A few weeks back, the U.S. Congress and the White House were going around the horn on whether or not to give the president “fast track ” authority to negotiate the terms of a trade agreement called the Trans Pacific Partnership (TPP). To put this in historical context, the U.S. Constitution has something called the Treaty Clause, which grants the President the right to negotiate the terms of treaties, but it also stipulates that the Senate must approve whatever gets negotiated. Fast track authority (or TPA — trade promotion authority) is a rule put into place that says that the Senate will vote a treaty up or down, but can’t amend it or filibuster a vote to approve it. The TPA was first enacted in 1975 and has been extended several times since then, but never without some controversy.

Political maneuvering aside, the TPP itself is an important treaty for the retail industry and American consumers, because it has to do with trade cooperation and tariffs between participating nations. So let’s get down to the basics. First of all, what is it? Well, I google’d “What is TPP? “ and got these two opposing views:

1. “The Trans-Pacific Partnership (TPP) is a secretive, multinational trade agreement that threatens to extend restrictive intellectual property (IP) laws across the globe and rewrite international rules on its enforcement. ” (from the Electronic Frontier Foundation)
   
2. “It is a proposed free trade deal currently being negotiated between 11 countries… It is expected to substantially reduce tariffs, and even eliminate them in some cases, between member countries and help open up trade in goods and services. It is also expected to boost investment flows between the countries and further boost their economic growth. The member countries are also looking to foster a closer relationship on economic policies and regulatory issues. “ (from the BBC) 

You get the picture — depending on the source its either economic poison or fuel for growth.

To get to a more balanced view of the TPP and what it means to retailers, I reached out to an industry colleague, Mark Burstein, the president of Sales, Marketing, & R&D for NGC Software, a company that specializes in web-based PLM, Supply Chain, and ERP solutions for the apparel industry. Mark’s retail career revolves around apparel; for example, before NGC Mark was president of Caribbean Apparel Associates (CAA), overseeing all operations for a clothing manufacturer with factories in Colombia and Mexico. Because of his background, Mark has an insider’s view into the trade talks.

So, what is the TPP? Explained the industry insider, “TPP is a 12-nation Asian Pacific trade agreement that wants to lower barriers to trade, and drop duties and tariffs for all products between these 12 nations. “

There you have it, short and sweet. It’s important to note that one of the 12 nations is not China (the nations are: USA, Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam). The region comprises 28 trillion dollars of economic output- about 39% of the World’s total output. Of that number, the U.S. puts out the largest portion by far. The trade discussions started in 2005, between New Zealand, Chile, Singapore, and Brunei. In 2008, then-president George Bush announced the US’s involvement and shortly afterward, the other countries all joined. The U.S. did not co-opt the negotiations — Burstein describes the dialogue as much more collegial than that. However, he explained, “a lot of requirements are coming from the U.S., because the U.S. is the biggest market for the products. Some of them are ‘social compliance’, ‘sustainability’, and ‘safety compliance’. So we’re imposing our values on the countries so that it will work bi-laterally. We don’t want to import from a country that doesn’t treat its people right. “

That last point is an important one; when I asked Mark if these requirements are being imposed from an economic perspective (to even the playing field with U.S. based manufacturers as relates to the cost of compliance), or from a moral one. “It is from a moral perspective, “ he explained, “those jobs have already left the country. “ The implication is that all the noise in U.S. media about Americans losing jobs is not accurate. “Some unions are against TPP right now because their interpretations are based on prior free trade agreements like NAFTA and CAFTA. From July 24 through the 31^st, the member nations are having their 41^st meeting since March of 2010. This is supposed to be the final meeting, and 30 days after that meeting is concluded (towards the end of August), they will open up the text of TPP to public review for 60 days, so people can look at it before Congress takes a vote (in the November/December timeframe). Right now unions are upset because, like most of us, they are in the dark about what’s in the text of TPP. Once the text is made available, the unions will look at it, and most of the problems that they believe will exist will disappear.

How will TPP affect retailers in the short and long term? “The fashion apparel and garment sector will be most affected by it “, said Mark. He explained further: “the average effective tariff right now is 20-25% across apparel and footwear. It makes it more expensive for the American public. So once tariffs start getting eliminated, it will result in savings for the American public. “

On the flip side, does TPP affect the exportability of American-made products? “It does; TPP will affect durable goods and even food — the U.S. is a net exporter of grain and meat “, explained Mark. That will help U.S. companies’ ability to sell into Asian-Pacific markets — but that also means more demand for U.S. products, and that could result in higher prices at home.

