Imperial Preferences

posted by
on September 11, 2012

[Part One of a Two-Part Series]

Last month I flew to Bangkok, Saigon and Hong Kong to try to get a better understanding of why something called “yarn forward” has been blocking progress in the Trans-Pacific Partnership trade negotiations. The TPP talks presently involve the United States and eight other countries including Singapore, New Zealand and Australia — soon to be a group of eleven nations, with the addition of Canada and Mexico — in the fastest-grown region in the world.

For sure, the term “yarn forward” would not mean much to regular folks. But to a handful of diplomatic insiders and trade junkies who immerse themselves in the arcane jargon of international-trade politics, yarn forward is anything but an obscure phrase. It turns upon America’s reluctance to give Vietnam, and to a lesser extent, Malaysia, enhanced access to U.S. clothing markets — unless the Asians agree to disrupt their current global supply chains to make their clothing from U.S. materials.

The fight over yarn forward rules of origin for textiles and apparel is widely considered to be one of the key reasons that the TPP negotiations, despite a lot of hoopla, have essentially made very little progress since March, 2010. That’s marks the date when American trade negotiators put the concept front-and-center of Washington’s TPP agenda during the TPP’s first round of negotiations, which were held in Melbourne. This Friday, the TPP’s 14th round will conclude in Leesburg, Virginia, The Sept. 6 – 15, 2012 Leesburg meetings, like the others, have been shrouded in near-total secrecy. Once again, about all that outsiders see is the usual diplomatic happy talk about all the “important” meetings that have been held by a lot of important, busy officials, and about all the encouraging “progress” that is being made.

Be skeptical. TPP, remains stuck on President Barack Obama’s stubborn insistence that any deal must include yarn forward rules of origin for textiles and apparel. The White House is also stonewalling demands, again mainly coming from Vietnam, to slash high U.S. tariffs on footwear. The president has essentially ignored the objections from the two most successful members of the American athletic-shoe industry, Nike and Adidas. The industry leaders together employ some 27,000 Americans. They have explained to U.S. trade negotiators that as most of the value in their shoes is created in America — design, marketing, retail, logistics, and so forth — protective tariffs make no sense in a world where the shoes are assembled overseas. But the Massachusetts-based New Balance, a niche player in in the U.S. athletic shoe market, has objected to tariff slashing. While New Balance also benefits from its own Asian supply chains for some 75 percent of its shoes, the company insists that high tariffs are nevertheless helpful to maintaining a handful of NB factories in New England. New Balance pays little or no duties on the components it imports from Asia to keep its U.S. factories humming. Although New Balance employs only about 2,600 American workers — half of them in manufacturing — the smaller company that wraps itself in Buy American sentiments has the business model that President Obama prefers.

I’ll explain the argument over how high shoe tariffs should be in the second part of this series. Part II will also report the telling details on what I learned when visiting apparel- and shoe factories in Vietnam, plus what I learned about how global supply chains work in Bangkok and Hong Kong. But for now, consider the broader political fight over yarn-forward rules for garments.

Simply put, such rules would require TPP member countries which want to export their clothing duty free to other TPP countries to agree to buy their yarn and fabric only from other TPP members. In practice, Vietnam, which is America’s second-largest supplier of clothing, after China, would have to buy American-made yarn and fabric to avoid paying high U.S. duties on imported garments that generally range from 18-36 percent. It’s not that American textile companies can’t set up operations in Vietnam, where their customers are — a few do, successfully. But mostly, the U.S. textile mills are run by insular Good Ole southern boys whose idea of competing in global markets is to basically stay at home, at least as long as they can lobby Uncle Sam to fix the rules in their favor. And in a yarn-forward world, U.S. government officials in Washington, D.C. would tell the Vietnamese et. al. where they could — and couldn’t — source their zippers, their yarn, their linings, their pocketing, denim, cotton, nylon, and so on. It’s a very long list.

Yarn-forward rules of origin for textiles would naturally put non-TPP member countries that produce yarn and fabric — like Thailand, Taiwan, Japan, and especially China — at an economic disadvantage. Does this conflict with the Obama administration’s “tilt” toward forging closer security and economic ties with Asia? Of course. But in this presidential election year, the American TPP negotiators are hardly focused on broader foreign policy goals. Instead they have their eyes on propping up President Obama’s political support in small southern textile-mill towns, which are in decline. Does it make economic sense to force the Vietnamese to buy American cotton and denim, and ship the components across the Pacific to make trousers and blue jeans? Again, of course not. Still, the Obama White House and the president’s top trade negotiator, Ron Kirk, insist (with straight faces) that such yarn-forward rules would be in Vietnam’s best economic interests. The TPP, the president has repeatedly proclaimed, will set the model for how international trade ought to work in the 21st century.

