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Vietnam Needs Investment in Textile Industry to Capitalize on TPP

Expected to reap substantial benefits from the conclusion of the Trans-Pacific Partnership (TPP) currently under negotiation, Vietnam has become an object of both intense analysis and controversy. While the country is poised for breakneck future growth, some experts fret that a lack of foreign investment directly into the garment industry could neutralize its newfound opportunities.

On the one hand, Vietnam is expected to disproportionately benefit from the “yarn-forward” rule, which stipulates that any garment must be made of either fabric or yarn supplied by the U.S. or any signatory TPP nations to be eligible for duty-free benefits when shipped back to the U.S. For obvious reasons, many importers have strenuously objected to the rule. Conversely, many American textile producers declaim that it is absolutely necessary for them to remain competitive in the future.

Most believe the rule will be an immediate boon for Vietnam, so much so that some U.S. companies are openly anxious about the competitive advantages it will bring the Southeast Asian nation. A letter calling for robust protections of the U.S. textile industry from the potential results of the TPP was sent to U.S. Trade Representative Michael Froman, signed by nearly 170 members of the House of Representatives. This letter specifically cited Vietnam’s potentially unfair advantages. “After sixteen rounds of negotiations, Viet Nam is seeking to replace longstanding textile rules that have been included in previous free trade agreements with a new rule that would allow Viet Nam to source textiles from China and export garments and finished goods to the United States duty free,” the letter warned.

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Problematically, most of the yarn and fabric used to manufacture Vietnamese garments is still imported from China, which is not included in the TPP. In fact, Vietnam still relies on imports of cotton, fabric and technology. For example, it imported more than 415,000 of the 420,000 tons its textile industry consumed last year, approximately 99 percent. Also, nearly 90 percent of the fabric it used was imported as well.

As a result, Vietnam desperately needs significant investment in its textile manufacturing facilities to be able to fully capitalize on the advantages of the TPP agreement. VITAS general secretary Nguyen Van Tuan said that Vietnam’s heavy dependence upon imports could make it difficult for the country to remain competitive in the new business environment created by the TPP. He cautioned that the government should strengthen local production by investing in domestic cotton, spinning and weaving industries, become a more hospitable destination for foreign investment and move production from CMT to fee-on-board (FOB).

There are some promising signs that investment capital is beginning to flow into Vietnam’s textile industry. According to Saigon Online, the Jiangsu Yulun Textile Group of China just received a license to build a $68 million textile plant near Hanoi. Also, Sheico, a Taiwanese corporation, has announced plans to construct a $50 million factory for the manufacturing of apparel. And China-based Shenzou International, which produces athletic apparel for brands like Nike and Adidas, just pledged $140 million to build a massive factory in Ho Chi Minh City. Footwear promises to be a huge part of Vietnam’s economy. According to the Vietnam Leather and Footwear Association (LEFASO), footwear exports totaled $8.4 billion in 2013, a 15 percent improvement in comparison to 2012. The U.S. is the primary importer of Vietnamese footwear, taking in $2.62 billion worth of shoes and sneakers. With respect to both leather and footwear, the U.S. accounts for 33.6% of Vietnam’s exports.

Now nineteen rounds in, The TPP includes the U.S., Vietnam, Singapore, Australia, Peru, Brunei, New Zealand, Chile, Malaysia, Mexico, Canada and Japan. The eleven countries involved in the negotiations sent $15.1 billion worth of apparel and textile imports to the U.S. last year. Of these, Vietnam was the biggest supplier by a wide margin, accounting for $7.5 billion of that volume.

Vietnam’s exports jumped an impressive 15.4% in 2013, defying the global trend toward slackening demand. According to the HSBC study, the garment and textile sectors are disproportionately responsible for that growth. Vietnam’s exports are expected to leap another 20 percent in 2014 on the strength of surging demand from both the U.S. and the E.U., which account for 18 percent and 14 percent of its exports, respectively.

The textile and garment industries are central to Vietnam’s economy. Last year, its more than 4,000 companies earned in excess of $20 billion, accounting for about 15 percent of its GDP. In 2013, it exported more than $700 million worth of the goods, according to the Vinatex.