textiles

Stitching Together Garments With Asian Trade Deals

Shanghai—Participants from more than 250 of the largest textile and garment manufacturing firms and industry associations in the world gathered in Shanghai this week as part of the 2016 China and Asia Textile Forum.   The overall economic picture for textile and apparel is decidedly mixed as overall economic growth is slowing, retail sales are off, yet many important apparel markets continue to show rising sales, including new markets within Asia.

One important panel session covered the benefits for textile and apparel producers coming in the Trans-Pacific Partnership (TPP).  [Assuming, of course, that US Congress does the right thing and approves the deal—but that is a post for next week after critical primary elections in Florida and Ohio.  Keep the calls coming into Congress in the meantime.]

While the TPP does provide significant benefits for many textile and apparel firms in the form of lower tariffs, the complexity of navigating the agreement is substantial.  It will provide job security for many, many consultants and legal firms for a long time to come as firms wrestle with new yarn-forward rules of origin for companies that have never had to grapple with these provisions in the past.

The TPP as a whole is a high-quality agreement.  The textile provisions—particularly for entry into the American market—are not.   It remains needlessly complicated and does not represent anything close to 21st century rules.  It does not foster efficient supply chains, will not encourage smaller firms, and basically goes against most of the general momentum of the rest of the agreement.

Many TPP countries granted duty free access to garments on the first day of the agreement.  The United States did not, except for a narrow range of products, like some categories of dresses.  Some American tariffs will remain in place for a decade. 

Some of the final reductions in important categories like denim can only take place after the United States certifies that labor provisions from elsewhere in the agreement have been fully implemented at the five year mark. 

But the lucrative American market has always been difficult to enter for textile and apparel firms, so even poor quality TPP rules can make substantial bottom line differences to companies willing to invest the time and effort needed to figure out the new system. 

Firms are already moving into Vietnam for spinning and dyeing operations, for example, to take advantage of new opportunities to get into US markets.  [Vietnam has the added appeal of the pending EU-Vietnam trade agreement that will provide improved access to the European markets.]

However, not every textile or apparel company can use the TPP.  Not every firm is located in a TPP market or is able and willing to move to one.  Not all sell products to TPP markets.  Not all are going to be able to easily shift sourcing of fabrics from current suppliers, especially. 

But all is not lost for textile and apparel companies.  Most Asia-based companies may also be able to use provisions in the Regional Comprehensive Economic Partnership (RCEP) negotiations. 

RCEP is an ongoing negotiation that brings together 16 parties in Asia—the 10 member countries of ASEAN, plus China, Korea, Japan, India, Australia and New Zealand.  Talks are targeted for conclusion this year and there is still time for companies to push for better outcomes that cover textile and apparel products of importance to firms in the region.

The garment supply chain for Asia often includes fabrics sourced from China, India, or Korea, sewn in Cambodia, Vietnam or Indonesia, and sold across the region including into Japan, Australia or China.  All these products could be eligible for RCEP benefits, if the rules of RCEP—including tariff cuts and rules of origin—are written to provide better preferences for RCEP member firms.

RCEP will likely be much easier to use than the TPP as well.  RCEP should not be using a yarn-forward rule of origin, so manufacturers can source fabrics from across the 16 member countries for inclusion into garments. 

Depending on how the rules are written, fabrics might be sourced from outside the region as well, as long as the garments are cut and sewn in RCEP member countries for sale within RCEP member countries.  This rule would benefit many garment manufacturers that currently source fabrics from non-RCEP countries like Taiwan.  It would allow manufacturers greater flexibility to choose materials from the most suitable source.

Companies from across Asia will have to push their governments to be more ambitious in textiles and garments.  Otherwise, important items could be left out of the final provisions and rapidly dilute the utility of the final agreement for firms. 

Asian companies are not used to working proactively with governments to shape ongoing trade negotiations.  This is, however, a critically important opportunity that ought to be seized by firms.  Government officials working on market access for goods, rules of origin and trade facilitation may not know very much about the specific conditions for textile and garment manufacturing in their own country or across the region.

