China Set to Lose Out to Vietnam as U.S. TPP Deal Looms

February 6, 2013 Posted by China Briefing Reading Time: 3 minutes

Feb. 6 – The Trans-Pacific Partnership trade bloc that the United States has entered into with 10 nations and of which China has been highly critical, is set to bite into China’s textiles industry later this year when U.S.-Vietnamese negotiations over tariffs and tax rates are concluded. The TPP – which includes the United States, Vietnam, Japan, Australia, Chile, Singapore, New Zealand, Brunei, Peru, and Malaysia – specifically excludes China as the United States wishes to assist with the development of other manufacturing markets as alternatives to China.

In Vietnam’s case, for example, the TPP seeks to encourage an upgrading of many Vietnamese manufactured products which currently fail to meet U.S. standards. In Vietnam, 80 percent of the country’s textile fabrics fail to meet U.S. quality standards and are forbidden for export to America. One expected impact of the TPP Agreement is increased investment by the United States into technology and manufacturing knowhow, which will assist Vietnamese companies upgrade and meet international quality standards. That opens the American market more fully to Vietnamese companies, which have until now traditionally concentrated on supplying lower quality goods to China, whose own quality control standards are notoriously lower.

As numerous countries – including many of China’s neighbors – seem increasingly wary of allowing their China trade to overly dominate their political leverage with Beijing, alternatives for upgrading manufacturing and supply chain facilities elsewhere are gaining ground. This has particular resonance when viewed against the backdrop of what is increasingly being perceived as a systematic failure by Chinese suppliers to consistently deliver both safe and quality products to international standards. Alternative supply chains are being developed.

Another signal that Vietnam is getting serious about hedging its own trade deficit with China and moving to attract more foreign investment in manufacturing is the expected introduction of a lower corporate income tax rate than China has – with the Vietnamese Ministry of Finance recently drafting legislation that would reduce the country’s CIT rate to 23 percent from Jan. 1, 2014 compared to China’s current 25 percent rate.

This, together with still lower tax rates and VAT exemptions in Vietnam’s export processing zones, can be expected to provide serious competition for export-driven manufacturing goods for delivery to North American markets; an economic loss of some significance to China. The Vietnamese-U.S. TPP Agreement is expected to be fully negotiated and signed off later this year, a situation that will increase competition between Chinese manufacturers and Vietnamese manufacturers in the textiles industry, many of which are foreign-funded. This will also likely trigger increased foreign investment into Vietnam’s export processing zones rather than what has until now been almost exclusively a China play as concerns exports to the U.S. market.

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