Vietnam is on track to become the world’s second-biggest exporter of textiles and clothing this year, but it is too soon to celebrate. 

Most of what the country ships is processed in Vietnam from high value-added but imported textiles. As the country’s bilateral trade surplus with the US balloons, Vietnam will need to move up the value chain by developing homegrown textile manufacturing if it is to diversify into new markets and escape Washington’s ire. 

Fabric of the nation

Textiles and garment manufacturing have been key pillars of the Vietnamese economy since the doi moi economic opening of the early 1990s. The sector has led low-cost rural workers out of the farms and into the factories, helping generate a reliable stream of foreign exchange revenue.

Vietnam last year surpassed Bangladesh, Germany and Italy to become the world’s third-largest single exporter of textiles and clothing, at $36.9bn, just below China and India.

Export values of “made in Vietnam” textiles and clothing expanded more than fourfold during 2007-17, and have increased at an average 15 per cent annually over the past five years, according to the United Nations Conference on Trade and Development (Unctad).

Vietnam is well on track to overtake India this year. Official government statistics show exports grew 16.9 per cent in January-August, twice the speed of the same period last year.

Textiles and clothing are Vietnam’s second-biggest export commodity and the sector is its leading industrial employer. Despite rising labour costs, the sector remains highly labour-intensive, employing 2.7m workers nationwide. That means 5 per cent of the country’s total labour force and 20 per cent of its industrial workforce are engaged in producing textiles and clothing, according to the Vietnam Textile and Apparel Association (Vitas), a government-linked industry group. 

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The sector’s remarkable export performance relative to other countries points to a combination of demographic and geographic advantages, as well as an openness in trade policy that gives Vietnam an edge over its competitors. The prospect of free trade agreements with the EU — expected to be ratified this year — and the original Trans-Pacific Partnership (TPP) led to a jump in foreign investment inflows. About half of the $15.7bn invested in Vietnam’s clothing and textiles sector from overseas since 1998 was invested in the past five years, according to Vitas.

Vietnamese seamstress

Despite the sector’s notable gains, Vietnam still lacks credible textile manufacturing capacity. About 70 to 80 per cent of the fabrics used to make clothing in the country are imported, mainly from China, while clothing production is mostly stuck at the low end of the value chain. This is the “cut, make and trim” phase where design and materials inputs are turned into a finished, packaged product. 

Vietnam’s government statistics bureau estimates that only a third of the value of finished goods from the textiles and clothing sector is generated domestically, with the rest consisting of imported materials. Although this is better than barely 20 per cent in smartphones and electronics, it reflects the limited gains for local enterprises engaged in clothing manufacturing.

While investors are keen to open higher value-added factories to do weaving, knitting and dyeing, provincial governments are reluctant to approve them because of environmental concerns. Despite the promise of economic gains, local authorities worry about breaching national regulations. 

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Localisation needed for export diversification

Ultimately, Vietnam will need to localise production of input materials. Citing recent historical examples such as Guangdong, economists highlight the positive spillover effects that textiles manufacturing can have in spurring industrialisation. In any event, the margins of clothing suppliers at the lower end of the value chain will come under pressure as labour costs rise, forcing change. 

But Vietnam also needs to move up the value chain if it is to diversify into overseas markets. The country currently sends nearly half of all of its textiles and clothing exports to the US. 

For Vietnam, the US-China trade dispute is an opportunity but also a threat. Vietnam is well positioned to take Chinese market share in this sector and the latest round of US tariff actions, affecting $200bn of China’s exports, included some small categories of clothing.

But this also risks increasing Vietnam’s bilateral trade imbalance with the US. Last year, the country was the second-largest exporter of textiles and clothing to the US after China, with 10.2 per cent market share. More importantly, Vietnam’s trade surplus with the US ballooned to $38bn. Trade with China may be the focus of the Trump administration, but Hanoi will not want to risk drawing more attention to the perceived inequality of its bilateral relationship.

Developing internal manufacturing capacity would allow Vietnam to expand into the EU and the markets of the 11 countries that signed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the trade agreement that emerged from the ashes of the TPP after the US withdrew. 

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Both the EU agreement and CPTPP impose strict rules of origin for inputs to qualify for tariff exemption. The rules also include strict environmental standards, something Vietnam’s central government will need to address if it is to respond successfully to local authority concerns about allowing polluting industries on their turf.

The EU is a far bigger market than the US but Vietnam has not even made it into its top five textiles and clothing suppliers. Similarly, CPTPP markets represent vast untapped potential. 

Vietnam’s key advantages mean its position as a global hub for the textiles and clothing sector is reasonably secure. However, reaping the full rewards of this position will require moving up the value chain.

FT Confidential Research is an independent research service from the Financial Times, providing in-depth analysis of and statistical insight into China and south-east Asia. Our team of researchers in these key markets combine findings from our proprietary surveys with on-the-ground research to provide predictive analysis for investors.



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