By and  on July 22, 2014

MEXICO CITY — Central American manufacturers are getting increasingly concerned over Vietnam’s participation in the Trans-Pacific Partnership.

Vietnam, a key player in the controversial, 12-country free-trade accord that has run into several roadblocks this year, wants flexible rules of origin and zero trade duties as soon as the accord is signed, according to industry sources. But Central American and U.S. textile executives are contending that status would cut into exports from the five Central American countries and the Dominican Republic that make up the Central American Free Trade Agreement with the U.S. by 25 percent during the TPP’s first year.

The U.S. is negotiating the TPP trade accord with 11 countries — Vietnam, Canada, Mexico, Japan, Australia, Brunei, Chile, Malaysia, New Zealand, Peru and Singapore. President Obama has said he hopes to have the framework of a deal in place by November when he travels to Asia, but midterm Congressional elections and mounting opposition in the U.S. Congress could delay a final deal.

“Our hope is that by the time we see each other again in November when I travel to Asia that we should have something that we have consulted with Congress about that the public can take a look at, and we can make a forceful argument to go ahead and close the deal,” Obama said at a White House meeting with New Zealand Prime Minister John Key in late June. “But we’ve got a lot of work to do between now and then.”

In 2013, CAFTA countries exported $7.8 billion worth of apparel to the U.S., according to Luis Estrada, general manager of Guatemala’s top textiles association, Vestex. Based on that figure, if Vietnam enters the TPP under its request for a non-yarn-forward rule, export losses could total $1.95 billion a year or nearly $6 billion in the first three years of the TPP, he noted.

“The losses could be huge,” Estrada said. “We are working very hard so that Vietnam enters the TPP under fair and equal terms.”

Carlos Arias, president and chief executive officer of industry consultancy Walter Wilhelm & Associates, said, “Investments of around $10 billion are needed to build the required infrastructure to meet U.S. customers’ requirements. There is very little yarn, fiber, synthetics and technical textiles production capacity. We are very behind Vietnam, China and other Asian countries.”

CAFTA members have teamed with U.S. textile lobbies, notably the National Council of Textile Organizations, to ask the U.S. Congress to pressure Vietnam to accept a yarn-forward rule of origin, forcing it to limit sourcing from other nations in the TPP block. The partners are also asking that zero tariff benefits would be granted over a number of years. Vietnam should also follow the same short-supply rules as CAFTA members to procure inputs to make clothing.

According to Vestex’s president, Severino Matta, Central American countries must adhere to strict short-supply lists that require great detail about the raw materials they need to meet CAFTA sourcing rules. However, Vietnam wants to be able to use a much larger and broader list.

“We are afraid that if they can use this list, we are going to get the same dog with a different collar, that Vietnam will be able to skip the yarn-forward rule and use whatever textiles they want for their production,” Matta said.

Those textiles could include yarn and fabric made in China, but also from India or other Asian countries, giving Vietnam a bigger competitive edge over Central America, which has gradually lost its U.S. export market to Vietnam, now the U.S.’ second-largest apparel supplier.

“The big concern is Vietnam,” said Mike Hubbard, NCTO vice president, adding that U.S. yarn and fabric mills export some $12 billion a year to the region. “This is a very low-cost and big producer that could start using a lot of yarn and fabric from China and bring it to the U.S. duty-free.”

If Vietnam cannot be persuaded to use the yarn-forward rule of origin, “the impact would be catastrophic for the U.S. industry and our partners in Central America,” said Hubbard, adding that Colombia and Peru in South America would also be impacted.

Since CAFTA was signed in 2007, U.S. and Central American countries have done brisk business, meeting many of the agreement’s trade and investment targets, Hubbard said.

“This has become a huge market, not just for U.S. exports but for what comes back [as finished apparel] from Central America,” he said. “For some of these small countries, this is a huge part of the economy.”

Experts said the textile and apparel trade accounts for 19 percent of Guatemala’s industrial gross domestic product and more for El Salvador and other Central American countries.

“We can’t talk about immigration reform [from South and Central America] while closing our economies and opening Vietnam’s,” Matta said. “If the U.S. allows this, the immigration problem is going to worsen.”

Matta echoed other views that Vietnam unfairly subsidizes its textile industry, with state supplier Vinatex generating 20 percent of exports. Wages average 70 cents an hour including benefits, while energy costs are also low.

Matta said CAFTA and its U.S. partners are asking for Vietnam to eliminate these subsidies and meet the same labor and environmental requirements of other TPP members. That said, Hubbard expressed optimism that the U.S. — which is leading TPP negotiations — will help orchestrate a win-win deal with Vietnam to benefit all the parties involved.

Lifting hopes that will be the case, Obama recently wrote to his Dominican Republic counterpart, Danilo Medina, to assure him the U.S. will take his and the region’s concerns into account during TPP talks.

However, the prospects for a signed TPP deal this year are clouded by mounting opposition from Obama’s Congressional Democratic allies and the expiration of Trade Promotion Authority, which gives the U.S. leverage at the negotiating table, threatening to delay a final deal.

A large contingent of Democrats in the House and Senate have voiced concerns over an array of issues in the TPP, ranging from Japan’s apparent intransigence on opening up its market to exports of autos and agricultural products, to strong labor enforcement and workers’ rights protections.

Nate Herman, international trade vice president at the American Apparel and Footwear Association, said instead of pushing for restrictions in the TPP, Central American nations should work harder to boost their competitiveness. While the region has improved its full-package offer since implementing the free-trade accord, it must do more to compete with Vietnam, China and other Asian rivals to retain U.S. manufacturers, according to Herman.

“A lot of buyers have to spend a lot of time to source yarns and fabrics,” Herman said. “That is not full-package in which you place and receive an order to your specifications.”

Herman added that Central American countries have become nimble players in the fast-fashion sector, able to deliver small runs in quick turnarounds for U.S. brands and that they could benefit from stepping up this capability.

Dean Garcia, executive director at Nicaragua’s main textiles lobby, Anitec, said Nicaragua is already working to woo investments to boost yarn, fibers and technical textiles output with commitments expected to reach $30 million this year.

Garcia said producers must also ratchet up efforts to move into value-added apparel segments and streamline their full-package offering, currently viewed as insufficient. Customs reforms and higher regional integration are also crucial.

To further increase its attractiveness, Nicaragua must renew its tariff preference level agreement allowing U.S.-owned maquilas to use a limited amount of materials from non-CAFTA members to make export apparel, he said. The program, which could be pursued by other countries to woo U.S. business, expires at the end of this year.

Herman said Customs’ red tape must also be eliminated to bolster the region’s appeal as U.S. annual inspections to ensure exports meet rules of origin and other treaty regulations have worsened, idling some factories for up to two weeks.

Matta agreed that CAFTA countries should boost their attractiveness through better full-package capabilities, short-order deliveries and developing new market niches against Vietnam, which he said remains mainly a mass-market producer. He said Central America has expanded into higher-priced and more specialized apparel segments, notably synthetic fiber dresses, women’s knitwear, cotton bathrobes, dressing gowns and negligees.

The region has also made headway in performance sports apparel, he said, adding that the value-added specialization trend will continue to bolster the region’s fortunes. Matta said the region will continue to lobby the U.S. to pursue the Vietnamese concessions.

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