Officials will certainly not know that, for instance, domestic companies could shift an additional 50,000 pieces of dress shirts per month if a key tariff were eliminated into a market.  They may not realize that they are fighting to protect a product category that will no longer be manufactured domestically at all or that growth opportunities are best found in a different category that needs the lowest possible tariff or a more favorable rule of origin calculation method. 

The rules set down in RCEP are likely to be the rules that govern trade in Asia for the next decade.  Using a 16 country agreement will be much easier for companies to use than overlapping sets of existing regional and bilateral agreements.  For a start, if the RCEP customs paperwork is consistent, firms will no longer need to fill out six or more different types of customs paperwork to ship products to the 16 markets in Asia. 

Firms should plan to attend the next round of RCEP talks in Perth, Australia, during the last week of April and should be talking to their own market access for goods and rules of origin RCEP negotiating officials now.

RCEP helps textile and garment firms that are sourcing and supplying to customers across Asia.  But it is also not a panacea.  Most of the final customers for companies remain consumers in North America and Europe.  RCEP provides benefits for neither market.

***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

Restoring the Multilateral Trading System?

BEIJING—I have not participated in a workshop on the multilateral trading system in a while.  But this week, I was invited to Beijing by UIBE, the South African Institute of International Affairs, and the Cordell Hull Institute to discuss the restoration of a multilateral trade cooperation dialogue. 

The discussion this morning has focused on particularly on how to conclude the Doha Development Agenda (DDA) at the World Trade Organization (WTO).  While I knew there was a large gap between the multilateral system and what I would call  “the real world,” I was struck all over again by how wide it appears to have grown.

The workshop opened with some remarks by one of the best WTO trade ambassadors I have ever met—savvy, knowledgeable, and experienced.  He discussed what was on the table for discussions in Geneva and urged WTO members to work together to be as cooperative and accommodating as possible to get the round done. 

We’ve been meeting with 4-10 companies a week since we set up the Asian Trade Centre last August.  In all those meetings, I could not recall a single company mentioning the WTO.  Not once.  These are meetings with some of the biggest companies in the world as well as some of the smallest.  All are active in Asia, but are otherwise engaged in a wide range of economic sectors from manufacturing to services to investment and finance.  They are nearly all oriented outward, in that they either already trade across borders or would like to do so.

No one has raised the WTO. 

But it actually gets even worse.  I am similarly struggling to think about any of the companies mentioning any of the issues under discussion or negotiation in Geneva.  Of course, companies that face tariff barriers, for example, will perhaps discuss the lowering of these obstacles.  But they do not look to Geneva to solve these problems.  Partly this is because they have given up after waiting so long for an outcome from talks that started in earnest in 2001 building on an agenda started even longer ago.  This problem has been compounded by the fact that many companies think that the tariff cuts they might want are unlikely to come from the resolution of the DDA. 

Many of the issues that companies raise repeatedly as major challenges, like incompatible standards, labeling barriers, complex domestic rulings at borders, opening of services markets, inadequate protections of investments, and repeated backsliding from existing commitments in some markets, are not on the table at all.  They were either not on the agenda in the DDA or, in some cases like competition policy, were tossed off the list early on.

Again, I would argue that the situation gets worse.  It is not just that these issues are not on the agenda, but there seems to be no desire to put most of these items on a future agenda either.  For example, many of the least developed countries (LDC) often argue that the WTO agenda has to include provisions to help the poorest members of the system compete.  Most of the issues mentioned in my company discussions are likely to be viewed as “too hard” or “too complex” or “too biased in favor of developed economies” and would not be helpful to LDC members.  Thus the very issues that may be necessary to get companies reengaged are likely to be kept off the agenda in the future. 

It’s also not only the least developed members that may make these sorts of arguments.  There are all sorts of members in the “developing” country basket who would and will make similar complaints.  Recall that, unlike the LDC classifications that are set by the United Nations, WTO members are allowed to self-certify as developed.  This means that countries like Singapore and South Korea remain, officially, developing country members in Geneva. 

