WASHINGTON — Vietnam has agreed to abolish “prohibited” subsidies to its textile and apparel industry as part of a trade deal it reached with the U.S. here Sunday, marking a major step in the Southeast Asian country’s bid to join the World Trade Organization.

The U.S. and Vietnam announced an agreement in principle Sunday after five days of talks here and expect to sign the deal in the near future, possibly as early as June.

Vietnam is trying to become the 150th member of the WTO, which would bring it into the mainstream of global commerce, lowering tariffs, attracting foreign investment and eliminating quotas on its apparel exports. The U.S. would receive substantially lower tariffs on its industrial and agricultural exports as well as more market access in services as the country becomes more market driven.

One of the sticking points in the trade negotiations between the two countries centered on Vietnam’s subsidies to its apparel industry and the potential threat unrestrained imports pose to the U.S. textile industry.

Apparel and textile imports from Vietnam are now limited by quotas that will be removed if the country’s bid to join the WTO succeeds.

Textile groups were pushing U.S. negotiators for continued restrictions on Vietnam, either through an extension of existing quotas or a special textile safeguard mechanism similar to the one with China, while import representatives argued that the goods should be unrestrained.

“First, we secured a very tough commitment from the Vietnamese that they will completely abolish all prohibited subsidies to the textile industry before they accede to the WTO,” said a senior U.S. trade official, who briefed reporters with another official in a conference call on Sunday. “Secondly, we have built in an unprecedented enforcement mechanism … and have the ability to reimpose quotas for a period if they don’t comply with their obligations within the first 12 months of accession.”

If the U.S. believes Vietnam has not complied by eliminating all prohibited apparel and textile subsidies by the date it joins the WTO, it will first seek consultations with Vietnam and if the consultations do not yield results, the U.S. reserves the right to seek a determination by a WTO arbitrator on an expedited schedule of 120 days. If the WTO arbitrator determines Vietnam is in violation of its WTO commitments, the U.S. has the right to reimpose quotas on Vietnamese apparel and textile exports for a year at the level provided for in the current textile quota agreement, the U.S. trade official said.

This story first appeared in the May 15, 2006 issue of WWD. Subscribe Today.

“It is a strong enforcement tool to ensure that Vietnam does in fact eliminate all of its prohibited subsidies to the textile and apparel industry as they have promised to do,” said the U.S. trade official. “What it is really designed to do is not to reimpose quotas but to ensure Vietnam takes serious its obligation to eliminate prohibited subsidies and we have every reason to believe they will.”

The trade official refrained from estimating how much those prohibited subsidies might amount to, but maintained they are “much, much smaller” than the $4 billion in apparel and textile subsidies [some of which are not prohibited] cited in many press reports.

U.S. textile executives and representatives blasted the deal, maintaining it does not contain an effective enforcement mechanism to force the Vietnamese to comply while unrestrained imports will flood the market.

“It is a very bad agreement for us because we are going to face a flood of subsidized Vietnamese imports sometime within the next nine months and that is going to be devastating to the industry,” said Cass Johnson, president of the National Council of Textile Organizations.

Johnson said the domestic industry’s request for quotas to be kept in place until Vietnam eliminated the subsidies was denied. He said Vietnam subsidizes its industry in a variety of ways and will merely reclassify its subsidies to comply with the agreement.

Importers were behind the agreement.

Brenda Jacobs, an attorney for the U.S. Association of Importers of Textiles and Apparel, said “If we had faced another safeguard process like we have with China, it would have been unacceptable. But to have a process that is handled through a WTO neutral arbitrator … is clearly more favorable.”

Vietnam exported $2.9 billion in apparel and textiles to the U.S. in 2005. By comparison, China, which is restrained by quotas under a textile safeguard, exported $22.4 billion in apparel and textiles last year.

Having completed direct talks with the Bush administration, Vietnam must next receive Congressional approval for Permanent Normal Trade Relations status and reach a final deal with the global trade body to join the WTO.