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4 Lessons in Global Trade from World Cup

What can the World Cup teach us about international trade?

It turns out plenty.

There is a popular narrative circulating in the halls of Washington about how the Trans Pacific Partnership (TPP) — the trade agreement that the United States is negotiating with 11 Pacific Rim countries — will damage the trade partnership that has been built under the U.S.-Central American/Dominican Republic Free Trade Agreement (CAFTA-DR).

The theory is that by giving Vietnam (one of the TPP partners) preferential access to the U.S. market, the TPP will erode the preferential access currently enjoyed by the CAFTA-DR countries. The theory continues that this will in turn hurt U.S. textile companies since many of their exports currently are destined for the CAFTA-DR region.

Eager to forestall this challenge, many in Central America, in partnership with some U.S. textile interests, have lobbied U.S. policy makers (including the President) to hobble the TPP. They have advocated for restrictive rules of origin and long tariff phase outs in the TPP to make that agreement less valuable for Vietnamese apparel exporters (and presumably for their retail or import customers). The logic suggests that, by knocking out the competition Vietnam presents, CAFTA-DR can continue to thrive.

So what does this have to do with soccer?

Any World Cup coach will tell you that you need to build your team first before you can worry about who you are playing. They know that success comes only by developing a squad with the right fundamentals, skill sets, and chemistry. Without these factors, and a solid game plan that plays to your own competitiveness, you will not get to the final match, let alone the round of 16.

Similarly, CAFTA-DR countries are making a fundamental miscalculation if they view the key to their own competitiveness through the lens of the TPP. Let’s look at four reasons why.

First, it is important to remember that international trade — like the World Cup — involves many competitors, especially in the early group play. It is not just the CAFTA-DR countries (which also compete with each other) and Vietnam that are trying to gain access to the U.S. market. These 7 countries (CAFTA-DR plus Vietnam) represent less than 20 percent of the share of the U.S. apparel import market. They all compete with other countries, including some who have made incredible gains over the past few years. It is true that Vietnam has become an important apparel supplier to the U.S. market in recent years. But that success can quickly turn around — for a host of reasons — as apparel executives continuously shake up their sourcing models. One need only look at the recent riots in Ho Chi Minh City, and the investor reaction to them, as an indication of how quickly things can sour. And if companies do lose interest in Vietnam, there is no guarantee that that foregone business will end up in Central America. Given current sourcing trends, it is more likely to migrate to another location in Asia.

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Second, the most talented soccer players learn at an early age that there is no substitute to hard work and eliminating the barriers that get in the way of their own competitiveness. CAFTA-DR countries would be well-served to follow their example. Under the current terms of trade — where CAFTA-DR countries enjoy preferential access to the U.S. market and Vietnam does not — Vietnam is doing very well. Some point to this as evidence that Vietnam does not need a free trade agreement to compete. The better question is to ask why, given its duty free advantage, CAFTA-DR countries are not doing better. Since Congress approved the CAFTA-DR in the summer of 2005, CAFTA-DR countries have seen their apparel imports to the United States drop off by about 20 percent. While this is better than apparel imports from the North American Free Trade Agreement (NAFTA) countries, which saw a 50 percent decline during that same period, it is still hardly a success story. Nearly all apparel executives will point to the restrictive rules of origin (ROO) (which are largely based on the NAFTA model) and burdensome compliance requirements as two of the culprits in CAFTA-DR that account for this decline.

Fortunately, Nicaragua, which has been able to benefit from a more flexible ROO (that also has actually incentivized U.S. fabric exports), has seen its apparel exports to the United States rise by more than 220 percent. Using the Nicaragua case study as an example, it would seem that CAFTA-DR countries could improve their own performance by seeking more flexible ROOs in the CAFTA-DR itself. One idea that could gain traction — and which has been embraced by the European Union — is to allow free trade agreement partners to cumulate inputs with each other. Such an approach, which already has some precedent in the CAFTA-DR as well as the Haiti trade preference program, could help these countries gain access to suppliers and markets in the TPP (and also in the European Union under the terms of an evolving free trade deal with Europe). This could even be a prelude to CAFTA-DR countries actually joining those agreements as full parties.

Third, just as soccer teams should not presume an outcome of a contest based on the reputation of their competition, it is unclear what a completed TPP will mean for Vietnam. We do not know what the final terms of trade will be for the TPP. Likewise, we don’t know when it will take effect (assuming it is completed and does take effect). And this lack of knowledge goes beyond the specific terms of trade for textile and apparel rules of origin or duty schedules. For example, the TPP may require the government of Vietnam to eliminate some of the policies that critics believe incentivize current apparel production in Vietnam. Likewise, increased demand for Vietnamese-produced apparel may end up driving up the cost of such garments, wiping out any gains made by duty reductions in the U.S. market. Either outcome could see TPP making Vietnam less competitive.

Fourth, smart players work to improve their own game, not those of their competitors. The long term result of a yarn forward rule — the very thing the CAFTA-DR countries are requesting — could very well be increased textile investment into Vietnam. In a “be careful what you ask for” scenario, the advocacy of CAFTA-DR countries could be enabling Vietnam to fix the major flaw — a non-vertical industry — that currently most adversely affects its own competiveness. While own goals are never happy moments, they are usually accidental. They are doubly tragic when done on purpose.

CAFTA-DR countries are right to expect that the TPP could affect their livelihoods. But instead of focusing attention on TPP, they should be more concerned with the fact that they have based their own competitiveness on terms of trade that pre-date the smart phone, that havenever really worked well, and that cannot be upgraded easily. All their efforts should be aimed at improving their own game, not worrying about somebody else’s.

By most accounts, the coming decade will present continuous changes and challenges for the apparel sourcing world. Some of these changes — a rise in near shoring — may work in favor of the CAFTA-DR countries. Others — such as a shift into Made in USA or Africa — may not. But one thing is clear. As CAFTA-DR countries view the TPP, they should view themselves through the lens of the World Cup. Success is not a function of disabling one of your competitors. Rather, it occurs when you are able to recognize and develop your own competitive advantage — no matter the playing field.

 

SteveLamar

Stephen Lamar is Executive Vice President at the American Apparel & Footwear Association (AAFA), where he is responsible for the design and execution of advocacy and compliance strategies on a series of legislative and regulatory issues, including international trade, sustainability, and product safety.