Talking Trade blog
Unleashing Vietnam’s textiles
Published 08 January 2015
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.
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