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Op-Ed: Will We See a TPP in Action This Decade?

When it’s deliver-or-die, supply chains become the lifeblood of a company. To that end, the fashion industry has embraced technology to navigate today’s hyper-complicated supply chain, with myriad solutions shaping the first, middle and last mile. Call it Sourcing 2.0.

The United States and South Korea announced in February 2006 negotiations for a free trade agreement (FTA) — which they finished in April 2007. Four and a half years later, in November 2011, the FTA — first rejected by the U.S. Congress and the Korean National Assembly, and subsequently re-negotiated — passed into U.S. and Korean law, and came into force in May 2012.

Australia and South Korea took seven years to conclude their FTA negotiations, but just one to get them approved — unchanged — by  Korea’s and Australia’s spectacularly quarrelsome legislatures.

Steering trade treaties through negotiation into law always takes time. But the Korean FTA had another crucial lesson for America’s 11 potential Trans-Pacific Partnership (TPP) partners: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. Without a mechanism to speed agreements through the U.S. Congress, American trade delegates can’t deliver what they promise in the negotiating room. So potential partners are reluctant to make big concessions.

That’s one reason negotiations on the TPP have made such little progress. When the partnership was first conceived in 2004, it was expected to be in force by 2012. But with growing likelihood that Congress will adopt a fast-track mechanism (known as Trade Promotion Authority, or TPA) this year, it’s possible to start being realistic about what TPP will mean for the U.S. garment industry — and when.

The biggest excitement for American retailers and brands is the likelihood of gaining, in Vietnam, a substantial duty-free production base in Asia like all other major importers — there’s limited production capacity in the other partners.

Will they get what they want, though? Not quite, I’d say: in four key ways.

1. I believe it’s 99 percent certain that duty-free status will apply only to garments made from yarn spun in a TPP member country — the “yarn-forward” rule.

Though U.S. importers still lobby hard against this, I doubt they’ll be successful. This isn’t a simple case of U.S. insistence on yarn forward against Vietnamese opposition.

The other garment-importing partners don’t have importer lobbies so concerned about restriction-free, duty-free sources. Australian, New Zealand, Canadian and Japanese importers already get duty free garments from a number of Asian countries, including  Bangladesh, Laos and Cambodia — and in some cases, Vietnam, Burma or India. A number of those agreements already have loose rules on where raw materials come from — and most other TPP partners’ textile lobbies don’t want back door access for Chinese yarn, which is what “yarn forward” fights against.

2. Vietnam is more pragmatic than many think. Think about this: its largest garment and textile holding company, Vinatex (still majority owned by the Vietnam government) sees “yarn-forward” as the route to keeping more of the value from garment making in the country.

U.S. importers will have to wait before having access to duty-free Vietnamese garments. Even with TPA, few observers expect TPP negotiators to have a deal initialized before the end of this year. Trade consultancy Sandler, Travis and Rosenberg (ST&R) predicted in November that a deal between the E.U. and U.S., were it agreed this year, would be unlikely to start getting debated in Congress before 2017. The TPP would follow a similar path: “fast track” approval can still take at least a year. With six months between approval and implementation, that means the first duty-free garments turning up at U.S. ports no earlier than late 2018.

3. I see that as a good thing. Eighty-eight percent of Vietnam’s garment exports today use fabric that wouldn’t qualify for “yarn forward” duty-free access. A few years’ delay gives time for building TPP-eligible yarn spinning capacity in three ways:

–        From new plants already announced: at Clothesource, we’ve logged announcements since January 2014 for $3.2 billion worth of new yarn spinning capacity in Vietnam. These announcements should always be treated with caution: there are many reasons some won’t materialize, will turn out differently than planned, or arrive late. But they add up to roughly 20 percent of Vietnam’s apparel exports in 2014 to the U.S., Canada, Japan and Australasia.

–        More textile companies will take a final decision to commit to TPP-dependent investment plans (which for spinning mills, can come into the hundreds of millions) once they’re reasonably sure the U.S. is going to approve a “yarn forward” TPP. A TPA announcement will cause a number of spinning and weaving projects to be initiated: final ratification by the U.S. Congress will firm many of them up.

–        One TPP partner is already a hotspot for new spinning mills, though: the United States itself. In 2013 and 2014, over $4 billion worth of new textile investments, mainly in spinning, were announced for the U.S. — driven mainly by America’s abundant real estate and the prospect of fracking bringing its already low energy prices down even further. Not all of that will see the light of day — but by 2018, a lot of last year’s paper announcements will be turning out real, TPP-eligible, yarn.

4. A new spinning and weaving plant doesn’t come cheap and takes time to plan and install. Few of Vietnam’s local authorities — or their communities — are as keen as Vinatex to see potential polluters on their turf. Of Vietnam’s 250 industrial parks, there are areas reserved for upstream textiles in just three provinces. But there’s a fair amount of spinning capacity elsewhere among TPP partners as well: Japan for example. Finding eligible fabric might not always be easy — but the sourcing community has been ingenious for decades, and this is the kind of challenge both direct buyers and intermediaries like Li & Fung love finding solutions to.

Much public discussion about this is unnecessarily negative:

–        Vinatex wants all the production income to stay in Vietnam, and its spokespeople dislike seeing raw cotton imported or foreign-owned mills sending profit to Chinese or Korean owners. It’s easy to misinterpret their gloom about Texhong or Dong Il making money they think a Vietnamese business should be making.

–        Lobbyists opposed to the “yarn forward” rule have a vested interest in dramatizing the problems it creates.

A TPP agreement, and its ratification by all the current partners, still isn’t certain, and my money is actually on its becoming operational in 2020. U.S. importers may struggle in its early days to find eligible fabric (especially if TPP comes into force faster than I think likely. What does come into operation won’t be what every lobbyists wants.

But if I were a betting man (and I’m not), I’d put $1,000 on U.S. apparel importers getting a mainstream duty-free Asian source — with the textile infrastructure to make it work — by the end of this decade.

I just wouldn’t expect it much sooner.

 

Mike Flanagan, CEO Clothesource. Clothesource offers consultancy on the world garment industry using the wide resources of The Clothesource Knowledge Base – the most comprehensive collection of information anywhere about sourcing for the apparel industry. He can be contacted at Flanagan@clothesource.net.

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