US-led Trans-Pacific-Partnership a worry for Indian textile exports

The Trans-Pacific-Partnership (TPP), a duty free trade agreement between the United States and 11 other nations, may harm the interests of Indian textile and garment sector. Indian textile exports of around $40 billion are at risk over the medium term, says rating agency India Ratings and Research (Ind-Ra).

The key nations out of the 12 countries that India exports textile and apparels to are the US, Japan and Canada. The value of India's textile and apparel exports to these three countries stood at $11.5 billion in 2014/15, which is likely to reduce due to the TPP, Ind-Ra's analysis states.

Amongst Asian peers, Vietnam, a TPP member country, would be the key beneficiary. Vietnam is the second-largest garment exporter in the world with garment exports worth $24 billion in 2014 and would thus be able to increase its textiles export market share strongly to TPP countries by being able to sell at zero duty.

Of India's $41.4 billion worth of textile (including raw cotton) exports in 2014/15, $18 billion was apparel exports. The US is a key destination for textile and apparel exports, and US import duties range between 15 per cent and 50 per cent, depending upon woven or knit textile, or type of raw material used. For the 11 countries that are part of the TPP, this duty could effectively become zero, in a worse-case scenario. This can lead to loss of export sales for India, and would be especially detrimental to companies that are exporting majorly to the US.

Partial protection for the Indian textile exporters would come from the adherence to the "yarn-forward" rule in the pact. Textile and garments produced from yarn/fabric made by a TPP nation will qualify for duty-free status. Lack of sufficient capacities of yarn/fabric may however constrain member countries. This could also trigger Indian and Chinese textile companies to set up backward integration facilities in TPP countries such as Vietnam. The build-up of capacities may happen gradually and in the short term, market share of Indian exporters is likely to decline.

The double whammy for India will come in case these countries set up their own backward integration facilities into yarn and fabric, which will hurt India's exports of yarn and fabric to these countries, and bring down India's share in textile exports.

Among TPP members, only the US and Japan are amongst the top 10 cotton yarn manufacturers. In 2014, the US exported $13.3 billion of textiles to the 11 TPP partners, while imports from TPP countries were $17.8 billion (source: OTEXA, 2015). The deal still needs to be ratified by all 12 nations, which may mean delays and risks to passage remain.

However India has an edge in value-added garmenting, which should remain partly insulated due to the lack of readily available similar capabilities in TPP countries. China, which houses 40 per cent of global apparel capacity ($165 billion exports), is not a part of TPP, which is a breather for India.

The TPP agreement concluded last week is a US-led trade agreement between 12 countries comprising US, Australia, Canada, Japan, Malaysia, Mexico, Peru, Vietnam, Chile, Brunei, Singapore and New Zealand after being in the negotiation stage for almost a decade. The objective of the agreement is to promote the domestic industry and gain duty free access to member nations. Garmenting is already a competitive business, with low entry barriers, rising wage rates and frequent fluctuations in input prices.

Incidentally, textile related products were among the key export segments that showed above average growth prospects during the past four years for India. The Federation of Indian Export Organisations (FIEO) had identified 36 such sectors to be given special focus to arrest the continuous decline of India's overall trade growth.