Vietnam: New Trade Agreement's Potential Apparel Winner

Senior Editor | Friday, July 8, 2011

U.S. clothing companies are eagerly watching how a new free-trade agreement called the Trans-Pacific Partnership plays out, betting it could give Vietnam a distinct advantage in apparel production.The free-trade pact, which encompasses the United States and eight other countries around the Asia-Pacific region, would throw open the door for more trade because tariffs would be eliminated for most products sold among the member countries.For Vietnam, this could be just the ticket to boost an apparel industry that has grown by leaps and bounds after joining the World Trade Organization in 2007 and eliminating apparel quotas for its products to the United States. Apparel is now the Southeast Asian country’s largest export. Vietnam has been a cheaper alternative to China, where factory wages have risen by an average of 20 percent to 25 percent in the last year. “Vietnam is one of our key sourcing countries, and we look forward to exploring additional opportunities that arise as a result of more-open trade under the Trans-Pacific Partnership,” Helga Ying, senior director of corporate affairs for Levi Strauss & Co. in San Francisco, wrote in an email.Last year, Levi’s invested $8 million to open a finishing facility two hours north of Hanoi, the Vietnamese capital, where 700 employees put the fashionable finishing touches on blue jeans headed to the Asian market. Levi’s Chief Executive John Anderson visited the plant a few months ago and said the company was ramping up production to 10,000 units a day with much more growth on the way.Levi’s is just one of several U.S. apparel companies that sees Vietnam as an alternative to manufacturing in China, where labor shortages have created delays in getting goods to market and prices are rising. Others eyeing increased production in Vietnam include Target Inc., Hanesbrands Inc. and American Eagle Outfitters Inc.Los Angeles–based Apparel Limited Inc. has been doing 60 percent to 80 percent of its pant and tops production in Vietnam for more than eight years. Lower production costs have kept retail prices for its polo shirts for the teen market at $10 and its pants at $20. Peyman Tofer of Apparel Limited said the company chose Vietnam because of a good working relationship with the factory owners there. “It boils down to relationships when it comes to sewing and supply,” Tofer said. But relationships aside, a free-trade pact involving Vietnam would eliminate the 17 percent average tariff Apparel Limited pays to import its merchandise.It would even the playing field with China, whose goods are subject to tariffs. Currently, Vietnam is the second-largest apparel supplier to the United States, exporting $6.6 billion in garments to the United States during the one-year period ending April 30. However, that pales compared with the nearly $40 billion in apparel and textiles China shipped to the United States during the same period.Trans-Pacific PartnershipThe seventh round of negotiations for the Trans-Pacific Partnership—which includes Australia, Brunei, Chile, Malaysia, New Zealand, Peru and Singapore—wrapped up June 24 in Vietnam. Two more rounds of negotiations are scheduled—one in September in the United States and one in October in Peru—before a framework is hoped to be achieved by a November meeting in Honolulu. But that is just the first step to getting a finished product, whose end date has yet to be predicted.So far, the negotiators haven’t completely hammered out the apparel and textile sections of the free-trade pact. But already, business leaders, politicians, lobbyists and trade representatives are lining up on opposite sides and are poised for battle.In one corner are U.S. apparel importers that want to see liberal terms applied to the apparel and textile sections of the free-trade pact. That would mean that fabric and textile components from third-party countries such as China could be used to make a dress or pair of pants and still receive duty-free status. That is particularly important for production in Vietnam, where hardly any textile mills exist. Most of Vietnam’s apparel components come from China or South Korea.“We are pushing for flexible rules,” said Steve Lamar, executive vice president of the American Apparel & Footwear Association, a trade group based in Arlington, Va., whose members include major apparel brands and companies such as VF Corp., Liz Claiborne and Hanesbrands. Lamar attended the most recent negotiating session in Ho Chi Minh City, Vietnam, where he and members of the Retail Industry Leaders Association met with Vietnamese textile and garment companies to talk about the trade pact.On the other side of the apparel battle is a group of politicians and U.S. textile organizations advocating more-restrictive rules for apparel production. They are lobbying for a yarn-forward provision that is similar to the rules of the North American Free Trade Agreement and the Dominican Republic–Central American Free Trade Agreement.A yarn-forward provision means that the yarn used to make clothing or fabric would have to come from one of the pact’s signatory members—such as Australia, the United States, Singapore or Vietnam—to qualify for duty-free status. But Vietnam doesn’t make yarn, still relying on China and South Korea. And shipping yarn from any of the trade-pact members to Vietnam doesn’t make economic sense. Any yarn-forward rule would severely limit any trade-pact advantages for apparel manufacturing in Vietnam. In early June, 52 congressional lawmakers sent a letter to U.S. Trade Representative Ron Kirk asking that U.S. access be restricted to Vietnam’s garment industry. They also requested that Vietnam be required to meet certain transparency and market-based economic benchmarks before gaining any benefits. The lawmakers, primarily from textile states—such as North Carolina, South Carolina, Georgia and Alabama—maintain Vietnam’s apparel industry is largely state-owned and subsidized.“I think it is very important that any free-trade agreement that moves forward include a strong rule of origin that is yarn forward,” said Lloyd Wood, a spokesperson for the American Manufacturing Trade Action Coalition, a trade group in Washington, D.C. “There should be no loopholes that allow third-country components to come in and where you have only a single transformation of cutting and sewing.”The Trans-Pacific Partnership was launched in 2006 when four countries got together to set up a free-trade agreement. Those countries were Chile, New Zealand, Brunei and Singapore. Two years later, after prodding from then-U.S. Trade Representative Susan Schwab, the Bush administration formally notified Congress it wanted to begin trade negotiations with the four countries plus Australia, Peru and Vietnam, which signaled they wanted to join the negotiations. Malaysia joined the group in October 2010. Ironically, the United States already has free-trade agreements with four of the negotiating member countries: Peru, Chile, Australia and Singapore.