By Kristi Ellis
with contributions from Arthur Friedman
 on November 5, 2015

WASHINGTON — The fashion industry is poised to capitalize on several new benefits unveiled Thursday in the 12-nation Trans-Pacific Partnership agreement text, marking a major milestone in the drive to knock down barriers on trade covering 40 percent of the world’s gross domestic product.

Women’s wear companies could be among the first to see immediate benefits from the deal, while many of the other benefits in the agreement will not be realized at the outset, according to industry officials and trade experts who have begun to analyze the more than 2,000 pages and 30 chapters of the technical language in the pact.

Trade ministers reached a deal in early October on TPP, which includes the U.S., Japan, Mexico, Canada, Vietnam, Malaysia, Peru, Singapore, Chile, Brunei and New Zealand. The pact seeks to eliminate duties, strengthen labor and environmental provisions, ease the flow of cross-border trade and strengthen intellectual property protections.

The release of the massive trade deal to the public starts a lengthy process in the U.S. and the 11 other countries that must ratify it. Under the rules of Trade Promotion Authority, the president must notify Congress when a deal is reached and wait 90 days before signing it. Obama did that late Thursday, starting the 90-day clock ticking, which means the earliest Congress could begin considering TPP would be in early February. Many pundits don’t expect Congress to vote on the trade deal until a lame-duck session next fall.

In addition, the U.S. and a critical mass of countries would have to ratify TPP before it can be implemented.

The U.S. fashion industry has a big stake in the agreement. The U.S. imports $22 billion in apparel, textiles and footwear from the TPP countries and exports around $14.25 billion. Vietnam is the second-largest apparel supplier to the U.S. after China and a big sourcing hub for companies.

While many high-volume “sensitive” products will be subject to longer tariff phaseouts, with some having to wait 12 years for duty elimination, many were also granted duty-free treatment on Day One. Of note to women’s wear firms, dresses and skirts in all fabrics, ranging from cotton to rayon and wool, are set to become duty-free on the first day of implementation, according to Julia Hughes, president at the U.S. Fashion Industry Association, who was briefed by top U.S. trade officials at her group’s board meeting in New York on Thursday.

“In our world we live and die season by season,” Hughes said. “If you are talking about 14 years until you see some of the benefits and products going to full duty-free, that’s a long time. What is important right now is what will be immediately duty-free, and dresses and skirts in all fabrics that go duty-free on Day One will help women’s wear companies.”

The industry has long known that TPP was likely to contain a strict yarn-forward rule of origin that requires the use of yarns and fabrics from the TPP region. Officials also made public a mechanism known as “short supply” that allows companies to source products on the list from anywhere in the world that are deemed not available in commercially meaningful quantities in the TPP area. The list released on Thursday contained 190 product categories, but some of those items will not be duty-free on Day One.

New details of the deal began to emerge slowly, as industry officials and experts began the arduous task of deciphering the technical language of the text.

Industry officials said there will be a 12-year phaseout for duties on “sensitive” woven products and a 10-year phaseout for duties on sensitive knit products. Products that fall within those baskets will still see their tariffs cut by either 35 or 50 percent on Day One, according to industry officials.

The TPP also contains an “Earned Income Allowance” program for cotton trousers from Vietnam. If a company uses U.S. fabric in cotton trousers made in Vietnam, they would be given a matching credit to use a certain amount of non-TPP imported fabric for the trousers. There is a 15 million square meter equivalent cap on men’s trousers in the first year, which grows to 20 million SME by the 10th year of the implementation of the agreement.

There is also a liberal cut-and-sew rule of origin for luggage and handbags products, officials said.

In a win for U.S. footwear manufacturers, Japan agreed to phase out and eliminate tariff rate quotas on leather footwear exports.

On the labor side, Vietnam has agreed to establish sweeping labor rights provisions for workers and unions. Vietnam is also subject to a special labor mechanism with a penalty process that could lead to the U.S. withholding or suspending tariff reductions if it does not live up to its labor commitments, which could cause issues for importers down the road.

Rajiv Biswas, Asia Pacific chief economist at IHS Global Insight, said in an analysis report that there are potential winners and losers among Asian countries in the TPP pact, which will remove 98 percent of remaining tariffs on trade in goods among TPP members.

“This will help manufacturing exporters like Vietnam and Malaysia in boosting their manufacturing exports to other TPP countries, notably the U.S., which is the world’s largest consumer market and accounts for around 30 percent of world consumption,” Biswas said.

He said the largest Asian TPP gainers are Vietnam and Malaysia. The TPP deal is expected to provide a significant boost to Vietnam’s gross domestic product growth rate and exports when tariffs for U.S.-bound garment exports drop to zero, he noted. Vietnamese exports of textiles and apparel were estimated at $24.5 billion in 2014, a 19 percent growth over the previous year.

“Large new investment inflows are also under way into the Vietnamese garments industry in preparation for the TPP deal implementation,” Biswas said. “This will provide significantly improved access to the U.S. market, as tariffs on Vietnamese garment exports to the U.S. will drop from a range of 17 percent to 32 percent currently to a zero tariff for products made from domestically sourced materials. The U.S. is already Vietnam’s largest export market, valued at $30.6 billion, of which textiles and garments accounts for about a third.”

Biswas said Malaysia, which does not have a free-trade agreement with any North American country, will benefit from greater access to those markets for its manufacturing exports.

For China, which is not a member of TPP, “the trade diversion losses are relatively low as a share of total Chinese GDP and exports, but will further reduce the relative attractiveness of southern Chinese provinces relative to Vietnam for new investment in low-cost textiles and electronics industry segments,” he said.

Biswas surmised that some Asian garment exporters such as Bangladesh, Cambodia, Pakistan and Sri Lanka will suffer trade diversion losses as TPP members such as Vietnam gain market share. India is also expected to suffer some negative effects in its textile industry, as the U.S. market accounts for 40 percent of Indian textile and clothing exports. However, the overall impact is expected to be relatively moderate as a share of total GDP and exports.

“This is a huge agreement, affecting 40 percent of the [world’s] economy,” said Stephen Lamar, executive vice president at the American Apparel & Footwear Association. “It has big ramifications for the second-largest supplier of apparel and footwear [Vietnam] and travel goods to the U.S. market. It has big ramifications for one of the number-one consumers of apparel, footwear and travel goods — here.

“It’s also really important to stress that one of the things to come out of this agreement is the elimination of tariff-rate quotas on leather footwear with Japan,” Lamar said. “What that means from a practical perspective is we’re going to have big market opening opportunities for U.S.-made footwear into Japan. That’s something that has been denied to us for decades.”

Hun Quach, vice president of international trade at the Retail Industry Leaders Association, said retailers “feel really good about the fact that there is duty elimination across the board.”

“There are going to be a lot of tariff cuts on all tariff lines on Day One,” she said. “That means there aren’t any tariff lines being held back and that is good progress. Vietnam is, of course, a big market for us and we are very interested in sourcing opportunities created through TPP.”

One benefit for retailers in particular is said to be a change in rules in Vietnam and Malaysia that will allow big-box retailers or other mass merchants to establish stores selling multiple brands, according to industry officials.

The National Council of Textile Organizations said based on its understanding of the final agreement, it believes many of the U.S. textile industry’s key objectives have been met, including a yarn-forward rule of origin for most products and reasonable duty phaseouts for sensitive textile and apparel items.

“We feel that the U.S. government was able to achieve a well-balanced outcome for all parties, including U.S. textile manufacturers and our partners in the Western Hemisphere,” NCTO said.

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