TPP to Make China’s Textile Exports Less Competitive

Date: 2015-10-10

What happened

On October 5, a Trans-Pacific Partnership (TPP) pact was reached by 12 nations including Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam and the US. The TPP intends to strike comprehensive free trade agreements covering all products and services. It includes seven key areas including dairy, textile & clothes, intellectual property protection, investor-state dispute settlement, restrictions on capital control & currency manipulation and SOE fair competition.

Textile manufacturing is China’s third largest export sector (taking 13% of total, only after mechanical electronics and light industry) and generates 18% of its revenue from exports, or higher considering indirect export revenue. As such, the TPP should have a large negative impact on China’s textile & apparel exports.

► Tariff: The TPP bypasses China and aims to reduce tariff to zero in the long term for partners in the block, while nations not in the block still face a 17% tariff. In this context, China’s textile industry will become less competitive in relative terms. China is the world’s largest textile producer, exporter and consumer, and accounts for 36% of global textile exports. Its textile exports to TPP members combined make up 33% of its total textile exports (the percentages of its textile exports to the US, Japan, Vietnam, Australia and Malaysia are 17%, 7%, 5%, 2% and 2% respectively).

► Country of origin: According to TPP’s preferential treatment terms, textile companies in the member states are required to import yarn and fabrics from nations in the TPP block, which will reduce China’s share of textile raw material exports. Take Vietnam for an example. The country has been importing 50% of its textile raw materials from China.

► Vietnam could gradually grab China’s share in the global textile exports market. According to our estimate, labor cost in Vietnam is only half of China’s level, and its textile industry’s overall costs (labor, cotton and tariff) are about 60% of figures in China, despite less advanced technologies and inefficient production. China’s
textile exports will likely be less competitive than those of Vietnam and other Southeast Asian countries. Vietnam’s textile exports to TPP members currently account for ~70% of its total textile exports and could double after TPP takes effect.

Chinese textile companies have already expected the TPP pact and built production capacity overseas in recent years. The TPP’s impact should be relatively moderate for companies with heavier exposure to overseas capacity, such as Texhong Textile, Bros Eastern, Shenzhou International, Luthai-A and Huafu with the percentage of Vietnam capacity at 40%, 33%, 17%, 14% and 9% respectively.

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