TPP Miscellaneous: The Yarn Forward Rule

In this article, we explain the Yarn Forward Rule as a case of how in certain cases, the benefits of zero tariffs on exports provided by the TPP are negated because of other imposed rules in certain industries. The Yarn Forward Rule is a rule that forces the textile industries in TPP countries to buy yarn from within the TPP. The rule favours the US yarn industry, and limits TPP countries’ ability to buy cheap yarn (for instance, from China) to make their textiles. As such, the end price in the USA of the zero-tariff Malaysian product is likely to be higher than the taxed products from competing non-TPP countries such as China, which will restrict the expected increase in Malaysian textile and clothing exports to the USA under the TPP.

This series is brought to you by based on a recent NGO briefing on the Trans-Pacific Partnership (TPP) in Malaysia by Ms Sanya Reid Smith, an expert on Trade and Investment Rules. She has been monitoring the Trans-Pacific Partnership Agreement (TPPA) since 2011, and is also the resource expert for Bantah TPPA Malaysia. The entire talk is uploaded on YouTube in a seven part series and can be accessed here; this article is drawn mainly from Part 6 of the talk. The index of the series is attached at the end of the article.

Video starts at 3:53

TPP is only useful for products with high tariffs, e.g. clothing

We are supposed to increase Malaysian exports to other TPP countries, that’s the purpose of a free trade agreement, right? To increase our exports. Remember that all the 12 TPP countries are in the World Trade Organization, which already sets a maximum for their tariffs. It locks the tariffs in. So for the US, its tariffs on imports from Malaysia etc are already locked, on average, at 3%. They cannot go above that. In the TPP the 3% will go to zero, but to get to zero you need to prove that this is made in Malaysia, and the cost of doing that goes back up to 5%.

So, the TPP is only really useful for the tariff peaks, the few things that have high tariffs left in the US, like clothing. But for clothing, we have the ‘yarn forward rule’. For clothing, the US says that, to prove this shirt is made in Malaysia, the thread onwards, the benang, from the benang onwards, must be from a TPP country. And this is, basically, to artificially support their benang industry, because it’s expensive, it’s dying, and nobody wants to buy their yarn.

TPP countries have to buy costlier US thread

In Malaysia, like most countries, we import the yarn from China. It’s cheaper. So today, the textile and clothing factories in Malaysia import the thread, the benang, from China, sew it here, send it to the US, with some high tariff, I don’t know what it is, 20% or something. In the TPP, to get the tariff to zero, you have to buy the benang, the thread, from some TPP country. But, for this benang industry, you have to have a big population, to have economies of scale: cotton, rayon, polyester, nylon, silk… Basically, the only country in the TPP with a big enough population for a yarn industry is the US.

So, their rule says: you must buy the US thread, which is more expensive, import it to Malaysia, sew it here into a shirt, send it back to the US, to get the zero tariff. But, if you do that, you are more expensive than the Chinese shirt made in China with Chinese yarn, even though tariffs have to be paid on the Chinese shirt entering the US. They start with the thread that is cheaper, so they are cheaper than the Malaysian one. So even the Vietnamese Chamber of Commerce and Industry, like the Federation of Malaysian Manufacturers (FMM) in Vietnam, said that with this rule, the yarn forward rule, that you must use the benang from America, they get nothing from the TPP.

As a result: yarn exports will not increase

Because you’re supposed to be able to export cheap textiles and clothing, but if you start with the more expensive US thread, you cannot increase your exports anyway. So Vietnam is a cheaper textile manufacturer than Malaysia, right? Lower costs of production, lower wages. So if they can’t make it, how can Malaysia? You also cannot gain from that sector. So because of rules like that, even the PricewaterhouseCoopers and the United Nations don’t expect Malaysia’s exports to increase by much in the TPP.

Everybody is already in the WTO, and the US is already locked at the WTO at an average of three percent tariffs, the maximum the US can impose. So even if Malaysia doesn’t join the TPP, the US cannot raise its tariffs above 3 percent on average on Malaysian products.


Index of the Series

This series contains 20 articles on the TPP, and can be read in any order:

Transcriptions are kept chiefly ad verbatim, with some minor edits for readability. The text has also been checked by Ms Smith for accuracy.

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