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U.S., Vietnam still far apart on clothing in trade talks

By Doug Palmer

WASHINGTON (Reuters) - U.S. efforts to forge a "21st Century" trade agreement with Vietnam and 10 other countries in the Asia Pacific region are running into problems mired in the past, including a textile trade policy that U.S. industry does not want to give up.

The United States hopes to finish talks on the proposed Trans-Pacific Partnership (TPP) pact by the end of the year, but Vietnam says the sides are nowhere close on its biggest priority: market access for its clothing and footwear exports.

The latest U.S. offer "is really, really difficult for us to accept," Nguyen Vu Tung, deputy chief of mission at Vietnam's embassy in Washington, said on Wednesday during a panel discussion at The Wilson Center, a foreign policy think tank.

Unless the two sides can reach a breakthrough, "I'm really concerned about the prospect of Vietnam to conclude the successful negotiation of TPP," Tung said.

The problem is rooted in decades of tariff protection for the U.S. textile industry, which now employs fewer than 300,000 workers compared to more than 2 million in the 1970s.

While the average U.S. tariff for imported goods is less than 2 percent, it is about 11.1 percent for textile and apparel products, with tariffs on some clothing near 30 percent.

Vietnam, one of the world's largest clothing exporters, wants the United States to phase out those tariffs, just as the United States is pressing Vietnam to eliminate tariffs on U.S. agricultural and manufactured goods.

Washington also wants Vietnam to address a slate of "21st Century" trade concerns. Those include new rules for the trade activities of Vietnam's state-owned enterprises, better protections for U.S. intellectual property, enforceable labor and environmental provisions and more foreign participation in Vietnam's government procurement market.

"There are really difficult things for us to accept, but we go along with that because we see that accepting these difficult conditions ... will help our economy," Tung said.

'YARN FORWARD'

In most U.S. deals dating back to the 1992 North American Free Trade Agreement, Washington has insisted on a strict "yarn forward" rule of origin for clothing imports to ensure that third countries, such as China, do not benefit.

The rule requires clothing to be made from yarn and fabric manufactured in one of the free trade partners to qualify for duty-free treatment under the trade pacts.

U.S. textile producers use the provision to sell billions of dollars of yarn and fabric each year to U.S. free trade partners in Latin America, where it is turned into clothing and sent back to the United States.

They fear without the yarn forward rule, Vietnam will be able to shut down that trade by importing yarn and fabric from China to make clothing to ship duty-free to the United States.

"You pretty much wipe out a significant portion of the textile industry here in and in Central America and Mexico and the Andean region," said Cass Johnson, president of the National Council of Textile Organizations.

New U.S. Trade Representative Mike Froman was pressed on that issue by senators from the textile-producing states during his confirmation hearing earlier this month.

"We have made clear that with regard to textiles we need to have clear rules of origin with yarn forward at its center," Froman told Senator Richard Burr, a North Carolina Republican.

Still, U.S. textile producers remain worried that the United States will dilute the yarn forward rule by offering Vietnam a large number of exemptions from when it is required.

At the last round of TPP talks in Peru, the United States proposed putting 170 items on a "short supply" list, which means they wouldn't be subject to the yarn forward rule, Johnson said.

"That's by far the largest short supply list that's ever been submitted in an FTA and a lot of the products we objected to," Johnson said.

But Vietnam's Tung said the short supply offer was "too small for us to accept" since initial analysis suggests it would only cover about 5 percent of Vietnam's clothing exports.

(Reporting by Doug Palmer; Editing by Eric Walsh)

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