Of the 161 members of the WTO, the vast majority are now classified as developing.  Nearly a quarter of the membership are LDCs.  Clearly, their needs and interests are important and need to be considered in setting the rules and outcomes of the WTO.

My own bias (or at least one of them) is that the global trading system ought to be beneficial for trade.  This means that it is critical that company interests be placed front and center in creating a trade agenda.  Other issues certainly matter and do play a role, but ignoring the needs of business in this century is not a recipe for multilateral success either.  How can multilateral trade agreements better provide the platform for businesses of all sizes in all members to engage in global trade arrangements?

Over the years, lots of very smart and clever people have suggested methods to bridge gaps in the system.  These range from restarting dialogue in Geneva in a non-negotiating setting to tweaking the rules for decisionmaking to adjusting the agenda by grouping issue areas differently in the hopes of overcoming entrenched divisions between members.

Yet, listening to the range of interests just around this table in Beijing presented by some of the best global trade policy experts, I can clearly see why governments that have options are increasingly just leaving the multilateral system behind.  It does not appear to be possible to move on and address the issues that matter in the real world until the past agenda is completed.  But this past agenda is largely irrelevant to many key potential stakeholders.  Thus, if I were a government official, I am not sure why I would invest important political capital in pushing through a potential deal in Geneva that my own stakeholders are largely not interested in supporting.

This has been, frankly, a very depressing morning.  I think I can make a powerful argument for why trade cooperation at the multilateral level is best.  The WTO rules serve as the foundation for every bilateral and regional trade deal.  Transparency and non-discrimination remain key fundamental principles.  Global trade rules benefit the largest number of people in the greatest set of members.  It helps companies—especially the smaller firms that struggle to make sense of a complex, overlapping world of smaller bilateral and regional deals.  Global trade can serve as a driver for economic growth. 

The race to regional agreements will leave many potential participants on the sidelines.  As I frequently say, not every country is an attractive dance partner when searching for new agreement partners.  Thus, the stampede to smaller deals will leave some countries completely outside the dance hall. 

One participant just mentioned the worries of his country for trade and investment diversion as a result of regional and bilateral trade agreements.  I think this is a likely outcome, particularly from some of the deeper, more meaningful megaregional agreements.  To cite just one example, the creation of the Trans-Pacific Partnership (TPP) in textiles is likely to change trade patterns around textiles and apparel into the future.  Countries that are not members of the TPP will struggle to keep market share in major economies like the United States because their exports will not get the same benefits (reduced tariffs and other issues) as competitor, TPP-enhanced firms will receive.

So where do we go from here?  It is not clear at all, other than being depressing.  The situation is currently impossible—many members are refusing to budge on anything until the old agenda is addressed while other members have zero interest in the old agenda.  There is no way to satisfy these two positions.  As a negotiator, I can only reach agreement when there are some (even if quite small) overlapping interests.  I don’t see these overlapping interests taking place at the moment.

Perhaps, if I might make my own contributions to a growing set of reform proposals, it is that the business community must reengage with the multilateral system.  In this case, it is necessary to explain to officials in Geneva what are the issues that matter to large and small firms and why these concerns must be discussed in the WTO as the most suitable venue.  Companies have increasingly just left the building and it appears to me that their absence alone is not making the point.  No government officials are going to be ambitious if they do not think they have sufficient input and endorsement from businesses.  To get a trade agenda underway that matters to companies operating globally now, firms need to clearly and regularly articulate what ought to be on this agenda.

If this group of experts meeting in Beijing comes up with some outstanding, creative ideas of what else ought to be tried, I’ll write another post about it next week. 

***Talking Trade is a blog post by Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

Unleashing Vietnam’s Textiles

In Hoi An in Central Vietnam.  This charming town could be viewed as ground-zero for tailoring.  Over the past few years, the number of tailor shops has zoomed past 500.  Most are located in the old, UNESCO-heritage listed central core that is only a kilometer or two across.