That’s sure not how the Vietnamese see it. From Hanoi’s perspective, yarn forward has a definite deja-vu feel. A little history lesson that the Obama White House has not learned quickly explains why. The yarn-forward concept comes straight out of 19th century imperialism. The British used to call their special deals with former colonial possessions Imperial Preference. The driving idea, whether with sugar, or opium, or cotton, was always focused on one thing: how the colonial possessions could contribute to the welfare of the mother country. One of the main reasons that Napoleon III sent the French navy to take the port of Saigon in 1859 was to force the Vietnamese to open their markets to exports of French textiles.

With such a history, no wonder that Prime Minister Nguyen Tan Dung and his government’s trade negotiators from Hanoi have hardly been enthusiastic about the notion that in the TPP, they should accept the U.S. demands on yarn forward. The Vietnamese communists famously fought first the French colonialists, and then the Americans, to achieve their country’s economic independence. Nobody now in Hanoi or Ho Chi Minh City (formerly Saigon) could relish throwing that away by bowing to America as the new mother country of the rag trade. In Saigon last month, I was repeatedly asked: Is this what we fought for?

Dung presently has enough domestic political problems of his own to deal with. The Politburo in Hanoi is thought to be undergoing an intense behind-the-scenes power struggle that involves the government’s failure to take effective action against economic corruption. While no outsider can really know what’s going on, observers in Saigon believe that Dung’s political survival could be on the line. So imagine how welcome the U.S. trade negotiators now must be with their demands —- advanced in their usual John Wayne style — that Dung cut an economically dicey TPP deal that would restrict trade opportunities for Vietnam, not expand them. While Vietnam may not (yet) be a shining model of democracy, could any leader in Hanoi agree to any proposal that would threaten to send some of 2.5 million workers, many of them young women from poorer parts of Vietnam, who aspire to sew their ways into prosperity —- back to the rice paddies? Obama is asking a lot.

This explains why trade negotiators from Hanoi — patiently keeping their eyes on the main goal of obtaining enhanced market access to the U.S. clothing and footwear markets via tariff-slashing — have repeatedly reminded their American counterparts that trade negotiations are supposed to work both ways. You ask us to further open our markets to U.S. financial services, especially banking, they have been telling U.S. trade officials. You want us to buy more U.S. prime beef and pork, the Vietnamese add. Fine, but why do you Americans refuse to bring us some serious market-opening offers for our exports of clothing and footwear that are of such importance to our economy?Yarn forward, the Vietnamese have (rightly) insisted, simply can’t work in a world where global supply chains are of vital importance to manufacturing. Given the realities of modern global supply chains, the U.S. yarn- forward proposal would limit opportunities to expand trade, not expand them.

Not convinced just by the economic and political logic? The evidence that yarn-forward rules tend to restrict trade flows has been reported by the U.S. Customs and Border Protection Agency. In existing U.S. preferential trade agreements — such as Nafta, the North American Free Trade Agreement, and Cafta, the Central American FTA — only 17 percent of textile and apparel imports have gone through yarn-forward routes. That means that 83 percent of the trade is conducted by manufacturers and importers who prefer just to pay the existing high U.S. tariffs, thus avoiding the nightmarish paperwork burdens associated with oh-so-complex yarn-forward rules.

The Obama administration’s current strident insistence upon bringing yarn-forward rules to the TPP early on caught the eye of Sen. Ron Wyden, a Democrat from Oregon who chairs the Senate Finance subcommittee on international trade. In a September 9, 2011 letter to U.S. Trade Representative Ron Kirk, the senator warned that the administration’s “rigid adherence” to yarn forward threatened to “undermine our larger strategic objectives in the TPP discussions.” A year later, Wyden’s letter looks prescient.

Undeterred, the American negotiators have been playing hardball. The Vietnamese are not negotiating in good faith, U.S. officials – have privately complained to diplomats from other TPP countries. One of those officials who have bad-mouthed the Vietnamese to other TPP negotiators is Gail Strickler, the Obama administration’s chief textile negotiator. But don’t blame just one lower-level official, as Strickler clearly speaks for the administration. U.S. Trade Representative Ron Kirk has asserted that Vietnam is a “small country” that is perhaps not familiar with how modern “high standard” international trade negotiations ought to be run. And when the man who now occupies the Oval Office inside the White House first ran for office in 2008, he promised U.S. textile lobbyists that as president he would support yarn forward in any U.S. trade deal his administration would be involved with. President Obama has at least kept this campaign promise.

Basically, the Obama White House is using what insiders call an isolated “silo” approach to the TPP talks. The ploy is to negotiate issues like yarn forward with individual (always smaller, of course) countries like Vietnam one-on-one, all the better to isolate them. The U.S. negotiating strategy is similar to the divide-and-conquer approach the Chinese have brought to maritime disputes in the South China Sea, where Beijing has aimed at preventing the Association of Southeast Asian Nations from taking a unified stance.

