Rules of origin are certain to pose a problem for Vietnam's textile enterprises after the TPP comes into effect.
In just the first half of this year, textile exports to markets joining the Trans-Pacific Partnership (TPP) accounted for 70 per cent of the total export value and will grow substantially once the agreement is signed. Issues surrounding rules of origin, however, are a major concern as 60 to 90 per cent of materials for textiles made in Vietnam are imported from countries that are not members of the TPP.
According to the Vietnam Textile and Apparel Association (Vitas), among the TPP markets the US is Vietnam’s largest, accounting for 42 per cent of total textile exports in July and estimated at $5.18 billion, up 11.01 per cent compared with July 2014, followed by Japan with $1.3 billion. In the eleven TPP markets, Vietnam’s textile exports since the beginning of 2015 have all seen positive growth.
The TPP, however, has very strict requirements on the origin of materials, to which Vietnam’s textile exporters have paid inadequate attention. Textile exports must follow the “yarn forward” rule, meaning that all materials used in production must have been produced in countries participating in the TPP.
A representative from the World Bank in Vietnam said that the country is the third-largest exporter to the US market but a vast share of its production materials are imported, mostly from China.
When joining the TPP Vietnam must provide more of its own inputs to increase added value as it will not be able to import materials from China if it wants to benefit from the preferential tariffs provided under the TPP.
Currently, the added value of the textile sector is low due to low labor productivity. For example, with Polo shirts, Vietnamese workers can sew 12 units a day while Chinese workers can sew 25 units. Mr. Nguyen Xuan Duong, Chairman of the Board at the Hung Yen Garment Corporation, acknowledged that Vietnam’s labor productivity is low, at only 30 per cent of that in Malaysia and 40 per cent of Thailand’s. Therefore, if the sector wants to move up the value chain it needs to invest in resources and technology.
Degree of optimism
According to Ms. Dang Phuong Dung, Vice Chairman and General Secretary of Vitas, the “yarn forward” rule will be major stumbling block for Vietnam because of weaknesses in material supplies such as fabric and dyeing, which are dependent upon imports. It is therefore necessary that enterprises and the government make greater efforts to attract foreign investment that addresses these weaknesses, she said.
Meanwhile, Mr. Vo Tri Thanh, Vice Chairman of the Central Institute for Economic Management, is optimistic that the rules of origin, technical and labor standards, and environmental and legal procedures will be difficult in the short term but will drive enterprises forward in the long term.
He believes that after joining the TPP the textiles market will grow and this creates opportunities for the sector to develop. The tariff rate on textiles is currently 16 to 17 per cent but under the TPP will be zero. It is clear that the TPP provides competition and benefits to the textile sector.