Vietnam may grab up to 17% of Sri Lanka’s clothing export market share to the US over the next decade as a 12-nation global trade deal – which it is part of – is approved by member governments in the next few years, according to a report by Standard Chartered Bank.
Vietnam-made clothing to the US will be 10-14% cheaper than Sri Lankan exports when a new mega Trans-Pacific Partnership (TPP) trade deal between the US and 11 other countries, including Vietnam, is ratified by member countries over the next few years. The TPP countries contribute 40% to global GDP.
The US buys 44% of clothing manufactured in Sri Lanka, amounting to $2.1 billion in 2015. Standard Chartered says Sri Lanka’s clothing exports to the US will grow to $11 billion by 2025 without the TPP, but could lose between 9% and 17% of this to Vietnam with the TPP in effect.
The TPP, which covers goods, services, investments and even opens government procurement, is in the process of being ratified by Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam and the US after nearly a decade of negotiations. Once ratified, the deal will immediately bring down 92% of each member country’s tariffs, now totaling $2 trillion to zero. Sri Lanka’s only two trade agreements with India and Pakistan have only liberalized less than 80% of tariff lines, and both have failed to move beyond trade in goods, services, investments and the movement of people.
Some analysts, however, believe that the loss of Sri Lanka’s clothing export market share in the US to Vietnam will not be that significant because the apparel sector is highly sophisticated and drives more innovation compared to Vietnam. Trade data makes this clear. Vietnam’s apparel exports to the US totaled $9.2 billion in 2014 and Sri Lanka, in comparison, was just under $2 billion; but when comparing the type of clothing, more than three quarter of Sri Lankan clothing exports command a much higher market share than Vietnam.
“In brassieres, Sri Lanka is the second-largest supplier (after China) to both the EU and the US, with a 10% share of both markets. In swimwear, Sri Lanka has 8% of the US market, and ranks third after China and Indonesia,” Standard Chartered Bank said.
To sustain this edge and grow, Sri Lanka will have to constantly move itself up the value chain ahead of Vietnam who will soon gain the level of sophistication Sri Lanka’s apparel industry is now at. Big apparel players here are already looking at the possibility of setting up production facilities in Vietnam to exploit the TTP and Africa to enjoy US trade concessions. The once cut-and-stich apparel industry here is also evolving into a service provider for the global apparel industry, providing design and marketing services to international retailers.
Apart from the TPP, Vietnam earlier this year signed a free trade agreement with the EU, and another is being finalized with Japan; this means it has preferential market access to three of the biggest clothing buyers (the EU, Japan and the US buy 80% of clothing produced in the world). Sri Lanka is hopeful the EU would reinstate GSP Plus trade concessions soon, which will give clothing exports zero-duty access.
China is also emerging as a major buyer of clothing, something Sri Lanka needs to keep in mind when it negotiates a proposed deal with the Asian giant.