A trade war, with ever increasing importance to U.S. cotton growers and U.S. textile workers continues to brew between Vietnam and U.S. textile industries.

The 15^th round of the ongoing cotton talks in the Trans-Pacific Partnership trade agreement hearings ended this past fall with much the same results — Vietnam walking out on the negotiations.

The two sides are bitterly divided between two basic marketing principles: The Single Transformation Rule and the Yarn Forward Rule.

U.S. cotton growers are caught squarely in the middle of the fight.

The U.S. textile industry, U.S. cotton grower’s most loyal customer, favors the Yarn Forward Rule. Vietnam, one of the fastest growing customers of U.S. grown cotton, and China, by far the largest volume buyer of U.S. cotton, support the Single Transformation Rule.

Vietnam is a partner in the Trans-Pacific Partnership talks, but China is not. However, some contend China would be the big winner should the Yarn Forward Rule of Origin loses out in the ongoing negotiations.

China is the largest buyer of U.S. cotton, comprising 42 percent of total export cotton sales last year.

Vietnam was the fifth largest buyer of U.S. cotton last year, with annual purchases near 500,000 bales. The country’s jump from seventh to fifth among U.S. cotton importers makes Vietnam the fastest growing purchaser of U.S. grown cotton.

China typically buys 5-6 million bales of U.S. grown cotton, with Turkey and Mexico combining to account for about 25 percent of export sales. Pakistan and Vietnam each make up about five percent of total exports.

In a report in early February, the Vietnamese Minister for Industry and Trade noted that his country’s export of apparel and textile goods rose to $1.05 billion dollars last year.

The minister termed the increase in production an optimistic sign of Vietnamese economic growth. However, of most concern to U.S. cotton growers, he also urged textile and clothing manufacturers to minimize dependence on foreign import of raw cotton and invest in domestic cotton production.

Definition of rule

The Yarn Forward Rule of Origin, usually called Yarn Forward Rule means that all products in a garment from the yarn stage forward must be made in one of the countries that is party to the agreement for trade with other countries.

For example in the Central American Free Trade Agreement (CAFTA), the Yarn Forward Rule means the yarn, fabric, sewing thread and the final garment itself must be made in the region, either in the United States or one of the six Caribbean or Central American countries that is party to the agreement.

If products meet these requirements, they can be traded tariff-free in member countries.

The Single Transformation rule would allow fibers and fabric from different sources to be used in finished goods.

Already there are numerous exceptions to the Yarn Forward Rule in CAFTA and NAFTA trade agreements, but allowing for components of finished goods to come from countries, like Vietnam, with lower labor wages, would mean an end to growth of the U.S. textile industry, some contend.

Resurgence in the U.S. textile industry in recent years has pushed U.S. purchases of domestic cotton to a recent high of 3.5 million bales last year. If the Yarn Forward Rule continues to be deciding factor on tariff free trading, U.S. textile officials contend domestic use of U.S. cotton will continue to grow.

Cass Johnson, president of the National Council of Textile Organizations, says the Single Transformation Rule maximizes opportunities for lower wage apparel jobs.

This would provide an incentive for burgeoning textile plants in the U.S. to move operations to countries with lower wages for textile workers, hence ending the upward trend in U.S. cotton usage.

Speaking at the recent annual meeting of the Southern Cotton Growers Association and Southeast Cotton Ginners Association, Andy Warlick, President and CEO of North Carolina-based Parkdale Mills, points out the average wage of textile workers in Vietnam is only 70 cents an hour.

Among the top Asian textile exporting countries, China has the highest average wages for textile workers, at $3.90 per hour.

“If the Single Transformation Rule stands in the Trans-Pacific Partnership trade negotiations, as the Vietnamese want, this would cut domestic use of cotton back to about two million bales, or about half of projected future U.S. mill consumption of cotton,” Warlick says.

The Trans-Pacific Partnership Agreement (TPP) is a proposed regional free trade agreement

(FTA) currently under negotiation among 11 Pacific Rim countries, includes the United States, Australia, Brunei, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. Initiated under President George W. Bush, the concept has wide support, but also growing opposition in the U.S. Congress.

