While it's a rule common to all US free trade agreements, including NAFTA, the "yarn forward" rule – or the Rule of Origin – was a major sticking point in recent Trans Pacific Partnership discussions, writes our Vietnam MD.
The US government's stated aim with the Trans Pacific Partnership was to ensure "a comprehensive deal, providing new and meaningful market access for goods and services", but it could be argued the Rule of Origin, or "yarn forward" rule, was more about excluding China from the proceeds of TPP trade.
Historically textile manufacturers in Vietnam have set up their factories and done all end processing in Vietnam, but more often than not, the products were made with competitively priced yarn or fibres from China. There really wasn't any incentive to source yarn locally due to the pricing savings. If that continues to happen once the TPP comes in, the Rule of Origin means those companies won't benefit from zero tariffs. It's designed to protect US jobs, but it also means that Chinese companies won't be able to open a company in Vietnam to just stitch together clothes. Industries must be developed within the TPP trade area from the yarn forward – that is, all materials must come from TPP countries. It's all about promoting regional supply chains to help ensure TPP countries rather than non-participants are the primary beneficiaries. Importers will be able to claim preferential tariff treatment only if they have the documentation to show that their entire supply chain comes from within the TPP area.
Of course, much of the US textile industry has been keen to ensure Rule of Origin was included in this agreement; they believe it will help to constrain China's (and to some extent, Vietnam's) entrance into the US market. But they also see Vietnam becoming more attractive to American textile industry investment.
Some countries saw the writing on the wall and have already been making moves to capitalise. For example, a number of Vietnamese companies are already starting up, or expanding, their own fibre manufacturing operations in order to not be left behind when the TPP is finally implemented. Key companies include the Century Synthetic Fibre Corporation (CSFC), Thanh Cong Joint Stock Co (TCM), and the Vietnam Textile and Garment Corporation (Vinatex).
It's no wonder countries were keen to conclude the TPP agreement: its trade area comprises a region with US$28 trillion in economic output, making up 40% of the world's total output. Successful implementation will see tariffs removed on almost US$2 trillion in goods and services exchanged between the signatory countries – some of the world's largest markets.
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