TPP offers promising new world for Vietnam's textiles sector

By ICIS News June 7, 2016 | 03:14 am PT

Vietnam’s textile industry is set to grow rapidly over the next 10 years as the Trans-Pacific Partnership trade agreement takes effect, acting as a catalyst for boosting trade and investments in the sector, industry experts say.

“Vietnam's textile industry has long been a key contributor to the country's high-growing, export-oriented economy, as the textile and garment industry accounts for around 15 percent of the country's gross domestic product (GDP) and 18 percent of its exports,” said Dylan Waller, a Vietnam-based analyst at Nomadic Equity.

The country’s textile exports have nearly doubled over five years to about $30 billion in 2015. Industry growth prospects are good and will largely be driven by the Vietnam’s export capabilities, Waller said.

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Once the TPP trade pact comes into effect, Vietnam’s garments and textile shipments to its biggest market – the United States – should see annual double-digit growth.

A major boost to the sector would be the expected after ratification of the Trans-Pacific Partnership (TPP) agreement. Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the U.S. and Vietnam – which represent nearly 40 percent of global GDP – are parties to the deal.

Once the TPP trade pact comes into effect, Vietnam’s garments and textile shipments to its biggest market – the U.S. – should see annual double-digit growth, Waller added.

The U.S. is currently applying an average 17 percent tariff on textiles, garments, and apparel imports from Vietnam. The tariff, under the TPP, will be gradually reduced to zero.

Over the next 10 years, the TPP trade pact could boost Vietnam’s GDP growth by 11 percent as well as boost its exports by 28 percent, according to Singapore-based Institute of Southeast Asian Studies – Yusoff Ishak Institute.

“The main challenge for this industry is for domestic companies to increase localization in order to prepare for the potential TPP,” Waller said.

He noted that 90 percent of the textile raw materials that are cut and sewn into finished garments in Vietnam are imported from China, which is not party to the TPP.

Signing on to the TPP means that Vietnamese garment exporters will technically no longer be able to import their materials from China if they hope to benefit from lower tariffs under the agreement.

Meanwhile, Vietnam has been drawing in foreign textile firms to set up factories in the country over the years because of lower labor cost, and this trend should continue when the TPP comes into effect, Waller said.

Vietnam ranks among the fastest-growing economies in Southeast Asia, with its 2015 growth rate of 6.7 percent at an eight-year high. Growth this year is projected by economists to remain at this rate.

According to the Economist Intelligence Unit, in the first quarter of this year, Vietnam's GDP growth slowed to 5.5 percent as adverse weather conditions affected its agricultural output, while industrial expansion has moderated. While the TPP agreement and the launch of the Asean Economic Community could be game-changers for Vietnam, the positive impact will take time to manifest itself.