TPP ‘yarn forward rules’ indirectly benefit Vietnam textiles

VOV.VN - Though passage of the Trans-Pacific Partnership (TPP) trade pact is bogged down in the US and most certainly not assured, many companies with stakes in Vietnam textiles have begun making investments as if it were already in full force.

tpp ‘yarn forward rules’ indirectly benefit vietnam textiles hinh 0

“These moves suggest how much the business community expects the clothing industry in the country to benefit from passage of the trade accord,” says Dr Tran Thi Minh Huong from the National Economics University.

Dr Huong says one of the lesser understood provisions of the TPP, known as the ‘yarn forward rules’, requires a member country that exports clothing to other TPP markets to use textiles that are either made locally or imported from another member country.

While the nation is one of the top clothing manufacturers across the globe, it has historically sourced the largest share, about 88%, of its textiles from China and the Republic of Korea (RoK).

“After import, factories in the country then cut and sew the fabric in the final stage of production prior to exporting finished garments to overseas markets such as the US, Canada and Mexico,” says Dr Huong.

Signing on to the TPP means that clothing exporters would technically no longer be able to import their materials from China if they hope to benefit from lower tariffs afforded under the agreement.

The yarn forward requirements were put in place in large part to protect the US yarn and textile producers, which lobbied the US government extensively on the issue as part of an effort to maintain stringent TPP rules of origins.

Contrarily, US retailers, continue to argue that clothing and textiles (as well as footwear) are part of the larger global supply network like so many other commercial goods and therefore should not be hampered by such provisions.

The apparel industry in Vietnam has for some time been aware that it would have trouble complying with the rules of origin of the TPP, in the absence of investors in textiles sinking significant funds into production facilities up front.

“Vietnamese negotiators had pushed for a ‘cut and sew’ rule of origin,” says Dr Huong, which, as its name suggests, only requires that the final cutting and sewing would take place in a TPP member country.

However, currently, both domestic and foreign companies have begun making upstream investments in manufacturing plant and equipment in Vietnam to take advantage of the preferential treatment that garment exporters from Vietnam may potentially enjoy under the agreement.

This means, says Dr Huong, that not only would the clothing industry gain preferential access to the US market, it would also be able to capture greater added value in the supply chain, should the TPP be ultimately ratified.

Dr Huong says when and if the TPP comes into effect, the industry leaders expects tariffs on the nation’s clothing exports to other members such as the US to eventually fall to near zero from the current level of roughly 17%.

Vinatex, the largest local textile company in the country, last year signed an agreement with a Japanese trading firm named Itochu to invest in several textile manufacturing plants in Vietnam.

Vinatex had announced plans to invest more than US$714 million to upgrade and expand its supply chain, including in weaving and dying operations, in an effort to comply with the TPP requirements.

A year ago April, Vinatex closed on a US$12 million deal with a Japanese partner named Toms Limited to construct a multi-million US dollar textile-dyeing-garment manufacturing complex in central Vietnam.

Other foreign investors have followed suit. Dong-IL Corp out of the RoK began erecting a US$52 million yarn factory in southern Vietnam as of last year, while Forever Glorious based out of Taiwan announced plans for a US$50 million weaving-dyeing-garment factory.

Meanwhile, several Chinese textile companies, such as Esqual Group and Jiangsu Yulun Textile Group, have either opened or are in the process of constructing large textile plants in Vietnam.

Since ratification (and hence negotiations) for the TPP seem to be far from over, and farther still from implementation, it remains to be seen how negotiators will finally decide to settle the issue of yarn forward.

The final outcome of these negotiations is crucial for the clothing and textile industry in Vietnam, which last year grossed tens of US billions of dollars of revenue, employing about 2.5 million workers in more than 6,000 factories nationwide.

Earlier studies, such as those by the World Bank, that showed that Vietnam is likely to be one of the biggest winners from the TPP, have largely been discredited due to the application of faulty assumptions related to the labour resources.

However, Dr Huong says the moves by foreign and local companies to invest in or expand operations in the textiles in Vietnam provide solid evidence the TPP ‘yarn forward rules’ indirectly at least are providing some limited indirect benefit for textiles. 

VOV

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