Tourists are here from everywhere, with a strong presence of Europeans and Australians at this time of year.  The number of hotels in the area has also increased markedly in the past five years to service the increasing demand from overseas visitors to this region.  Few people leave Hoi An without at least a few items of clothing stashed into their suitcases or newly purchased bags or backpacks.

Despite the roaring success of the tailor shops in Hoi An and the textile sector as a whole in Vietnam, the industry is set for a significant change in the coming five years. 

Vietnamese officials have been extremely active in signing free trade agreements.  They are in the last stages of work on a deal with the European Union.  They just signed an agreement with Russia, Belarus, and Kazakhstan.  But the biggest prize will be the completion of the Trans-Pacific Partnership (TPP). 

Vietnamese apparel exporters face competitive challenges getting their products into the United States, including relatively high and complicated tariffs.  Exporters are also at a disadvantage compared to manufacturers in countries like Mexico with existing FTAs with the Americans, since Mexican textiles have significantly reduced tariff rates.   Despite these problems, Vietnam’s clothing exports have continued to rise.

Under the TPP, many of the current tariffs are set to fall significantly.  To take advantage of these benefits, however, the agreement also calls for textile and apparel producers to use complex rules of origin (ROO). ROOs are necessary in FTA agreements to ensure that only products produced in member countries can take advantages of the benefits provided by the agreement.  If an FTA were finished without ROOs, any country (whether they are actually a member of the deal or not) could simply ship items and enjoy the benefits of reduced tariffs:  it would be no different than receiving the payoff from unilateral tariff cuts. 

The United States requires an especially complicated ROO for apparel—the so-called “yarn forward” rule.  Under yarn forward, items in a product must be made with the original yarn in the fabric sourced from the United States to qualify for FTA benefits.

Right now, Vietnam’s textile manufacturers generally use imported cloth.  Most comes from China.   Under a different set of textile rules, the “cut and sew” method of determining origin, Vietnam could continue to manufacture products as they currently do but would have the added benefit of lower tariffs in the American market.  The U.S. market is of prime importance to the clothing industry of Vietnam.

Note that cut and sew ROOs would not allow third-parties or non-members to sneak into TPP markets.  Members like Vietnam would still be required to demonstrate that a portion, like 40% of the final value of the product, came from Vietnam or other TPP member countries to obtain lower tariff benefits.

But the cut and sew rules are largely not allowed in the TPP either.  Instead, under strong pressure from American textile manufacturers, U.S. officials have stuck with yarn-forward ROOs for most products.

This presents a challenge and an opportunity for Vietnamese textile and apparel manufacturers.  While Vietnamese firms have done quite well under the current system and could continue to use the same sourcing methods for yarn and fabric, they cannot send the finished products to the United States under the new, lower tariffs.  If firms want to benefit from lower tariffs (perhaps 10-40% lower depending on the product), they will have to change sourcing patterns to get U.S. or TPP-made yarn and fabrics.

Hence the potential exists for radical changes in the textile industry in Vietnam.  In the past, Vietnam has not been able to wean itself off reliance on the Chinese market for raw materials.  Chinese-made fabrics have come to dominate the trade, even here in Hoi An. 

But since it became clear that the TPP is likely to materialize, firms are beginning to plan for the future.  Vietnam has started getting more and more companies (particularly from South Korea and China), relocating production of weaving, spinning and dyeing to here.  These are quite capital-intensive industries, so it has always been a challenge for local firms to decide to open such plants themselves.  The TPP, however, is such an important opportunity that these facilities are now necessary.

Another post will track some of the new inward investments.  For now, it is enough to note that the tailors of Hoi An are likely to offer new products in the future.  This includes a different range of fabrics for creating the dress, suit or shirt of a tourist’s dream.  Perhaps a new set of shops will be offering denim in five years, for example.  Certainly, the number and types of locally manufactured fabrics is likely to be dramatically larger than what is on offer now.