As the full text of TPP was released last week, we got a glimpse of the treaty’s contents and following implications. As seen before, there are many concerns regarding the alleged labor conditions in Vietnam and concerns from labor and human rights groups on including Vietnam in the treaty. Sure enough when the text of the TPP was released, many Labor advocates has doubted the enforce-ability of reforms in Vietnam from a legal point of view (Article credit: “After Trans-Pacific Partnership Text Released, Labor Advocates Say Human Rights Protections ‘Not Enforceable’”, by Abigail Abrams, 11/05/15 http://www.ibtimes.com/after-trans-pacific-partnership-text-released-labor-advocates-say-human-rights-2171278). Many labor organizations have an issue with Vietnam being given five years to comply with full labor standards before sanctions can be leveled against it. Many democrats have already criticized the agreement for respites given to Vietnam. What does this mean for Vietnam? Would this be one of the critical point that US lawmakers use to overturn the deal? Would a change in terms lead to Vietnam walking away from the deal?
An article published in The Diplomat, titled “The potential of TPP for Vietnam”, dtd September 04, 2014 by Truong-Minh Vu & Nguyen Nhat-Anh (http://thediplomat.com/2014/09/the-potential-of-the-tpp-for-vietnam/) asserts how the TPP will help counter the trade deficit with China. The article argues that while Vietnam has been majorly exporting only raw materials to China, imports from China are a broad range of products for export production including machinery, steel, chemicals, and raw materials. The authors contend that a spill over effect of the excess trade with Canada and US may lead to deeper cooperation in development of higher quality services and production enablers. Another aspect of TPP is the soft power balance in Asia. While China has steadily increased its assertion in Asia, Vietnam following a non-aligned policy cannot directly have alliances with other countries. In such a state, a trade deal is a perfect soft deterrence for China’s growing influence in the area. So how will TPP actually work in favor for US and check China? Will we see any retaliation from China to counter the TPP (lowering prices on goods, services, Chinese companies expanding in Vietnam? With the Regional Comprehensive Economic Partnership (RCEP) in horizon, what would be the long term impact of TPP?
The U.S. Trade Representative’s office said that the agreement would eliminate or significantly reduce tariffs on U.S. products and deter non-science based sanitary and phytosanitary barriers that have put American Agriculture at a disadvantage in TPP countries in the past.
President Obama said that TPP will enable sale of more products for agriculture. Currently over 18.000 taxes and tariffs on American products will fall and most of them even to zero. The US exports of agricultural exports to the TPP countries totaled $63 billion in 2014, 42% of the total agricultural products.
Vilsack said that agriculture is going to be a big winner with TPP, and overall it is estimated that US exports could increase to $130 billion making agriculture 9% of total exports. TPP will eliminate import taxes as high as 40% on U.S. poultry, 35% on soybeans and 40% on fruit exports. USDA has done an excellent job of compiling commodity benefits at www.fas.usda.gov/tpp-benefits-us-agricultural-products. For state-by-state benefits, visit www.fas.usda.gov/tpp-benefits-us-states.
The American Soybean Association said that the agreement will eliminate tariffs and other market access barriers and substantially increase access in remaining markets. They are optimistic that soybean products will fare well in the TPP agreement. In Japan, tariffs on soybean which is 13.2 yen/kg currently are eliminated within 6 years, 34% in Vietnam eliminated in 11 years and in Malaysia the 10% tariffs will be eliminated immediately.
Also, other products like corn and wheat will have duty free exports in the TPP countries like Vietnam, Malaysia and Japan in few years.
Singapore banking group says that India’s position on trade agreements is under scrutiny after the TPP agreement was signed by the 12 countries. The TPP implementation is not final yet as the lawmakers from the countries have to pass this agreement, but India’s patchy record on FTAs is feared to hurt their ambitions to double exports to USD 900 billion over the next 5 years.
India has existing FTA with only 3 of the 12 countries in the TPP. DBS said that India has expressed plans to join the APEC(Association of South East Asian Nations), but has made little progress in that mostly they are focusing on other key pacts like the European Union.
However, India’s progress has been slow on FTA with the European nations. The Indian government has taken active interest to attract foreign investments and manufacturing facilities, but progress on bilateral and multilateral trade pacts has been tricky. A quarter of India’s merchandise exports headed to the US and ASEAN countries last year and another 4% to key Latin American markets. Concern is whether improved market access, tariff reductions and diversion might erode India’s market share. It is cited that India’s exports especially in textiles and leather products might face threats because Vietnam and Malaysia get cheaper access to the US and others in the deal.
As TPP will take years to implement the real impact may be smaller. The weak global demand backdrop, collapse in commodity earnings, domestic bottlenecks and government’s ambition to raise India’s share in global market to 3.5% by 2020 will be a uphill task considering the factors. So how much can India sustain this drop in trade? Or will they come up with trade pacts before the TPP is actually implemented?
According to the article, (http://www.bloomberg.com/news/articles/2015-10-06/tpp-trade-deal-who-stands-to-benefit-suffer-in-asia-pacific), the TPP deal sealed Monday in Atlanta will bring various gains and losses to the countries involved, as follows:
- Japan: Japanese car and auto-parts makers may be the biggest winners, as they gain cheaper access to the US, the industry’s largest export market. During negotiations, Japan was forced to reduce some of the protections granted to its rice farmers, creating a non-tariff import quota of 1% total consumption, while livestock farmers may be hit harder, as tariffs on beef will be cut from 38.5% to 9%.
