TPP’s Possible Downsides for Vietnam’s Factories

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November 21, 2015.

The Trans-Pacific Partnership (TPP) is supposed to bring more business to Vietnam’s manufacturers, but there is a possible downside to it. It could potentially cause high labor costs and strained production for the nation’s factories. Stanley Szeto, the chief executive of Lever Style, a Hong Kong-based firm that manufactures shirts and pants for brands from Hugo Boss to J. Crew, says he’s “not very excited” about the trade pact because any surge of investment could make it more expensive to manufacture in Vietnam. “Costs will go up and it’ll be harder for everybody to get capacity at factories, and labor (procurement) is going to be more competitive,” says Mr. Szeto. Although the TPP will eliminate tariffs on items such as clothing, contract manufacturers in Vietnam will not experience many of those savings if the pact goes through. This is due to the fact that global brands, and not manufacturers, pay the cost of import duties under a system where the responsibility of the good transfers to the buyer once the products are shipped. The elimination of tariffs thus results in the reduction of costs for brands rather than manufacturers. “Still, manufacturers in Vietnam would benefit from the TPP because global brands will likely choose to source more from the country, boosting volume for factory operations there,” says Adam Sitkoff, executive director of the American Chamber of Commerce in Hanoi, a membership group for U.S. companies.

Louie Nguyen, CFA is the CIO of San Diego-based Soledad Investment Management. Soledad invests qualified clients’ assets in markets around the world, including Vietnam.

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