Yarn Forward

As is always the case, free trade really means almost free trade, but with conditions. One of the big ones is something called yarn forward. Explained the apparel specialist, “‘yarn forward’ would require that only fabric produced from yarn made by a TPP country would qualify for the trade agreement’s duty-free status.” The rule is intended to ensure that the trade benefits of the TPP only apply to signatory countries rather than outside players such as China. However, the rule also has significant effects on signatory countries, such as Vietnam. The country is currently a key global garment manufacturing location, but its factories often use Chinese-made fabrics in their products, and China is not a part of the TPP. In fact, around eighty-five percent of Vietnamese textile and garment companies have outsourcing contracts with foreign partners. What all this means is that if Vietnam wants to be eligible for TPP benefits such as lower tariffs in the US, it will have to develop its own local fabric industry or constrain itself to only importing fabric from other TPP countries.

We still do not know how the implementation of yarn forward will occur in the TPP, but if the rules of origin do not have exemptions for countries like Vietnam and Malaysia, the cost of garments will rise significantly. Vietnam has joined forces with retailers such as Wal-Mart and Target in order to push for more flexibility in the rule. The USTR (United States Trade Representative) appears to be somewhat receptive to these voices and, in its most recent ‘summary of objectives’, it has included a short supply rule. This rule would allow raw materials ‘not commercially available in the United States or other TPP countries to be sourced from non-TPP countries and used in the production of apparel in the TPP region without losing duty preference.

There are 200 fabrics that are listed to be in short supply, because they are not available in TPP countries. Product made from short supply yarns will qualify for TPP. According to Mark: ” the list is totally fixed; there is no flexibility now – they have been negotiating this for three years, and it is locked down solid. “

Yarn forward is a big potential downside to the TPP, and the country most likely to be affected is Vietnam. How so? The majority of products coming from Vietnam now are made from Chinese fabric. Explained Mark, “once TPP passes, there’s going to be a major investment in yarn spinning and knitting fabric in Vietnam – and the Chinese have already anticipated this. So the majority of investment in Vietnam is Chinese anyway! “

Before you say who cares, take a look at the label on the shirt you’re wearing — chances are good that it says, Made in Vietnam.

Implementation

One of the beneficial effects of the TPP is that participating countries will become better markets for American durable goods (the example that comes to mind is American cars into Japan). But this brings up an important thing to know: once the bill gets signed, then comes the implementation. According to Burstein, it will take another two or three years after the agreement is signed for it to take full effect. For example, Vietnam might come in on Day One, but Japan may take a year before implementing the pact. That means that a product made in Vietnam on Day One using a yarn produced in Japan will still be subject to a tariff until Japan has fully implemented the agreement.

There will be a phase-in to TPP, three phases when tariffs get reduced. Initially, there will be some categories of product for which the tariffs will go down to zero. The 2^nd group will have their tariffs phased out over 5 years (20%/year). The third group will have tariffs reduced over the next 10-12 years. According to Mark, “no one has a handle on which categories are in which group – that’s the kind of the stuff that will be negotiated right up until the last minute. “

 And What About China?

There has been speculation in the popular press that America joined the TPP as a countermeasure to China’s dominance in the Asia-Pacific marketplace. Burstein discounts that notion as someone’s opinion, but he nevertheless says that it will be a fact. “I won’t say that America intentionally brought this whole thing together to weaken China “, said the industry expert, “but it will. “

Coming To A Store Near You (Maybe)

The last meeting is scheduled to conclude this week, followed by the public comment period, and presumably followed by a Congressional vote. But that brings us back to the political side of this debate, and why the TPA wrangling was significant. Before the TPA was approved, Congress could change any and all of the negotiated terms of the agreement. What that meant in practical terms was that the other negotiating nations could hold back on certain concessions knowing that Congress would tinker with the deal. With TPA, all the cards are on the table, and Congress can only vote the agreement up or down.

But whether or not the agreement is voted on will affect the Obama legacy. Because of the upcoming American elections, the current U.S. Administration has only one shot at getting that up-or-down vote before Congressional members start to worry about their own electability. So, if the vote doesn’t happen in the November/December timeframe, all bets are off. The next vote probably wouldn’t occur until after the U.S. elections in a lame-duck Congress.