sian garment manufacturers are signaling concern about disproportionate benefits for Vietnam over regional rivals in the textile sector as a result of major trade deals including the new, U.S.-led Trans-Pacific Partnership and a free trade agreement with the European Union.
Vietnam is already the world's fourth biggest garment exporter, but will gain new preferential access to markets among the 11 other countries that have signed up to the TPP as well as the 28 EU member countries under the EU-Vietnam FTA. These are lucrative markets for Asia's garment exporters and apparel makers of leading Western brands.
The World Bank estimates that the TPP deal alone could see Vietnam's exports -- from clothing and footwear to coffee and seafood -- increase by 30% and boost the country's economic growth by 10% by 2030.
The TPP still needs to be ratified in the U.S. and several other countries, delaying implementation at least until next year, while the EU-Vietnam FTA will take seven years before duties on Vietnam's garment exports to Europe are completely eliminated.
Even so, key regional apparel producers such as Cambodia and Myanmar are already alarmed that if the trade pacts proceed as planned, Vietnam could undercut their vital garment industries. China and Bangladesh, the world's two biggest garment exporters, are also likely to be affected, as well as Indonesia and Pakistan, which have large but struggling textile and apparel sectors.
"Vietnam's trade deals will be a concern -- not just for us, but the whole region," said Khine Khine Nwe, secretary general of the Myanmar Garment Manufacturers Association, told the Nikkei Asian Review.
According to MGMA, 38% of Myanmar's apparel exports went to Japan in 2013, followed by South Korea at 31%. "Most of the factories in Myanmar produce for the Korean and Japanese markets," said Jay Kim, managing director of garment maker Opal International Co. in Yangon. He suggested that Vietnam's favored trade status with the EU and the U.S. might not severely affect Myanmar for now. Japan, like the U.S. is a TPP signatory.
Myanmar garment makers now look to Europe as both a market and a source of investment, with garments a key part of the country's plans to become a manufacturing economy.
The EU cut duties on Myanmar's exports to Europe in 2013 as part of a market access program for less developed countries. Around 20% of Myanmar's garment exports now go to the EU, a proportion that is likely to grow, following similar trends in Cambodia, which saw its exports to the EU increase from 28% of its total garment exports in 2011 to 42% in 2014 under the same program.
But the EU will gradually reduce its duties, currently 11.7%, on garments from Vietnam, where labor productivity is higher than in Cambodia.
Kim said that 90% of Opal's exports go to South Korea, but the company, which employs 5,000 people in three factories in Yangon, hopes to attract orders from Europe and the U.S.
"Last year U.S. buyers surveyed the Myanmar market, but they are waiting. Maybe after April they will start," Jay Kim said, referring to the date when the incoming government led by Aung San Suu Kyi will take charge.
Myanmar could still face a challenge from Vietnam, which could at least double exports to the U.S. once the TPP takes effect, according to garment industry leaders. Indonesia, which sends half of its textile and garment exports to the U.S. and EU is also under threat.
Indonesia assesses costs
High energy costs have reduced Indonesia's competitiveness, prompting Darmin Nasution, the country's coordinating economy minister, to announce last October that night-time electricity tariffs would be lowered in an attempt to reduce manufacturer overheads.
"The main challenges are the cost of electricity is too high," said Ade Sudrajat, chairman of the Indonesian Textiles Association. "The second thing is market access to the EU and the U.S. If we can meet these two challenges then growth can be in double digits."
But the challenge posed by regional rivals Malaysia and Vietnam joining the TPP has prompted concerns in Jakarta, with Trade Minister Tom Lembong saying on Jan. 27 that Vietnam's new deals, in particular, are "a threat."
Despite the fact that Indonesia's economy is four times the size of Vietnam's, Vietnam's exports to the EU stood at $22.2 billion in 2014, compared with Indonesia's $14.4 billion.
Most exposed of all could be Cambodia, where the garment sector is a main pillar of the country's small economy. According to the International Labour Organization, the industry employs more than 700,000 workers and accounted for $5.3 billion -- roughly 80% -- of Cambodia's total export revenue in 2014.
Ken Loo, secretary general of the Garment Manufacturers Association of Cambodia, said that its garment sector had already lost U.S. market share to Vietnam due to that country's lower labor costs and higher productivity. "If we can't compete when we are on an equal footing, when the TPP comes... how can we compete then? The short answer is: we are definitely concerned," he said.
Garment makers elsewhere are also feeling pressure.
Faruque Hassan, senior vice president of the Bangladesh Garment Manufacturers and Exporters Association, told the NAR that "access to TPP for Vietnam is certainly a concern for apparel exporting countries, especially for Bangladesh." He noted that Bangladesh will continue to face average duties of 16% on garment exports to the U.S. while Vietnam's duties will be eliminated.
The Pakistan Garment Manufacturers and Exporters Association recently highlighted the perceived threat posed by Vietnam. "Vietnam is an emerging market for garments and has become a major threat, particularly to Pakistan's value-added textile sector," the association said in a statement. "After it entered into an FTA with EU, Vietnam is already exporting $23 billion garments against Pakistan's meager $5 billion textile value-added goods," the association noted.
Constraints on Vietnam
The TPP means Vietnam, an authoritarian one-party state, will have to open up, at least to allow trade unions to operate and give more rights to factory workers.
Paul Huynh, a director at KPMG Vietnam, said that Vietnam's trade agreements "will have a tremendous impact for employees with opportunities to enhance labor standards to meet international best practice, as well as reforms around labor standards."
If Vietnam lives up to these commitments, it could also benefit from a better reputation than some of its regional garment competitors. Bangladesh has seen its reputation diminished by several fatal disasters at garment factories, while protests and strikes over working conditions and wages are common in Myanmar and Cambodia. The minimum wage in Cambodia has increased from $80 per month to $140 since 2014, while in Myanmar a new minimum wage of around $67 per month was agreed in 2015.
Western brands keen to avoid being tainted by allegations of buying from sweatshops could opt to boost their presence in Vietnam. But Vietnam is likely to remain wary of allowing unfettered industrial action, regardless of the TPP, given that union activity elsewhere has been linked to opposition political parties.
In Cambodia, for example, following the disputed 2013 national elections, labor unions aligned to the opposition Cambodia National Rescue Party, which claimed the poll was marred by fraud, took to the streets demanding higher wages -- protests that ended in violent police crackdowns that resulted in the deaths and injuries of some workers.
The TPP has strict "rules of origin" stipulations that mean garments made in Vietnam from fabric sourced from countries not party to the deal will not be eligible for preferential access.
Bigger Vietnamese companies, however, have started to adjust to the TPP and EU requirements before the deals had been signed. Vinatex, the country's largest textile company, made deals with Japanese companies in early 2015 to produce fabric and dyes locally, while around the same time South Korean and Taiwanese companies established operations in Vietnam -- not to make garments for export, but to make textiles and fabrics for garment exporters -- a signal that the "rules of origin" stipulations could attract foreign investors to Vietnam.
But for other companies in Vietnam, the costs associated with this shift could well offset any gain Vietnam enjoys from its improved access to the U.S. market. "While [Vietnam] will have better preferential access in the U.S. market, its overall competitiveness will actually decline," said Jayant Menon, an economist with the Asian Development Bank.
"It all depends on how better Vietnam equips itself to utilize this opportunity and the capacity to fulfill the rules of origin," said Faruque Hassan.
Tran Loan, chief executive of Hanoi-based Tohe Style, which exports specialized T-shirts and accessories to Japan, said that for most Vietnamese garment makers, the rules of origin clauses could prove a challenge. "Most factories get their thread and other inputs from China," she said.