U.S. textile negotiator Strickler is a former executive of a Massachusetts textile firm that is now part of a group of companies that have been bought by Patriarch Partners, a private-equity firm that specializes in distressed asset management. And when negotiator Strickler has been pressing the positions of the National Council of Textile Organizations, which is pressing for yarn-forward rules to prop up the U.S. mills, she is on familiar territory. Strickler is a former board member of the NCTO. In the TPP talks, Strickler has hardly bothered to disguise her disdain for the business plans of such successful luminaries of the American economy like Macy’s, Nordstrom, Levis, Gap, J.C. Penney, Nike, Adidas, Walmart, Target — it’s a long “enemies” list. Strickler declines comment.

To be sure, the targeted companies have been fighting back to protect their bottom lines from the government’s attack. Many of them have been active in opposing yarn forward through the TPP Apparel Coalition. The coalition comprises five trade associations including the National Retail Federation, the United States Association of Importers of Textiles and Apparel, and the American Apparel & Footwear Association. The coalition has been trying to get the Obama administration to understand that there is no valid economic justification for separate rules for the rag trade in the TPP.

“We don’t think a yarn forward rule of origin can facilitate trade in today’s global supply chains,” says TPP coalition consultant Virginia Foote. Foote’s views carry weight in Hanoi, where she now lives after having played a key role in nurturing Vietnam’s economic reforms that have led to its current enhanced trade with the United States, and also that country’s accession to the World Trade Organization.

Undeterred, U.S. negotiator Strickler has been working to split off some of the weaker members of the TPP Apparel Coalition, offering them special carve-outs if they agree to play the game. I learned last month in Southeast Asia that Strickler has managed to cut a deal with one important American clothing manufacturer, Victoria’s Secret. The U.S. negotiator has agreed to a special arrangement for Victoria’s Secret that would protect that company’s global sourcing of materials for its intimate apparel produced in Vietnam. (Victoria’s Secret’s top woman in Saigon, Jocelyn Tran, refused to see me in Vietnam, or to respond to written questions.) But her deal with the U.S. government is clear: while Victoria’s Secret would get a break for its lingerie, undies manufactured by the giant Hanesbrands Inc. in Vietnam would not. Hanes would be put at a competitive disadvantage.

Hanesbrands now looks like the proverbial bird on a telephone wire, it’s wings fluttering nervously, not wanting to fly into the White House arms, but perhaps understandably wondering if cutting it’s own private political deal might be prudent. (A Hanesbrands spokesman did not respond to two e-mails asking if he would care to dispel the impression that his company could be poised to cave to the political pressure.)

Still other TPP coalition member companies have been sending in detailed information to the Obama trade negotiators on how their global sourcing works, product by product.

There are two opposing interpretations of what signals are being sent by companies that have been willing to provide their proprietary manufacturing data to the feds. Are the TPP coalition members giving the U.S. officials evidence on why yarn-forward rules would harm their supply chains? If so, the message has not yet sunk in. Or have at least some U.S. clothing manufacturers and importers given Strickler lists of what they might be able to live with, and what Victoria’s-Secret type of special favors they might be induced to grab for themselves? Outsiders can’t be sure — but Strickler has told other TPP negotiators that she has reason to believe the U.S. industry will, at the end of the day, be brought to heel. After all, that’s what happened in other U.S. preferential trade deals like Nafta and Cafta — even if U.S. retailers and importers now have regrets.

Meanwhile, at least, the Vietnamese TPP negotiators are sending clear signals. Hanoi officials have consistently kept their eyes on their ultimate goal of eliminating the U.S. tariff barriers to their aspirations to expand trade. When you are serious about giving us enhanced access to U.S. markets for shoes and garments, we’ll be willing to talk about giving you Americans more access to our financial and agricultural markets, the negotiators from Hanoi insist. Readers of a certain age will recall how, during the Vietnam war, the Vietnamese — by contrast to the Americans — never negotiated against themselves. And of course, President Obama’s ignorance of elemental Vietnamese history as demonstrated by his demands that Hanoi knuckle under to a 21st Century version of Imperial Preference, suggests to the Vietnamese that some people never learn.

When I was in Southeast Asia last month, I visited factories in Vietnam to see exactly how their operations would be affected in a yarn-forward world. I talked to industry insiders in Thailand about how yarn forward could hurt American manufacturers like Hanesbrands. And in Hong Kong I learned more about how how global apparel supply chains work from some of the most knowledgeable experts in the world — and why governments would be well-advised not to interfere. Stay tuned for the details.

To be continued in Part II