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Trade Pacts Carry Potential and Pitfalls

Regional trade accords gain steam as WTO lags.

WASHINGTON — Sourcing executives are hoping to expand investment and business in the Asia-Pacific region and the European Union, as negotiations over two megaregional trade deals progress and the World Trade Organization tries to regain footing following a global trade accord on a scaled-down package of market-opening measures.

This story first appeared in the December 17, 2013 issue of WWD.  Subscribe Today.

U.S. and EU trade negotiators are meeting here this week for the third round of talks on the Transatlantic Trade and Investment Partnership accord that would have implications for U.S. imports and exports of apparel, textiles, cosmetics, footwear and accessories. Negotiations on a Trans-Pacific Partnership agreement between the U.S. and 11 other countries, said to be in the final phase, promise to provide significant sourcing opportunities for U.S. apparel importers and textile producers, with both sides arguing for different rules to help boost business.

Trade observers applauded the trade facilitation deal reached in Bali this month by the 159 member countries of the WTO, but argued that the deal, while providing an estimated $1 trillion to the global economy, signals a changing role for the global trade body.

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“These regional agreements [such as TPP and T-TIP] are where the action is in terms of trade liberalization,” said Phillip Swagel, professor of international economic policy at the University of Maryland. “It’s hard to see the WTO going from a trade facilitation measure to a really big [tariff-cutting] agreement. It will remain important, but the avenue for further trade liberalization will diminish.”

The TPP is seen as providing the biggest sourcing opportunities for the industry, while the T-TIP is seen as giving companies better export opportunities and more regulatory cohesion.

The U.S. is negotiating TPP with Vietnam, Canada, Mexico, Japan, Australia, Brunei, Chile, Malaysia, New Zealand, Peru and Singapore. Most trade experts argue that the Obama administration cannot successfully close negotiations on TPP until the President is granted trade promotion authority. Under TPA, Congress can only vote up or down on trade pacts negotiated by the executive branch.

Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics, said, “I don’t think [U.S. Trade Representative Michael] Froman can really come to a compromise on hard issues such as a textile rule of origin until he gets TPA. There will be too many textile and apparel people looking over his shoulder…and as we have seen, it is pretty hard to put forward an offer which will satisfy Vietnam and not create a huge backlash in Washington until TPA is enacted.”

The U.S. has proposed a yarn-forward rule of origin that requires apparel be made of fabric and yarns supplied by the U.S. or other TPP partner countries to qualify for duty-free benefits when shipped back to the U.S. Importers are lobbying for a more flexible rule that would allow them to use yarns and fabrics from any country, but domestic textile makers claim they need a yarn-forward rule to compete.

“If you look at a situation like Vietnam, most of the textile inputs come in from locations other than Vietnam and other than TPP countries,” said Stephen Lamar, executive vice president at the American Apparel & Footwear Association. “The issue people have with yarn forward is that it creates such a narrow window for the supply chain and very few products can pass through that window [to receive duty-free treatment]. As a result, companies shy away from using the trade agreement.”

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Auggie Tantillo, executive director of the National Council of Textile Organizations, said, “For the most part, it is our market that is a significant aspect of this deal. But Mexico, Central America and the Andean countries also have a lot at stake because if Vietnam increases its market share in the U.S., that’s going to come at the expense of somebody else. Our goal is to keep it from coming at the expense of the Western Hemisphere.”

Sourcing executives said Vietnam, the second-largest apparel supplier to the U.S., is already attracting new investment in advance of TPP being finalized.

Bill Jasper, president and chief executive officer of U.S. yarn manufacturer Unifi Inc., said while the majority of the investment is from major Asian producers, including South Korea, Taiwan, China and Hong Kong, he also noted that there has been new investment in the U.S. in cotton spinning facilities that could benefit from export opportunities to the TPP region.

“I think it’s fair to say we are exploring export and investment opportunities in Vietnam and with other TPP countries,” Jasper said.

As negotiators meet here this week for the third round of talks on the proposed U.S.-EU pact, retailers and brands are interested in seeing the two sides streamline regulations, remove burdensome technical barriers and eliminate redundancies in several areas.

“The deal with the EU is really interesting because while we obviously still have very high duties and want to eliminate duties, a large part of what everyone in business is talking about with Europe is dealing with some regulatory barriers,” said Julia Hughes, president of the U.S. Fashion Industry Association. “In that sense, while we are not saying there will be more product made in the U.S. or in Europe [as a result of a trade deal], it is an opportunity to work on eliminating regulatory barriers to trade, which can be extremely costly.”