My personal understanding: the US textile industry insists yarn-forward RoO in TPP is not because they expect a substantial increase of textile exports to Vietnam as the case of NAFTA and CAFTA which help capture the export markets in Mexico and Central America. But rather it is because:
1) Without yarn-forward, situation will get even worse. Particularly, a less restrictive RoO will make Vietnam’s apparel exports which contain textiles made in China, Taiwan or South Korea qualified for duty free access to the US market. Definitely this will be a more imminent and bigger threat to the US textile industry than simply facing competition from Vietnam’s apparel which contains Japanese made textiles. And still many US textile companies don’t treat the Japanese textile industry very seriously, although I think they should. Remember, Japan currently is the fourth largest textile supplier to Vietnam and the NO.1 textile supplier to China.
2) With yarn-forward RoO in place, at least US textile companies can invest in Vietnam (remember, globalization is about movement of capital as well. Many apparel companies in Mexico and Central America actually are invested by US companies). Without yarn-forward RoO however, Vietnam can simply rely on imported textiles as the case mentioned in (1) and there will be no incentive for US textile companies to move factories to Vietnam (meaning, capital holders will lose).
So overall yarn-forward RoO may win a few more years for the US textile industry. But in the long run, it is my view that the US textile production and its exports to the Western Hemisphere countries may still inevitably decline (especially those output to be used for apparel assembly purposes) after the implementation of TPP. In the 21st century, the nature of competition is supply chain v.s. supply chain.
The future of the US textile industry is those high-end markets, particularly technical & industrial textiles.
Sheng Lu
Additional Reading: The potential impact of TPP on the US textile industry
FASH455 Global Apparel & Textile Trade and Sourcing 
Japanese textiles are of high-end quality. Is there a significant need for apparel in Vietnam ? If so, will japanese textiles really substitute US products ? I believe the rules of origin for textiles and apparel should reach the level of other products – time for protectionism and special rules for textiles and apparel should be over after the quota liberalisation.
TTP and TTIP can only be a step forward for our industry with new, libaral rules.
Thank you for your great comment! Vietnam doesn’t have a high demand for high-end apparel but it does rely on imports for high-quality textile intermediaries such as MMF fabrics. Even China today still has to import yarns and fabrics worth billions of dollars from more advanced countries such as Japan and South Korea because China couldn’t produce by itself. Textile manufacturing is much more technology and capital intensive than apparel. That’s why a country has to reach certain stage of development so as to be able to manufacture high quality textiles.
On the other hand, I don’t think the issue regarding RoO is whether Japanese textiles really substitute US products or not. Vietnam’s apparel exports seldom use US-made textiles. Only 1.4% of Vietnam’s total textile imports in 2012 came from the US. This is largely because of the regional production-trade network. Instead, the top export market for US textiles is central America. But how many the US can export to central America demands on how many the central American countries can export their apparel to the US (through NAFTA and CAFTA). What worries the US textile industry is after the TPP, Vietnams’ apparel will take away the market shares of central American countries, which eventually will reduce the demand for US textiles from Central American countries. And as mentioned before, Vietnam seldom use US-made textiles. This is what “supply chain vs supply chain” refers to.
I totally agree that more liberalized rules need to be adopted for the global T&A industry. Unfortunately after the elimination of the quota system, T&A remains one of the most heavily regulated sectors in international trade despite the global nature of the industry. I hope my research can inform the T&A industry what will happen after certain rules of the game are adopted. Please feel free to leave any further comment and questions.
Thanks for the detailed reply. Would you adopt this opinion/situation on TTIP as well ? I believe there is no comparable scenario to the Vietnam situation but nevertheless US negotiators still propose the “yarn forward” – rule. “Yarn-forward” or even “manufacture from (non-originating) yarn” as proposes from European Associations are hard to fulfil within the EU. If these rules will come into effect nearly no (honest) EU-exporter will have a chance to benefit.
By the way, how sure are you that the origin information for these restrictive rules provided by exporters is really true ?
Thank you for your great follow-up questions and comments. I agree with you that RoO will be an issue for T&A under TTIP as well. Because both TPP and TTIP are under negotiation right now, the tricky part is any terms adopted by one agreement may have implications for the other. The current T&A RoO adopted by EU is like an equivalent to “fabric forward”. But if TTIP adopts such a less restrictive RoO, other parties may push the US side to abandon yarn-forward in TPP as well. International trade & trade policy is never a pure economic issue.
I am studying the economic impact of TTIP on related T&A trade flows right now. EU has a distinct pattern of intra-region trade for T&A. So basically EU (28) as a whole has a complete T&A supply chain + the end apparel retail market whereas the US mainly exports textiles and imports apparel. A more complicated situation is that 1) TTIP is more about regulatory coherence than tariff reduction. 2) The supply chain for high-end apparel and mass apparel are very different.
I do not agree that the EU still has a complete supply chain for textiles needed for apparel. Yarn and fabric production has also moved to other countries and EU textiles industry is more focussed on specific finishing processes of imported yarns and fabrics. That´s why I doubt that yarn-forward or manufacture-from-yarn-rules are still realistic and can be fulfilled by the compliant working EU companies.
