With TPA in Hand the U.S. Seeks to Push Vietnam to Reduce Reliance on Chinese Fabric

By Edward Barbour-Lacey

HCMC – The United States Senate has recently passed a Trade Promotion Authority (TPA) bill that will greatly expand President Obama’s trade negotiating authority on trade agreements such as the Trans-Pacific Partnership (TPP). The TPA, also referred to as “fast-track”, will allow the President to negotiate free trade agreements and then submit them to Congress with no amendments or filibusters allowed, with only an up or down vote on the entirety of the trade deal. It is hoped that this measure will speed up the progress of the TPP.

Despite this progress, potential stumbling blocks remain, chief among these is the debate over rules of origin, particularly as relates to China. American trade negotiators are currently pushing Vietnam to drastically reduce its imports of textiles from China (which is not a part of the TPP).

RELATED: Dezan Shira & Associates’ Pre-Investment, Market Entry Strategy Advisory

The TPP is a United States led trade agreement involving twelve countries, including Vietnam, and is currently under negotiation. Upon completion, the TPP trade area would comprise a region with US$28 trillion in economic output, making up around 39 percent of the world’s total output.  If the TPP is successfully implemented, tariffs will be removed on almost US$2 trillion in goods and services exchanged between the signatory countries. Thus, Vietnam has much to gain from the implementation of the trade agreement, including drastically reduced tariffs in some of the world’s largest markets.

It is the intention of the United States to push Vietnam to begin importing more fabric from the US, thus growing that country’s fabric industry and creating more jobs. A key part of this strategy is the move by the US to have a rule known as “yarn forward” included in the TPP agreement. In essence, “yarn forward” would require that only fabric produced from yarn made by a TPP country would qualify for the trade agreement’s duty-free status. The rule is intended to ensure that the trade benefits of the TPP only apply to signatory countries rather than outside players such as China. However, the rule also has significant effects on signatory countries, such as Vietnam.

RELATED: Yarn Forward’s Effect on the Trans-Pacific Partnership and Vietnam

However, critics have argued that US fabric exporters will struggle to produce enough fabric to meet the ever-expanding demands of Vietnam’s textile industry. This would have the perverse effect of driving Vietnam back to China in order to acquire all the fabric that it needs, but at the same time, Vietnam would not be able to benefit from the lowered tariffs of the TPP because the China sourced fabric would not qualify.

Vietnam is the second-largest exporter of apparel and footwear to the United States; 2014 saw sales of US$13.1 billion. However, the country’s local industry only produces enough fabric to cover a fifth of the amount needed. As a result, Vietnam imports about half of its fabric from China, worth around US$4.7 billion. Vietnam is scrambling to quickly build up its local industry, but many believe that it will be at least five years before the country can become self-sufficient.

Ahead of the finalization of the TPP, countries from around Asia, including China, have begun pouring millions of dollars into textile factories in Vietnam in the hopes that they will be able to benefit from tariff free access to some of the world’s largest markets, such as the United States.

In a bid to walk the middle road between its critics, the United States is currently reviewing the applicability of a “short supply” rule. This rule would allow raw materials “not commercially available in the United States or other TPP countries to be sourced from non-TPP countries and used in the production of apparel in the TPP region without losing duty preference.” However, the United States Trade Representative (USTR) says this flexibility will be limited since the US does not want to be seen as opening the door again to China.

Import and Export: A Guide to Trade in Vietnam
In this issue of Vietnam Briefing Magazine, we provide you with a clear understanding of the current business trends related to trade in Vietnam, as well as explaining how to set up your trading business in the country. We also attempt to give perspective on what will be Vietnam’s place in the Association of Southeast Asian Nations (ASEAN) in 2015, and look at some of the country’s key import and export regulations.

Using Vietnam’s Free Trade & Double Tax Agreements
In this issue of Vietnam Briefing we explore how Vietnam’s Free Trade Agreements – and especially those via its membership in ASEAN – will affect foreign investment into Vietnam. We also go a step further and examine the specific, bilateral Double Tax Agreements that Vietnam has enacted, and how these can be further used to minimize profits and withholding taxes that would otherwise be levied upon foreign investors.

Developing Your Sourcing Strategy for Vietnam In this issue of Vietnam Briefing Magazine, we outline the various sourcing models available for foreign investors – representative offices, service companies and trading companies – and discuss how to decide which structure best suits the sourcing needs of your business.

• Previous Article Vietnam and Western Australia Trade Bolstered by High-Level Bilateral Support
• Next Article State by State: Vietnam and California Trade