Ind-Ra: Free Trade Agreement between 12 Countries May Dent Indian Textile Exports

The Trans-Pacific-Partnership (TPP) a duty free trade agreement between 12 nations may impact the Indian textile and garment export sector negatively and put Indian textile exports of around USD40bn at risk over the medium term, says India Ratings and Research (Ind-Ra). The TPP member nations led by the United States (US) account for 40% of world trade and the deal gives them duty free access to each other, and makes imports from other countries uncompetitive. However the lack of TPP members' backward integration into yarn and fabric will constrain members from taking full benefit and hence limit the negative impact in the short-term. The impact will depend upon how fast these countries are able to set up captive capacities.

This may lead to an overall pricing pressure which will weigh down the garmenters' margins. Ind-Ra currently has an overall Stable Outlook for the Textiles Sector (Link: FY16 Outlook: Textiles).

The key nations out of the 12 countries which India exports textile and apparels to are US, Japan and Canada. The value of India's textile and apparel exports to these three countries stood at USD11.5bn in FY15 which is likely to reduce due to the TPP. India exported USD41.4bn of textiles (including raw cotton) out of which USD18bn was apparels in FY15. US is a key destination for textile and apparel exports, and US import duties range between 15% to 50%, depending upon woven or knit textile, or type of raw material used, which can lead to loss of export sales for India, especially detrimental to companies which are exporting majorly to the US. Companies with superior geographic diversification are better placed.

Amongst Asian peers Vietnam would be a key beneficiary of TPP, while India, China, and Bangladesh would be negatively impacted. Vietnam is the second-largest garment exporter in the world with garment exports worth USD24bn 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. However India has in 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% of global apparel capacity (USD 165bn exports) is not a part of TPP, which is a breather for India. Also, amongst TPP countries, Vietnam is the only key manufacturer of garments, hence capacity to serve the entire demand will be limited.

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.

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 US and Japan are amongst the top ten cotton yarn manufacturers. In 2014, US exported USD13.3bn of textiles to the 11 TPP partners, while imports from TPP countries were USD17.8bn (source: OTEXA, 2015). The deal still needs to be ratified by all 12 nations which may mean delays and risks to passage remain.

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