Why does textiles and apparel industry (believes to) need more stringent rules and more protectionism than others ? One reason might be their structure and the domination of SMEs believing in the status quo. But more than 40 years of heavy protection by the quota system has proved the opposite. Successful are the companies which are innovative, fast and customer-driven – not the ones lobbying for protectionism – most of them are gone.
It is truly an exciting discussion! I agree that imported yarns are providing an increasing share in EU, but spinners remain operation in EU. According to the Eurostat, by the end of 2012, there were about 3720 spinners in EU(28) (mostly in Italy, Spain and France) with industry output totaling 9.3 billion Euros. In response to competition, many spinners adopt the strategy of vertical integration, taking advantage of scale efficiency or shifting to higher value added production. Weaving and knitting also have a strong presence in EU today. Around 4700 weaving or knitting companies were still in operation in EU by 2011 (mostly in Italy, Spain and Germany) and the industry output totaled 14 billion Euros. EU also exports fabrics to other regions such as Turkey and Africa. However, structural change is going on in the industry. EU textile companies overall are showing more interest in the technical textile area. And they may also have to rely more on markets outside EU.
In terms of the debate on trade protection, we had a great discussion in class on the book “the travels of a T-shirt in the global economy”. You may find some interesting comments from our students. http://tmd433.wordpress.com/travels-of-a-t-shirt-discussion/part-iii-trouble-at-the-border/
Thank you again for your very inspiring questions. I hope I can invite you to talk to my students in the near future.
The topic of yarn-forward rule of origin has personally intrigued me since I attended the 2014 Cotton Summit at the University of Rhode Island. It amazes me how many different views there are on this subject from various segments and organizations of the textile and apparel industry. All of the speakers at the summit had interesting and valid points as to why they support or did not support the yarn forward rule of origin. With all these different opinions, it is hard to choose a side. However, one very interesting point made in this article that I did not realize before is how a less restrictive rule of origin will make Vietnam’s apparel exports (which contain textiles made in China, Taiwan or South Korea) qualify for duty free access to the US market. Although I would need to do further research on this theory, at a glance it does not seem fair, and in opinion, that’s what this debate really comes down to; fairness. What is fair to one segment of the industry may not be to another segment. Finding a good balance is the ultimate challenge.
Since early this fall I have been gaining knowledge about the yarn-forward RoO and the affect it has on the global economy. I agree that that this RoO is beneficial for the US produced textile companies and also US retailers. My question is if US were to significantly increase our capital investments in the Vietnam region, would they be able to reciprocate in terms of loyalty when using US-made textiles in their apparel products? The trend towards shortening supply chains in order to gain a quicker speed-to-market is growing quickly, and although the US’ investments would be beneficial to their market would they help equally help benefit ours when Japan, China, Taiwan, and South Korea are in such close range?
A german institute of the University of tuebingen recently published a study about the potential impacts on TTIP (not TPP) on developing and emerging economies (http://www.iaw.edu/tl_files/dokumente/Study-Summary-2015-TTIP-ifo_iaw.pdf). Their recommendation : no complex rules of origin but the principle of free circulation only and as precondition for goods to benefit from the duty preferences. Any chance for support of this “revolutionary idea” in the US ?
thank you very much for sharing this interesting study! I think that trade policy in the 21st century shall be supply-chain friendly and appropriate rule of origin is a critical component of it. I would be happy have some further dialogues with you on this important topic.
The BDI (“the voice of german industry”) is proposing a uniform cross-industry Value Added Rule for TTIP :
“German industry advocates a uniform, cross-industry value added rule of 50 percent, based on the EU calculation method. According to this rule, non-originating materials may not exceed 50 percent of the value of a good. The basis for determining the admissible share of non-originating materials is the ex-works price of the finished product. For the implementation of the cross-industry value added rule, the U.S. net costs and the EU-calculation method need to be applied in parallel. Both differ from each other, however. The U.S. method requires a good to have a minimum regional value content as a certain percentage of the total production costs.
German industry proposes a general reduction of ten percent of the mini-mum value creation under the U.S. net cost method in comparison to the EU value added method. Non-originating materials may thus not exceed 40 percent, according to the U.S. net cost calculation. According to analy-ses in BDI’s membership, both calculation methods then give approximately the same results concerning the preferential status of goods. An indispensable precondition for a parallel application of both methods of calculation is “averaging”, which is described in more detail below.”
U.S. uses “yarn-forward” of origin to protect its export market in the Western Hemisphere . As we all know that Vietnam is also the TPP members. Moreover, the wages of Vietnam’s factory workers are relatively low comparing to other TPP members. Thus, Fashion companies and retailers in America are willing to choose Vietnam as a good sourcing. They would import apparels from Vietnam rather than Mexican. However, American textiles is too far from Vietnam and Vietnam does not have capability to produce textiles currently. If “yarn-forward” of origin policy does not exist, China would be the biggest textile exporter to Vietnam. The condition will make Vietnam threat the Western Hemisphere and damage their benefits.
agree!!