TPP Poised to Create Shift in Apparel Sourcing Landscape

While issues such as the continued rising cost of labor in China and fabric availability (or lack thereof) in certain apparel-producing regions remain major drivers in deciding where to source product, the big X-factor that stands to make the greatest impact on today's ever-shifting apparel sourcing landscape is the Trans-Pacific Partnership (TPP) Free Trade Agreement (FTA), currently under negotiation.

Speaking at Apparel's Executive Forum held earlier this month, Mary O'Rourke of O'Rourke Group Partners, said she expects the TPP to "change the sourcing landscape drastically."

As free trade agreements go, the TPP — which currently is comprised of the United States, Canada, Mexico, Chile, Peru, Australia, Brunei, Malaysia, New Zealand, Singapore, Japan and Vietnam — stands out as particularly noteworthy because, according to O'Rourke, the U.S. government "fully intends for this to be the final FTA template." That's a gamechanger, she says, because whatever is ultimately hammered out will serve as the model for "folding other countries into" the agreement.

Other countries in the Asia-Pacific region are expected to join relatively quickly after the agreement is finalized, she says, pointing to South Korea, Thailand and the Philippines as the next likely to participate.

So, what's the status? The TPP has currently been through 19 rounds of negotiations, and there are hopeful signs that a final agreement will be completed in early 2014, but key challenges of market access relative to apparel and textiles, and short-supply designations, remain. It is likely, says O'Rourke, that the yarn-forward rule will apply, and that current short-supply designations will carry over to the TPP, while new short supply designations for both fabric and garment HTS codes will be added. Duties likely will be eliminated over a five- to eight-year period, with some duties eliminated immediately.

Of the 12 parties to the agreement, Vietnam is the real stickler (the U.S. already has FTAs with most of the other countries and so would see little to no negative impact from this agreement with them), and presents as the greatest problem (or opportunity, depending on where you sit). The TPP could give Vietnam – which already has a 10 percent share of U.S. apparel imports – a significant advantage over China and the Western Hemisphere, depending on how rules of origin and duty phaseouts are implemented.  "How we treat Vietnam is critical," says O'Rourke. "Its share could go from 10 percent to 35 percent very quickly."

The U.S. textile community, partnered with many apparel manufacturers south of the border, is in favor of stricter measures that would limit Vietnam's ability to ramp up exports, while apparel importers are supporting a "much more aggressive FTA" for market access and rule of origin (i.e. single transformation vs. yarn forward). O'Rourke expects the USTR team to push for the yarn-forward rule of origin.

"Vietnam's government wants single transformation. We believe that for geopolitical reasons, Vietnam remains very important, and while we don't believe [the U.S. government] will give in on yarn-forward, we do think they will be very generous on duty reductions," she says, adding that she expects there to be a significant number of items, "more so than we've had in previous negotiations,"  that will see immediate duty elimination. Still, she expects the U.S. to be able to "hold the line" on some categories that most impact U.S. textile suppliers.

The yarn-forward rule (which means everything from the yarn forward must be produced in the countries that are parties to the FTA) is problematic for Vietnam. With limited in-country textile production, Vietnam currently gets 75 percent of its fabrics from outside its own borders, mostly from China, which is not part of TPP.

The other parties to the TPP do not offer much in the way of fabrics, says O'Rourke, although she expects to see some of them kick it into gear quickly, particularly Malaysia, which could become a more important knit fabric supplier to Vietnam.

The duty reduction that TPP may cause could trigger a significant shift in sourcing to Vietnam from other countries, particularly China. In a slide she shared with the audience, "Minimum Apparel Cost Reduction Potentials Given a 25 Percent Duty Reduction," O'Rourke shows the cost reduction tipping point, for various apparel items, at which brand owners/retail importers would be expected to consider a sourcing shift to Vietnam:
  • Cotton Tank: 3.5%
  • Cotton Bottoms: 3.6%
  • Cotton Knit Shirt: 4.1%
  • MMF Swim: 5.0%
  • MMF Bottoms: 5.6%
  • MMF Knit Tops: 6.1%
Jordan K. Speer is editor in chief of Apparel. She can be reached at [email protected].
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