A May 28th report from Cowen and Company Equity Research includes interesting perspective from Edward Hertzman, the CEO of the Sourcing Journal, and discusses the emerging Trans-Pacific Partnership, what it could mean for global businesses and timelines for the possible approval and implementation of the trade deal.
Understanding TPP and TPA
The Trans-Pacific Partnership (TPP) is a landmark free-trade deal involving twelve Pacific rim countries and the U.S. that has been under negotiation for several years. Trade Promotion Authority (TPA) is legislation anticipated to be voted on in the House of Representatives in mid-to-late June that would allow the president to submit legislation to implement the trade agreement that Congress cannot amend and must be quickly voted on. If TPA is passed by Congress by July, the details of the TPP could be finalized by early September.
President Obama argues that Congress must pass the TPA in order to convince the leaders of other nations to make final compromises and sign on to the Trans-Pacific Partnership as they are currently refusing to do so knowing any deal they reach can be overridden by the U.S. Congress.
More on the Trans-Pacific Partnership
In the report, Cowen analysts John Kernan and team note that “outperform rated Nike and Hanesbrands both maintain significant sourcing operations in Vietnam and could see significant FOB cost benefits (duties can be as high as 20%). NKE manufactures 43% of their footwear in Vietnam and the country is one of NKE’s top seven apparel manufacturing countries.”
They also highlight that duty-free status will only be given to items made from yarn produced one of the 12 Trans-Pacific Partnership member countries, but note that none of them have the capability to produce large amounts of fabric. In addition, merchandise margins are anticipated to remain under pressure, as factory margins are very tight and it will be a major challenge to reduce costs much further despite continuing pressure from brands and retailers for more unit cost reductions.