A new Free Trade Agreement between Vietnam and the European Union is expected to intensify competition and put further pressure on China’s challenged apparel and textile manufacturing base, according to experts.
After Chinese textile exports fell 5 percent last year to $286.8 billion — the first time they dropped in six years — the EU is still the largest destination for Chinese garment exports, but last year exports reached only $44.86 billion, a drop of 10.6 percent year-on-year, according to China’s Ministry of Industry and Information Technology.
While exports from China are dropping, the garment-manufacturing industry in southern neighbor Vietnam has grown significantly. Labor in the rising economy costs about half as much as in China, one of the main reasons why Vietnam has become such an attractive option.
Last year, Vietnam’s textile and garment exports to the EU grew to 3.2 billion euros, up from 2.6 billion euros in 2014. Despite Vietnam’s cheaper workforce, overhead, logistics and other costs associated with the manufacturing of garments are higher, so sourcing from China or Vietnam has come at roughly the same price tag, according to research by consulting firm A.T. Kearney.
For exports to Europe, the price difference could now be offset by the recently signed FTA between Vietnam and the EU, which is to be ratified next year and would see the elimination of all trade tariffs for apparel exports over a seven-year-period.
“Vietnam has already managed to get a foot in the door, with the EU being a key market for its footwear exports. The ratification of the EU-Vietnam Free-Trade Agreement will likely benefit the textile and apparel exports from Vietnam,” ANZ bank said in its latest Greater Mekong Quarterly Outlook.
Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics, said cutting the tariffs will particularly benefit big fashion importers.
“That might not seem to make much difference to prices charged on the shelf [given retail markups], but it’s probably about the same magnitude as the manufacturer’s profit margin as a percent of sales,” he said.
Vietnamese apparel exports to the EU will increase and more EU-based companies will source from Vietnam, said a spokesman for the European trade commissioner. Although the agreement is not in effect yet, some said China is already feeling the pinch.
“Many of our previous clients shifted to work with factories in Vietnam,” said Su Shen, a representative of Guangdong Weixin Textile.
More recently, orders for his company in eastern China’s Shantou province are down, which Sun attributed to the signing of the FTA.
“We are feeling the effect…in terms of orders from Europe, the drop is about 20 percent,” he said.
For most industries, FTAs between two nations have little impact on third countries — with the exception to the rule being apparel, Hufbauer said.
He studied the impact of the 1994 North American Free Trade Agreement between the U.S., Canada and Mexico on economies of third countries in the region, specifically in the Caribbean. Eliminating tariffs for Mexico’s exports to the U.S. and Canada gave its garment manufacturing sector an edge over regional neighbors. Countries like Jamaica were hit hard. Between 1980 and 1995, garment exports from the Caribbean island had grown to $600 million, up from $10 million. The average annual growth rate was 28 percent. But in 1996, shortly after NAFTA came into effect, Jamaica’s garment exports had dipped 7 percent, costing 7,000 workers their jobs.
Mexican apparel experts, meanwhile, were growing three times as fast as those from the Caribbean.
“Based on that experience, I would expect that the Vietnam-EU FTA will divert a considerable amount of garment exports from China to Vietnam,” Hufbauer said. “So over a five-year period, I would expect that a substantial share of Chinese garment exports to the EU would shift to Vietnam.”
He puts that figure at about a fifth of China’s current exports, a loss currently equal to $9 billion annually.
Christian Schumacher, managing director of consulting firm StepChange Innovations, said, “EU companies will source from anybody who meets their cost and quality requirements.”
Swedish fast-fashion retailer H&M declined to provide information on its supply chain, but said it welcomed “all measures that promote a global free trade.” Vietnam, a spokesperson said, is “one of many important production markets.”
Not only are China’s exports to the EU expected to be affected, but also its textile exports to Vietnam. The majority of the material used in Vietnam’s garments is sourced from China. Under the FTA, tax exemption is granted only on garments that use textiles directly from Vietnam or South Korea, another country that signed an FTA with the EU.
The EU said strict rules for the origin of garments and textiles was to make sure that the elimination of duties “will not be an open door for Chinese products to flood the EU market.”
“This could incentivize Vietnam to source more inputs from [South] Korea and less from China, diverting trade,” said Cathleen Cimino-Isaacs, a research associate with the Peterson Institute.
Vietnam has already started to ramp up its own textile production. Vinatex, the country’s largest textile and apparel corporation, said it would increase domestic production of fabric by two million metric tons over the next five years.
Shortly after the FTA was finalized this year, Vinatex also announced that it would invest $91 million in a new 3.7-hectare plant with a capacity to produce 12 million items of clothing or linen annually.
Han Licheng, head of Zhejiang Garment Industry Association, said factories were already moving to China’s hinterland, where labor costs significantly lower than in denser coastal hubs. For years, China has seen production slowly move to Southeast Asian countries, from Vietnam to Cambodia and Myanmar, where labor costs are significantly cheaper.