WASHINGTON — Moody’s Investors Service is giving the 12-nation Asia-Pacific trade deal that’s under negotiation a “credit positive” for apparel and footwear companies, noting in a new research report that large apparel companies could reap significant supply-chain cost savings if the deal is implemented.
Moody’s said its rated universe of 39 apparel and footwear retailers “stand to benefit” from lower tariffs on imports.
“We expect the biggest beneficiaries will be large-scale global companies that can reduce costs by shifting production to lower tariff countries and also expand existing business in emerging markets of the Asia-Pacific region,” the report said.
The Trans-Pacific Partnership negotiations involve the U.S., Japan, Mexico, Canada, Australia, Vietnam, Singapore, Peru, Chile, Brunei, New Zealand and Malaysia. Negotiators were unable to reach a deal at the end of July on the massive trade pact encompassing some 40 percent of global gross domestic product, but the countries are said to be continuing talks with the hope of reaching a deal by the end of the year.
Some 30 percent, or 208 factories, of the total Nike uses around the world are located in the TPP countries, while 27 percent, or 305 factories, of the number from which Adidas sources are in the TPP region, according to company disclosures cited in the report.
Based on a sample of apparel company disclosures, VF Corp., Gap Inc. and PVH Corp. have a smaller apparel manufacturing footprint in TPP countries when compared to footwear firms such as Nike and Adidas, according to the Moody’s report.
An estimated 10 to 20 percent of all global apparel factories are located in the TPP countries, while about 30 percent of footwear factories are located in the TPP zone, Moody’s noted. Excluding the U.S., the other TPP countries account for an estimated 15 percent of all apparel and footwear factories globally.
The U.S. imports $23 billion in apparel and footwear from the TPP countries and exports nearly $14 billion, according to Moody’s. Taken together, the TPP countries represent about 17 percent of apparel and footwear imports into the U.S. and 55 percent of total apparel and footwear exports out of the U.S.
Vietnam, already the second-largest apparel supplier to the U.S., could be a big beneficiary of a TPP deal, according to the report. But Moody’s analysts warned that the proposed strict yarn-forward rule of origin could limit the potential benefit companies might accrue from duty reduction and elimination. The rule requires apparel to 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.
Vietnam today imports a significant percentage of its yarns and fabrics from China, which is not a party to TPP, so any apparel imported to the U.S. with those inputs from China would not qualify for duty-free treatment. However, brands and retailers might eventually come out on top. There has been a big effort by other Asian companies to ramp up textile investment in Vietnam to take advantage of the TPP benefits.
Apparel and footwear imports to the U.S. from Vietnam are currently subject to tariffs ranging from 5 to 30 percent of the cost, insurance and freight value of imported goods, the report said. The TPP tariff phaseout schedules are still being negotiated by the countries and some industry officials have said they expect longer phaseouts on sensitive, high-volume imports. That means companies might have to wait several years for some products to become duty-free under TPP.
Shifting production to lower-tariff regions will also bring companies closer to the end users in the TPP region, as well as in the giant Chinese consumer market, the report said. The Asia-Pacific region has been a “growth driver” for large U.S.-based apparel and footwear companies opening stores there, it noted.
Gap, for example, opened its first Old Navy store in China in 2014 and has plans to open an additional 40 Gap and Old Navy stores in 2015, which would bring the total to 150 by yearend, the report said.