The Trans-Pacific Partnership: Plan B

Regional free trade agreements (FTA) are less about trade liberalization and more about trade restriction. The underlying idea is that the insiders will benefit at the expense of the outsiders.  To be successful every insider country must show a net  quantifiable benefit.  This is the measure of the FTA’s efficacy. There are of course exceptions.  Developed countries will sometimes offer duty free access to developing and least-developed countries as a form of aid, which is a good and noble effort.  However, acts of charity notwithstanding, if the FTA fails to provide a tangible net benefits, the agreement makes no sense.

If we accept this premise, we must conclude that the current U.S. strategy TPP garment strategy fails.

The U.S Trade Representative (USTR) has but a single strategy which it is trying to impose on all parties — Plan A.

Plan A is based on the yarn-forward rule:  To qualify for duty free access, the garment must meet the following standards

a      Garment produced in a TPP country

b      From fabric woven (or knitted) in a TPP country

c      From yarn spun in a TPP country

TPP currently has nine members:  Australia, Brunei, Chile, Malaysia, Peru, New Zealand, Singapore, United States, Vietnam.

Of these, only Vietnam, with a 9.5% (April 2012) market share is a major U.S. garment supplier.

The U.S. Trade Representative’s (USTR) argument is that the yarn-forward rule will lead to greater U.S. yarn and textile exports.  The yarn forward rule worked well with NAFTA and even better with CAFTA, why not with Vietnam?  The answer is that Vietnam is different.

Vietnam is in the center of Southeast Asia, one of the very few regions where investment funds are plentiful and where the textile industry is considered to be a good place to invest those funds.  In the 12 months ending April 2012, Vietnam garment exports totaled $8.6 billion.  If the U.S. succeeds in imposing the yarn-forward rule on TPP, everybody from China to India will rush to build spinning and weaving mills in Vietnam (or more likely Malaysia or Singapore).  Within two to three years not only will the U.S. textile industry be shut out of TPP, it will also face increased competition from state-of-the art regional yarn and textile producers.  In this regard we should not forget that while 60% of U.S. yarn and textile exports go to NAFTA and DR-CAFTA, the balance 40% goes to other countries; notably  China which is the U.S.’ second largest customer for yarns.

A TPP yarn-forward rule would offer no quantifiable benefit to the U.S. and would decrease U.S. textile exports and thus further increase unemployment.

I suggest another TPP garment strategy: Plan B

Rather than a yarn-forward rule, TPP should offer duty-free access based on a fiber-only rule.  It is very simple:

Any garment produced in a TPP country, would enjoy duty-free access provided the fiber comes from a TPP country — regardless where the yarn was spun or the textiles woven (or knitted).

With a 46% market share, the U.S. is the world’s largest cotton exporter.  However, that position is now in peril.  In the past the U.S. maintained its dominance by providing subsidies to cotton producers.  As a result WTO decision (DS 267 dated 2 June 2008) banning U.S. cotton export subsidies, that option is no longer open.  U.S. cotton farmers now face direct competition from the other major cotton producers, notably in South Asia while at the same time previously second level producers in Africa and South America are increasing their efforts.  To make maters worse, cotton prices which previously had been at record highs due to a combination of increased demand for cotton garments and China’s efforts to build up a strategic raw cotton reserve, have now entered  an extended period  of decline.

Unless strategic efforts are made now, U.S. cotton growers will be faced with  the long term trend of lower cotton prices combined with a lower global market share.

Plan B would reverse that trend, at no expense to the U.S. Government or its citizens.

The United States is the world’s largest importer of cotton garments with import duty rates among the highest for any product.

Ø    The fiber-only rule would ensure an immediate and substantial  increase in demand for TPP cotton by ensuring that virtually all cotton garments imported into the U.S. would be produced of TPP cotton

Ø    The fiber-only rule would ensure a long term premium for TPP cotton.  The exceedingly high import duty rates for cotton garments would ensure a separate market for TPP cotton.

Plan B could offer even greater advantages, based on the implementation process.

Shipments under the fiber-only rule would have to be monitored to ensure compliance.  The usual method based on Certificates of Origins (CO) would require that each shipment be examined — a long and costly process.

A more efficient method would be to license spinning mills to issue Comprehensive Certificates of Origins (CCO).  Under the CCO system qualifying mills would be able to issue CCOs without undergoing shipment inspection, provided they used TPP fiber exclusively for all shipments regardless of destination.  Rather than inspecting each shipment, the mill itself would be inspected on a regular basis; e.g, every three months, to ensure compliance.

Spinning is an economy of scale.  A large spinning mill may cost well in excess of $100-$200 million.  Few spinners would build a new mill to meet CCO requirement.  It would be far more cost effective to use existing facilities.  As a result, to a large degree exports to non-TPP countries would also use TPP fiber.

Finally, the fiber-only rule ensure that China no longer dominates the global garment export market, by shifting away from China, the world’s largest cotton grower, to other countries.

Unlike the USTR’s Plan A yarn-forward-rule  which provides no tangible benefit, Plan B fiber-only rule would provide an increasing premium market for U.S. fibers now and for the foreseeable future.

The fiber-only rule would benefit not only the United States but also most of the other TPP members — Australia, New Zealand, Peru and Chile ­— all fiber exporters.  It would be much better to create a system which benefits almost everyone, than imposing a system which benefits only one country — Vietnam.

Finally, FTAs, particularly those involving textiles and garments, are highly politicized.  In the United States, free trade agreements are negotiated by the administration but must be approved by Congress.  Already, the U.S. Congress is complaining that the USTR is acting in secret, refusing even to give Congress an indication of U.S. TPP negotiations.

This is an election year.  Republicans are looking for every opportunity to criticize the Democratic administration. The administration is taking a terrible and unnecessary risk.  Imagine the results when the administrations USTR finally comes before Congress offering their plan A as the only strategy, a plan which not only brings less than 0 benefit the U.S. but in fact subsidized investments in Vietnam.

Imagine their reaction when Congress becomes aware that a Plan B exists, which not only brings immediate quantifiable benefits to the U.S. but also increases cotton exports at no cost to the U.S. taxpayer.

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