Greatest concern to growers

Perhaps of greatest concern to U.S. cotton growers in the noticeable absence of China in the TPP.

There is some concern that ratification of the agreement may further pit growing Asian economies, like Vietnam, in direct competition with China, which could force stricter economic trade policies that would hurt business relations with China, which is the largest buyer of U.S. cotton.

Warlick stressed to the more than 200 cotton growers, ginners and cotton industry leaders in the audience that 100 percent of the cotton used in U.S. textile mills is bought from U.S. cotton growers. We have been for a long time and remain your most loyal and dependable customers, he adds.

U.S. textile mills bought about 3.5 million bales of U.S. cotton last year. By comparison, China bought more than five million bales of U.S. grown cotton, or about 42 percent of all domestic cotton bought by foreign buyers.

Johnson notes the Yarn Forward Rule allows the U.S. textile industry to grow at a slower rate. Continuation of this rule, he says, expands high value textile manufacturing base, plus chemicals, fiber, recycled products and fiber investments. And, it continues to increase the amount of U.S. grown cotton bought by U.S. textile mills.

Indeed, the U.S. textile industry, which once dominated the rural enterprise of the Southeastern U.S., has made a bit of a recovery in recent years.

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U.S. textile output has been growing since 2009 after several years of decline. The value of shipments was $53 billion in 2011, a 4 percent increase over 2010, and total industry value is expected to climb once 2012 figures are added.

Unfortunately not all the businesses with a stake in U.S. cotton production are in support of the Yarn Forward Rule.

Last spring, two letters were sent to U.S. Trade Representative (USTR) Ambassador Ron Kirk. One letter was sent from a bipartisan group of House members and one from a bipartisan group of Senators to President Barack Obama, urging opposing positions on the rule.

In the House, 76 congressmen, led by Trey Gowdy, (R-S.C.), and Larry Kissell, (D-N.C.), and including 35 Republicans and 41 Democrats, sent a letter to Ambassador Kirk urging that strong textile rules be included in the TPP agreement in order to "stimulate private investment, exports and job growth within free trade partnering countries, including the United States.

Senate action

In the Senate, 15 senators — led by Mark Warner, (D-Va.), and including seven Democrats and eight Republicans, sent a letter to President Obama urging more flexible textile and apparel rules and "meaningful market access."

The letter calls the current U.S. position "an overly broad approach" and urges instead "a new approach which reflects the significant value created by American retailers, apparel brands, manufacturers, and importers as well as domestic textile producers.

“Such an approach should include a flexible general rule of origin for apparel that maximizes the incentive to grow U.S. exports, value and jobs in the TPP."

The Textile and Apparel Alliance for the Trans-Pacific Partnership negotiations (TAAT) was formed last year, after Vietnam proposed textile and apparel country of origin rules that would enable its state-owned enterprises to use subsidized inputs produced in China and export the finished goods duty-free to other TPP participants.

The coalition notes that allowing inputs from China in Vietnamese goods would provide China with new, unrestricted access to the U.S. market. It supports textile rules that are based on rules in free trade agreements (FTAs) the United States has negotiated over the last 25 years.

The National Cotton Council, along with a number of other U.S. trade groups, is listed among supporters of the Yarn Forward Rule.

Gary Adams, National Cotton Council vice-president for economics and policy analysis, says, “The National Cotton Council has a long-standing policy of supporting a Yarn Forward Rule of Origin.

“That rule of origin has been the model for free trade agreements entered into by the United States and it is the best approach for insuring that preferential benefits are conveyed to the signatory countries in an agreement.

“Relaxing the Yarn Forward Rule of Origin not only jeopardizes the U.S. textile industry, but also places in jeopardy the substantial cotton and cotton textile trade that occurs with other Western Hemisphere countries.

“A strong rule of origin will be particularly important in negotiations such as the Trans Pacific Partnership, which includes Vietnam — a non-market economy,” Adams says.

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