- Australia: The TPP deal will remove approximately $9 billion of import taxes from Australian trade, and they will gain access to the US sugar market. Additionally, the cut in the beef tariff will help Australian ranchers, and seafood and most horticulture products will see tariffs dropped as well. Furthermore, Australia and New Zealand successfully pressured the US to compromise on the amount of time that pharmaceutical companies will get to monopolize new biotech drugs, which could lead to cheaper drug prices and more competition.
- New Zealand: Tariffs are due to be eliminated on 93% of New Zealand’s trade with its TPP partners, representing annual savings of approximately $259 million New Zealand dollars, with the Dairy industry seeing savings of approximately $102 million New Zealand dollars per year. Additionally, tariffs on beef exports will be completely eliminated, with the exception of Japan, where they will drop from 38.5% to 9%.
- Vietnam: Vietnam will be among the biggest winners, with GDP being boosted approximately 11% and exports growing 28% in the next ten years. Reduced imports in the US and Japan will benefit the country’s apparel manufacturers and the fishing industry will benefit from elimination of import tax on shrimp, squid, and tuna. Eliminating import taxes on pharmaceutical products, however, will lead to tougher competition between domestic Vietnamese companies and foreign companies. The TPP will also increase patent protection, restricting Vietnamese companies’ access to new products as well as inhibit their ability to produce new drugs.
- Malaysia: State-owned enterprises in Malaysia may suffer from the TPP deal, which calls for equal access to government procurement, however electronics, chemical products, palm oil, and rubber exporters are among beneficiaries.
- China: Since China failed to join the TPP, they are likely to be among the biggest losers, and are now indicating some interest in joining the TPP in the future. In the meantime, Chinese exporters may lose some market share in the US, Japan, and Vietnam. To combat these losses, China will try to reach more free-trade deals with other countries, especially in Asia.
TPP will be the most significant FTA in terms of how it impacts textile and apparel manufacturing jobs, production and export. This is mainly due to inclusion of Vietnam in this arrangement and the potential impact Vietnam possesses to manufactures that make up the textile and apparel supply chain in the Western Hemisphere. These concerns are mainly due to Vietnam’s apparel industry, extensive government subsidies and government ownership of VINATEX, the largest exporter in Vietnam.
The textile and apparel chapter of TPP must contain these three provisions:
(1) The Strong Yarn Forward Rule of Origin:
This has been the standard textile rule in FTAs for the past 25 years, and it requires that yarn, fabrics and final garments be produced within FTA countries in order to receive benefits from them. The U.S. has secured a yarn forward rule of origin in all of its FTAs but also contained various loopholes that undercut the overall value of the rule. The U.S. has proposed one major flexibility- Short supply list. This is list of specific yarns and fabrics either unavailable or available in very limited quantities within TPP countries, so the products can be made from these items would be exempted from the rule of origin. Vietnamese government is pushing for a weak rule or origin that merely requires the cut and sew aspect be performed in a TPP country which means that China will continue to supply Vietnam.
(2) Fair Market Access Duty Phase-Outs
Market access rules define how quickly tariffs under TPP will phase-out. In the previous agreements, tariff phase-outs have been extended for longer periods of time. The ability of Vietnam to rapidly surge into the U.S. market along with depth and range of government’s support are primary reasons why longer phase out terms are necessary. The U.S. government normally eliminates tariffs through basket categorization as A – Least sensitive, B – moderately sensitive and X – most sensitive products. All import duties will eventually be eliminated on all textile and apparel products as part of the TPP.
(3) Strong Customs Enforcement Rules
Based on foreign countries in TPP, there are concerns about ability to enforce negotiated principles of agreement regarding the treatment of textile products. Negotiators should include an electronic customs enforcement system to track textile components and eliminate potential fraud and errors. Also, TPP partners should provide sufficient resources for enforcement.
The United States government has a unique opportunity to develop a high-standard FTA in the Trans-Pacific Partnership by including strong textile rules that encourage private investment, export growth, and free market entrepreneurship.
Once Vietnam joins free trade agreements like TPP and Vietnam EU FTA, it will face new challenges in the textile and garment firms. Their use of outdated technology, shortage of capital and weak management capacities will raise quite a lot of competitive pressure from the large global companies was highlighted by Tran Quang Nghi, chairman of National Garment and Textile Group(Vinatex) at a conference on “Garment and Textile – Opportunities and Challenges.”
Also, Truong Thi Thanh Ha, general director of Dong Xuan Knitting Company said that domestic textile and garment companies have not invested in modern technology in recent times. Seeing this, the question arises for Vietnamese government as to whether they will support domestic business or not because it seems they have more challenges than opportunities from the upcoming trade pacts. Vietnamese companies depend to a great extent on imported materials which along with low productivity will make it more difficult to take advantage of FTAs.
Phan Chi Dung, head of the Light Industry Department, said that despite high growth rates in recent years, the value added to garment imports is still limited. Vietnam would have access to wider market once the TPP is in place, but investors will gradually prefer to shift their manufacturing base there. This would require businesses to restructure to enhance their competitiveness. Bank for Investment and Development of Vietnam (BIDV) has already committed to provide loans of $2 million to support garment and textiles firms for the next 5-year period.
There are mostly small and medium sized enterprises in Vietnamese textiles, and the 12 countries part of TPP account for 70% of total value of garment export made by Vietnam. Therefore, Government of Vietnam has targeted to increase Vietnam’s textile and clothing exports to $35 billion by 2020 and further to $60 billion by 2030.