Why Vietnam’s Inclusion in the TPP Is Critical for Consumer Firms

Why Vietnam has higher relevance

The inclusion of Vietnam in the TPP (Trans-Pacific Partnership) is particularly important for firms in the footwear and apparel (XRT) (XLY) industries. About 11.6% of the total US apparel imports are sourced from Vietnam. After China, it’s the second largest apparel and footwear exporter to the US.

Apparel imports from Vietnam are also growing at a faster pace. Vietnam is a low-cost producer. It competes with nations like Bangladesh, China, India, and Cambodia for outsourcing contracts. The relatively lower cost of labor, compared to China, gives Vietnam a significant advantage. It’s helping the country grow exports at a faster pace.

Tariff impact

A number of US apparel companies have outsourced part of their manufacturing to Vietnam—including Nike (NKE), Lululemon Athletica (LULU), Under Armour (UA), and Columbia Sportswear (COLM), among others. Nike’s has agreements with 38 apparel factories in Vietnam. Some of Under Armour’s suppliers are based in Singapore. The company also outsources part of its production to Vietnam. Columbia Sportswear manufactures 67% of its products in Vietnam and China.

Another important fallout from the TPP could be the modification of the 12% tariff imposed by Vietnam on imported fabrics from the US. This would give a boost to US fabric exporters.

Currently, the US levies 0%–32% as tariffs on apparel imports, depending on the country. That will likely reduce for TPP countries if the deal is passed. Removing tariffs on imports from Vietnam would also benefit apparel firms’ margins.

“Yarn forward” rule

The “yarn forward” rule is one of the key issues that apparel retailers hope to resolve under the TPP. Under the rule, unless all of the components that go into making the item, excluding fiber, are manufactured in countries that have a FTA (free trade agreement) with the US, the item would be subject to normal tariff rates—regardless of whether the US has a FTA with the country ultimately exporting the item of clothing.

Needless to say, US retailers and apparel exporters included in the TPP want the rule modified. It forces them to source fabric from countries that have a FTA with the US. Vietnam sources significant amounts of yarn and textiles from China. It isn’t part of the TPP. It isn’t expected to join the TPP soon.

Source: MarketRealist