing American trade ties, the Asian apparel industry and the US retailers it supplies have ample reasons to be on edge.

Signs are particularly worrisome for apparel players sourcing from Vietnam, a member of the Trans-Pacific Partnership (TPP), the unratified 12-nation deal that will now not include the US after Trump extracted America from its commitments via a January 23 presidential memorandum.

Trump signs order to withdraw from TPP

Not only are the Vietnamese seeing their chances for tariff-free textile and apparel exports to the US under TPP vaporising, they must now fear even worse. Asia-based trade experts say that Trump is warming up to the idea of implementing a border-adjusted tax would hugely complicate apparel sourcing for the US market.

This border-adjusted tax is a congressional Republican proposal that would replace the US corporate income tax with a levy on companies' imports, while excluding goods for export, to make US-based manufacturing more competitive.

"It is a little unclear how they intend this to work but it would hit the apparel industry extremely hard," Deborah Elms, executive director of the Singapore-based Asian Trade Centre, told just-style.

"So, you are already seeing the big US retailers gearing up for what is going to be an epic battle in Washington to do something against it, and Vietnam must be paying extreme attention to how this is going to work out."

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TPP 11?

As a border-adjusted tax would fundamentally reshape the balance of benefits in apparel sourcing, Vietnam will likely become a promoter of the 'TPP 11' – that is, a TPP without the US.

Australia and New Zealand, for their parts, have already expressed support for the TPP 11, whereas initial interest in Japan seems cooling to that idea. According to Elms, even without the US market, there are still many benefits Vietnam's textile and apparel exports would earn under TPP 11.

"For example, Australia's 9.5% tariff for swimsuits would drop to 0%, and the Australians do buy lots of swimsuits," she says.

Elms cautions, however, that it will take some time for the current TPP members to visualise the benefits of TPP 11. She dismisses the idea of bilateral free-trade agreements (FTAs) between the US and TPP member states changing the equation for apparel sourcing for the better. During the presidential campaign, Trump vowed to sign "many" bilateral FTAs that "are good for America."

"When apparel exporting countries like Vietnam sit down to negotiate with Trump's team, they will rapidly realise that benefits would largely flow one way, to the US and not the other party," Elms explains.

That said, Trump's trade officials certainly seem willing to cherry pick some bilateral deals with the US's former TPP partners. In his presidential memorandum ordering the withdrawal, Trump said the US would "permanently withdraw the United States from TPP negotiations," telling his trade officials "to begin pursuing, wherever possible, bilateral trade negotiations to promote American industry, protect American workers, and raise American wages."

And Peter Navarro, director of the newly created White House National Trade Council, on January 30 said the US was "going to go right to Japan and Australia, New Zealand, Malaysia and [non-TPP] Thailand and negotiate bilateral deals."

This of course would leave out the sector's two biggest sourcing countries: China, which hadn't been part of TPP anyway, and whose trade policies have long been criticised by Navarro, along with key TPP member Vietnam.

Sourcing trends

Julia Hughes, president of the United States Fashion Industry Association (USFIA), predicts that current American sourcing trends will continue for the time being, regardless of these trade deal shifts.

Although China accounts for 41% of US apparel imports, purchases from this country "have either been flat or down over the past couple of years," she notes. Imports are expected to level off anyway, as the costs of producing in China increase, prompting some buyers to continue relationships with Chinese companies, but with manufacturing bases located elsewhere.

"Many companies have been looking at working with Chinese manufacturers to source in other countries as well," she says.

Vietnam, which accounts for 12% of US apparel imports, is still rapidly growing as a source and this is going to continue over the short haul, suggests Hughes. "In the immediate term, we're not going to be seeing any shift, largely because companies had the expectation that TPP would not have gone into effect for several years anyway," she says. "None of the companies I have spoken to have factored the potential for duty-free into their 2017 plans."

However, some of the topside potential for this growth may be trimmed as longer-term trade policy considerations take hold.

"A year to a year-and-a-half ago there were a lot of investments in yarn spinning in Vietnam driven by TPP's rules of origin; now these are going to be rethought," she says. "But the long-term growth outlook for Vietnam, as a low-cost source, is expected to continue, at least minus the additional boost investments like these would have brought to the situation."

Concerns closer to home

Other concerns closer to home are becoming more acute as details emerge about the Trump trade programme and the bilateral deals it envisages. "It becomes more complicated than campaign rhetoric would recognise," says Hughes.

She argues that while abandoning the TPP – or for that matter failure to conclude a TTIP (Transatlantic Trade & Investment Partnership) with the European Union (about which no announcements from the Trump administration have been forthcoming) – may curtail future growth prospects, any changes to the North American Free Trade Agreement (NAFTA) would probably be disruptive to existing trade.

"We have more than 20 years of NAFTA," she says of the treaty between the US, Canada and Mexico. "For textiles and apparel, disrupting NAFTA would be a setback not only for the business of US textile manufacturers, but also potentially cost jobs."

She adds: "In NAFTA [the US] definitely has a positive trade balance. While there is a lot of apparel originating from Mexico, this is more than outweighed by exports to Canada, according to the US commerce department."

"In any case, the US sells more to Mexico than it would have without NAFTA," she emphasises to just-style.

With additional reporting by Ed Zwirn.