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What’s Next for Sourcing in Vietnam Without TPP?

All things trade related seem to be shaky at the moment, but one thing that’s at least slightly more certain, is that the Trans-Pacific Partnership won’t be moving forward as the multilateral trade deal it was intended to be.

More than a few companies went big in Vietnam or invested more in their existing resources there, banking on TPP and the growth that would have come with it, so the question now that President Trump has pulled the U.S. from the agreement is: what’s going to happen with sourcing in Vietnam now that there’s no deal?

Well, it seems, little may change at all.

“Clearly Vietnam had much to gain from TPP,” a U.S. government official in trade said speaking on condition of anonymity. “But notwithstanding that, Vietnam has seen incredible growth in the last few years and I would expect that to continue, TPP or not.”

Vietnam’s growth in the time of TPP

According to the Office of Textiles and Apparel (OTEXA), Vietnam’s share of the U.S. apparel market has increased from 9.2% in 2012 to an estimated 13.3% for 2016, when the U.S. took in $10.79 billion worth of apparel imports from Vietnam.

Looking at data from the Vietnam National Textile Garment Group (Vinatex), the country’s total exports of textiles and garments went from $17 billion in 2012 to $28.5 billion last year, a nearly 68 percent jump in five years.

Though TPP negotiations had been ongoing for seven years, the pending trade deal only had an impact in Vietnam in the last couple of years, according to Pham Phu Cuong, member of board of management cum vice general director of Vinatex and chairman of Vinatex South.

Vietnam’s textile sector has seen fast and sustainable growth over the last 20 years, so it isn’t to say that much of its current growth was a result of TPP, Cuong explained. There has been some increase in weaving and dyeing in Vietnam with investments from China, South Korea, and Japan in hopes of benefitting from TPP, but the amount isn’t significant enough to say a defunct TPP will be overly damaging, Cuong said.

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“Apparel imports continue to grow, even when overall imports are sluggish, so one could argue that that sends a message that Vietnam is going to remain strong as a destination for sourcing of apparel no matter what is happening with TPP,” Julie Hughes, president of the United States Fashion Industry Association (USFIA), said.

There has also been some shifting within Asian sourcing, and that seems to have helped Vietnam’s successes too.

“I think we’ve seen a gradual decrease—a marginal but gradual decrease in China’s share in U.S. imports of apparel and correspondingly, I think Vietnam has been one of the beneficiaries of that,” according to the U.S. government official.

But is capacity a concern for Vietnam?

There has been talk among the trade that Vietnam is already approaching capacity for new investment because of how much has come in in the past few years, and that it may also be approaching capacity for yarn spinning and fabric production.

To spin yarn and make fabric requires considerable amounts of water and some are concerned that the availability of water in Vietnam isn’t sufficient to accommodate more apparel production.

And TPP might have helped with some of that.

“TPP was driving us to get the whole supply chain in Vietnam. Without TPP, maybe there’s less of that,” Hughes said, adding however, “They do have the opportunity to increase the workforce for making apparel, but for the more commodity intensive things, there were concerns about hitting capacity there.”

Cuong refuted most of the concerns about capacity in Vietnam and also highlighted the country’s availability of labor.

“Vietnam has advantages of a home to a population of more than 90 million with skilled labor force,” he said. “We still have conditions to increase capacity in this sector.”

The country can still tap into the labor force in rural areas by opening factories there, improve the productive capacity of the workforce by investing in technology and skills training, and put more supportive government policies in place, Cuong offered.

“We believe that with such solutions, the capacity of Vietnam will be increased,” he said. “With many FTAs in effect and supportive government policies (e.g. duty free imports of raw materials for making exported goods), it is expected that Vietnam can take more investments in this sector.”

And investments don’t appear to have slowed anyway.

Taiwanese fabric manufacturer Taiwan Paiho said in December that it would start operations at a new plant in the fourth quarter of 2017, producing mainly jacquard warp-knitted fabrics. Hong Kong-owned firm Hop Lun Vietnam Company also said in December that it has an apparel manufacturing facility under construction in the Vinh Phuc province of Vietnam. Once in operation, the plant is expected to employ 2,500 workers and bring in $38.2 million in exports from apparel.

“I don’t think we’ve seen the end of the investment spurt in Vietnam but we may be getting to where it slows down again,” Hughes said.

So what’s next for Vietnam?

For Vietnam, no TPP isn’t great but it’s not likely to plague the country’s apparel industry, either.

“Frankly speaking, it is a bit disappointing to Vietnam in this case since we spent more than five years to pursue the TPP,” Cuong said. “However, TPP is not the only agreement that Vietnam desires to reach.”

Vietnam already has a slew of bilateral and multilateral trade deals in place, including those it benefits from as a member of ASEAN, and it also has its own agreements with Korea, Japan and the EU.

“We do hope that if TPP does not move forward, a bilateral FTA between U.S. and Vietnam will happen,” Cuong said, but he added, “With many FTA’s in effect, exporting textile and garment products of Vietnam will continue to contribute to export performance of the country. Therefore, the Vietnamese government will support the development of this industry with or without TPP by preferential policies, training and improving workers’ skills, and expanding to new export markets and new products.”

Vinatex expects double-digit growth for its textile and garment exports this year and the country looks poised to face increasing competition from neighboring nations and rampant global uncertainty.

So far, companies that have invested in Vietnam don’t seem to have any regrets, nor are they pulling back or shifting options because of the loss of TPP, according to Hughes.

“I think Vietnam is going to stay our number two supplier to the U.S. market,” Hughes said. “They’re strong, they’re in their slot, they’re going to stay there whatever way the wind blows.”