The recent signing of the Vietnam-European Union (EU) Free Trade Agreement (EVFTA) is expected to open up numerous chances for Vietnam’s garment & textile businesses to boost exports and expand markets.
However, in order to fully tap into the opportunities, enterprises are required to further invest in purchasing modern equipment and improve administration work and quality of products, aiming to enhance their competitiveness.
Expanding market shares
As one of the biggest companies in the southern province of Dong Nai, most of the commodities manufactured by Dong Nai Garment Corporation (Donagamex) are subject to overseas exports, of which the EU market accounts for 30%. According to Donagamex General Director Bui The Kich, EVFTA offers a good opportunity for garment & textile enterprises to integrate extensively into the global supply chain. Notably, when EVFTA comes into effect, businesses are not only entitled to tax incentives but are also favoured to expand business activities and boost exports. However, in order to enhance their competitiveness in the EU market, enterprises are forced to make in-depth investments, especially concerning advanced equipment and technologies, aiming to improve labour productivity and diversify goods models. In fact, Vietnamese garment & textile companies are hoping that the EU market will bring a big boost to each enterprise and the whole sector. At the same time, by accessing EU equipment and technology, Vietnam’s garment & textile industry will be modernised in the future.
Sharing the same view, Deputy General Director of Garmant 10 Corporation – Joint Stock Company (Garco 10) Bach Thang Long said that most of the world’s major garment & textile exporting countries, including China, India, Bangladesh, Myanmar and Cambodia, have yet to sign a trade agreement with the EU. Therefore, this will be a chance for Vietnamese firms to speed up. Currently, the volume of exports to the EU takes up 32% of Garco 10’s total exports. If making good use of the EVFTA incentives, the company will be able to raise the figure by an additional 15%. Nonetheless, the biggest hindrance to Garco 10 and other businesses is to meet the rules of origin of materials stipulated by the deal. If they fail to satisfy, Vietnamese firms will inevitably not benefit from the agreement, and even face numerous difficulties when competing against foreign enterprises.
Cao Huu Hieu, Executive Director of Vietnam National Textile and Garment Group (Vinatex), emphasised that businesses are expecting EVFTA to open up new opportunities for Vietnam, as the country’s market share in the EU still remains modest, only fluctuating at 2%. The EU’s import trends in the last six months show that China is gradually losing its share in this market. Thanks to its preferential tariffs with the EU, Bangladesh is currently the country benefiting the most from the agreement. While waiting for EVFTA to officially take effect, Vietnam’s garment & textile companies need to proactively adjust their production and business strategies and learn to firmly grasp strict requirements when participating in exporting products to the EU market, particularly the issue of rules of origin, in order to enjoy preferential tariffs under the agreement.
Proactively preparing sources of materials
When EVFTA comes into effect, some tariff lines will decrease immediately by 0% or gradually decline according to the roadmap, thus creating opportunities for Vietnam’s garment & textile industry to accelerate exports to the EU market. So far, the average tax rate of garment & textile products has always been around 16%, while some emerging competitors of Vietnam’s garment & textile industry, such as Myanmar and Cambodia, are entitled to a preferential tax rate of 0% because these are underdeveloped countries. As a developing nation, Vietnam is subject to a higher export tariff, making the exploitation of the EU market not as effective as expected. Referring to this issue, Vice Chairman of Vietnam Textile and Apparel Association (Vitas), Truong Van Cam, said the growth rate of Vietnam’s garment & textile industry in recent years has always remained high, at two digits. Regarding 2018 alone, Vietnam’s garment & textile exports to the EU market reached more than US$4.2 billion, only behind the United States (with over US$13 billion). Although considered a moderate exporter to the market, Vietnam’s garment & textile industry has still yet to stand on par with other countries subject to similar tariffs, such as India, China and Bangladesh, on account of their better export planning to the EU. Therefore, when EVFTA takes effect, it will open up many opportunities for the garment & textile industry, especially concerning tariffs. Accordingly, if Vietnam meets the fabric-forward rules of origin, it will enjoy a preferential tariff of 0%. However, the difficulty currently faced by Vietnam’s garment & textile sector is that its fabric sources are depending too much on foreign countries, with import revenues of US$7 billion from China (55%), US$2.1 billion from the Republic of Korea (16%), US$1.6 billion from Taiwan (China), and US$750 million from Japan. According to EVFTA regulations, only fabrics imported from the Republic of Korea to manufacture exports to the EU are recognised to meet the fabric-forward rules of origin and enjoy a tariff of 0%. Meanwhile, fabrics imported from other countries will not be recognised.
Bui Kim Thuy, an economic expert, said that, regarding textile and apparel, EVFTA seems to be less strict than the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), because the EVFTA rules of origin only stipulate from the fabric stage forward. But this still remains a bottleneck of Vietnam’s garment & textile industry as it currently has to import fabrics from non-member markets of EVFTA. However, EVFTA has a more flexible provision allowing the “third party cumulation”. This means if Vietnam and the EU simultaneously have FTAs with a partner, Vietnam is permitted to use inputs from that third party partner and consider them originating. For example, Vietnam and the EU currently have FTAs with the Republic of Korea, so Vietnam can cumulate inputs from the Republic of Korea to enjoy preferential taxes under EVFTA. Thus, in the future, if some ASEAN countries or some FTA partners of Vietnam have FTAs with the EU, Vietnam will have much more markets to import raw materials that satisfy EVFTA’s rules of origin.
Truong Van Cam, Vice Chairman of Vitas, stated that the EU is a very demanding market, with strict requirements on the quality, hygiene and safety of products, as well as on the environmental and labour issues. These will be challenges for businesses. Therefore, Vietnamese firms need to thoroughly learn about EVFTA’s regulations to seize opportunities to boost the production of exports. In addition, cooperation and coordination between large enterprises, both at home and abroad, should be strengthened to manufacture fabrics, with the origin-related requirements being ensured. Next, businesses also need to improve the quality of human resources and apply modern scientific and technological advances to increase productivity, reduce costs and enhance competitiveness. Vinatex Executive Director Cao Huu Hieu affirmed that the EU is not an easily-accessed market because it has many member countries, the orders are relatively small compared to the US orders, the time to change product patterns is relatively close, and customers are quite careful and demanding in the stages of product quality and safety management. However, the EU market’s advantage is that the average import unit price is quite good. In the future, with the benefits from tax cuts, Vietnam’s garment & textile enterprises will definitely be bolder in promoting, exploiting and developing the EU market.
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