Waiting for Godot?: The TPP and Textiles

Waiting for Godot?: The TPP and Textiles The Trans-Pacific Partnership (TPP) and its effects on Hong Kong Fashion Industry Professor Bryan Mercurio The Chinese University of Hong Kong 21 January 2016

Introduction, Players and Background • US Pivot to Asia – economic, security, etc. • Economic – pivot is led by a mega-regional trade agreement called the Trans-Pacific Partnership (TPP) – P4 (2006) – Brunei, Chile, Singapore, and New Zealand • 2008: US, Australia, Peru and Vietnam • 2010: Malaysia • 2013: Canada, Japan and Mexico

– 33% of world trade, 40% of global GDP

TPP and Textiles • Textiles and Apparel have always been ‘special’ – Multifibre Agreement (1974) – WTO Agreement on Textiles and Clothing – expired in 2005, bringing free trade to the industry

• In some markets, considerable tariff and non-tariff barriers remain – Tariffs • HTS 50-63, but focus on 61-63 (apparel)

– Rules of origin (ROO) • Determining when a product qualifies for the tariff preferences • ROO differ depending on the product/sector • Complicated and in some ways designed to limit trade in textiles (and select other sectors, ie automobiles)

TPP and Textiles • TPP and textiles – Chapter 2 (market access) – Chapter 3 (on ROO) and 4 (specific to textiles/apparel) – Several side letters

• TPP is set to reduce/eliminate tariffs on – Dresses, skirts and bags – deep reductions upon coming into force – Knit tops and woven trousers – most duties phased out after 10-12 years

• ‘Yarn Forward’ rule (Art 4.2(4)) – Goods must use TPP country yarn (fabric and sewing thread) and be made in a TPP country in order to qualify for the preferences – Exceptions • For certain goods, if total weight of non-TPP yarn does not exceed 10% of main fabric (Art 4.2) • Bras, synthetic baby garments and textile bags – ‘cut and sew rule’, must be cut and sewn in TPP countries • Short-supply list: - 194 fibers/fabrics, can be sourced from anywhere and receive the preferences. Some items will be removed from the list five years after entry of the agreement

The TPP Effect: tariff reductions • Significant movements –exports to select TPP countries – Japan: 99.2 percent of textiles/apparel exports will be immediately duty free (1.5% tariff average) – Vietnam: 98.4 percent of textiles/apparel exports will be immediately duty free (100 percent within four years) (13.6% t/a) – Malaysia: 79.2 percent of textiles/apparel exports will immediately be duty free (14% t/a) – New Zealand: 50 percent of textiles/apparel exports immediately (100 percent within seven years) (3.3% t/a)

The TPP effect: The United States • US exports – Fourth largest exporter of textiles and apparel – 70 percent of exports go to TPP countries

• US imports – Largest importer of textiles and apparel – Fairly high levels of tariff protection in apparels in ‘normal trade relations’ (ie – MFN rate): highest tariffs peaks of all TPP participants – Restricts the ability of others to capitalise on the TPP

The TPP Effect: Shifting Patterns • Shifting production patterns (towards Vietnam and Malaysia) – Costs • Vietnam, estimated at 70% currency/efficiency of China • Due to yarn forward rule cannot source cheaper yarn imports from China (or India) • Must change sourcing patterns in order to take advantage of TPP, but some costs

– Development • TPP has potential to increase Vietnam GDP by 15%, but needs massive inflows of FDI and technical assistance to upgrade and expand production and processing facilities (and efficiencies)

The TPP Effect: Shifting Patterns • Winners – US and Japan for high quality items – Malaysia, Mexico and Peru for lower quality production – Vietnam expansion of production share

• Losers – China’s yarn manufacturing industry • Domestic and ASEAN • Must upgrade bilateral links – RCEP or otherwise

Godot may not arrive: industry must be proactive • Conduct a strategic examination of types of imports with ROO and duty phase outs • Look at what is sourced, and where. TPP country or otherwise – should some be moved • Key items of strategic interest could offer gains, but is product/company specific • Remember the possibility of Safeguards

Waiting for Godot in Hong Kong • Yarn Forward Rule limits Hong Kong gains from TPP – Focus on exceptions (ie short supply list) – Focus on high-end products with low tariff rates

• Re-evaluate industrial policy – Necessary to stimulate industrial production – Coherent and consistent approach is needed

• Negotiate access via FTAs – Entry into TPP – may not be politically possible – Leverage ASEAN negotiations into RCEP – Negotiate separate US-Hong Kong free trade agreement?

Thank you for your attention Bryan Mercurio Faculty of Law The Chinese University of Hong Kong [email protected]