TPP Apparel Rule Stirs Inter-Sector Conflict Over Market Access

The bilateral Vietnam negotiations are conducted under the umbrella of TPP. If the administration remains intransigent on a “yarn forward” stance that critics label more protectionist than similar rules in previous free trade agreements (FTAs), other U.S. industries could suffer from inhibited access, industry officials said. The Vietnamese may dismiss certain labor, environmental and intellectual property standards, among other “rules” associated with potential wholesale compromise, said Mireya Solis, senior fellow at the Brookings Center for Northeast Asian Policy Studies.

“If Vietnam does not see significant gains in market access, it will hold back in the rules areas,” said Solis. “For the United States there would also be that [market access] pay off. U.S. industries would get greater opportunities in the Vietnamese markets. …There is a clear desire to resolve these differences.”

The “yarn forward” rule of origin is a standard inclusion in FTAs that the U.S. has with 20 countries globally (here), absent in only a select few agreements. The rule pertains to the source of yarns and fabrics that contribute to production of manufactured textiles and apparel. In the Vietnamese version embedded in TPP negotiations, the U.S. is mandating that Vietnamese apparel be produced from fabrics and yarns that come from other TPP countries in order to receive preferential tariff status. Many observers claim the rule is an administration effort to mitigate Chinese economic influence in the region, saying the U.S. textile industry remains politically powerful.

But the Vietnamese apparel industry is growing at breakneck speed, registering second globally in 2012 among apparel exporters to the U.S. at $7.7 billion annually, according to the American Chamber of Commerce in Vietnam (here). China still remains far in the lead, however, with nearly five times more apparel exports to the U.S. than Vietnam. U.S. importers claim the “yarn forward” rule of origin, as it currently appears on the U.S. platform, is comparatively restrictive, offering few “flexibilities”.

Due to the potential to hamper Vietnamese apparel exports, the current “yarn forward” rule is unpalatable to Vietnamese trade negotiators. And that is pitting the U.S. textile manufacturing industry against apparel importers and other sectors across the spectrum, some industry players say. The USTR did not respond to inquiries about the reasoning for a strict “yarn forward” and resultant sector tensions.

“The U.S. stance in the apparel chapter is preventing what else it can get with the rest of the deal,” said David Spooner, an attorney at Squire Sanders specializing in international trade matters and a former USTR official. “Vietnam will demand improvement until its blue in the face.”

The current “yarn forward” rule contains a “short supply” list of exempt items that members of the import community say is nearing 200. Those “short supply” items are very specific, technically qualified yarns and fabrics that the USTR considers inaccessible in the region at a commercial level. As of now, that is the sole “flexibility” to the “yarn forward” rule, some say. FTAs in the past have provided other “flexibilities” for apparel export, aside from the rule of origin, they said. One “flexibility” in the other FTAs, for instance, has been “cut and sew” exemptions for apparel that is produced in a complex manner. Moreover, this current “short supply” list is more restrictive than other similar lists, said Spooner and other industry sources. At this stage, there is no mechanism to change the complexion of the list in the future despite a quickly evolving apparel industry. Spooner said the tensions between the domestic textile industry and other sectors are unprecedented for this point of an FTA negotiation.

“We are looking for a TPP agreement that includes commercially meaningful rules of origin that promote trade in apparel,” said Stephanie Lester, vice president-international trade for the Retail Industry Leaders Association. “We’re seeking substantial flexibilities that promote opportunities in our industry.”

Domestic Industry Says Yarn Forward Protects Jobs, Detractors Say Net Job Loss

The U.S. domestic textile industry embraces the protectionist “yarn forward” rule of origin, claiming a weak deal will cost more than 500,000 U.S. domestic manufacturing jobs (here). The newly-appointed president of the National Council of Textile Organizations (NCTO), Augustine Tantillo, said the pressure to add more “flexibilities” to the “yarn forward” rule of origin is causing consternation for the domestic textile manufacturing industry.

“We are taking the administration’s word. … The US government has told us the short supply list is fluid ... it’s not closed. We are expecting discussions on other items. But we strongly discourage other flexibilities and exemptions,” said Tantillo.

The retort to that, said Spooner and other industry sources, is that technology innovation and design jobs for U.S. apparel, footwear and other sectors far outnumber U.S. domestic textile manufacturing jobs. Some “yarn forward” detractors say the U.S. will face a net loss in American jobs through protectionist apparel policies with Vietnam. And the detractors are not merely those individuals concerned primarily with domestic technology employment. A number of U.S. industries, notably the domestic pork industry, have lobbied hard over recent months to ensure the “yarn forward” rule of origin does not negatively impact the potential for greater market access in TPP countries.

“U.S. agriculture is on record unequivocally saying that we are not going to be sacrificed by the apparel industry,” said Nick Giordano, vice president and counsel- international affairs for the National Pork Producers Council (NPPC). “We are not going to allow ourselves to be traded or sacrificed for other sectors. It’s clear the Vietnamese have an offensive interest in TPP. … If they have a few key sectors, and we stiff them there, what’s going to happen with other sectors, including agriculture? The writing is on the wall.”

The NPPC is pushing for blanket tariff elimination among all countries and sectors in TPP negotiations. According to Giordano, the U.S. “yarn forward” stance may produce a backlash that prevents the pork industry’s chances of getting duty free access to the Vietnamese market. Giordano admits the U.S. is engaged in negotiations that involve wheeling and dealing and quid pro quo exchanges. The administration, he said, is likely “not showing all its cards” at the moment. But the only comprehensive tariff eliminations, albeit on varying reduction phase out plans, ensure across the spectrum access for industries including pork, Giordano said.

As of now, the TPP countries include the U.S., Canada, Mexico, Chile, Peru, Australia, New Zealand, Brunei, Singapore, Malaysia, Japan and Vietnam. There are some “sensitive products” that various negotiating countries would prefer to exclude from the comprehensive tariff elimination network, experts said. Some noteworthy examples are Japanese rice, Canadian dairy and poultry and U.S. sugar, they said. Due to the existence of such “sensitive products” and country policies such as “yarn forward” roadblocks remain for a trade deal that would embody a third of global trade and 40 percent of global GDP, according to the USTR (here). A Peterson Institute for International Economics policy brief (here) argues the deal could ramp up U.S. exports by $124 billion by 2025.

“I think it (the end of the year target for negotiation conclusion) is a very ambitious goal. I find it hard to imagine they can agree on everything that needs to be agreed upon before the end of the year,” said Solis. “But the Obama administration and Ambassador Froman have really emphasized conclusion at the end of the year. That’s the central message Ambassador Froman brought to Japan and will bring to Brunei. It’s a good thing. We are in the final stages of negotiations.” -- Brian Dabbs