Vietnamese products to no longer rely on one market

The European Parliament has ratified the Vietnam - EU Free Trade Agreement (EVFTA) and the Vietnam - EU Investment Protection Agreement (EVIPA). How will Vietnam’s import-export industry move, and what do enterprises need to do to get good results?

A garment enterprise in District 7 in Ho Chi Minh City. (Photo: SGGP)

A garment enterprise in District 7 in Ho Chi Minh City. (Photo: SGGP)

According to Minister Tran Tuan Anh of the Ministry of Industry and Trade, last year, export turnover of Vietnam to the EU reached US$41.48 billion and imports from the EU touched $14.91 billion. Therefore, the agreement will help the country to promote export, diversify markets, and gain higher value-added via setting up new value chains.

Amid the context that the political situation and the global and regional security have been changing rapidly and happening complicatedly, the EVFTA will help Vietnam to improve its internal capacity to cope with difficulties, at the same time, strengthen its position to implement its independent, autonomous foreign policy, multilateralization, diversification, along with fortifying and intensifying national defense and security. The EVFTA is an opportunity for Vietnam to increase market share in the European market and the condition for the country to improve competitiveness. Accordingly, 85 percent of tax lines of Vietnam will be reduced to zero percent right after the agreement takes effect and after seven years, 99 percent of tax lines will be removed. The EVFTA is a big opportunity for Vietnam to open the doors to the EU market, especially for enterprises that export agricultural products, namely dragon fruit, mango, rambutan, pomelo, and durian.  

Amid the context that accessing Chinese market has been facing several difficulties due to complicate developments of the Covid-19 epidemic, the newly-ratified EVFTA will open a big opportunity for Vietnamese enterprises to enter the potential market with a population of more than 500 million people and a gross domestic product of around $18 trillion, reducing the dependence on Chinese market. Strong market-opening commitments from the EVFTA will definitely increase the competitiveness of Vietnamese goods in terms of price when importing to this important market, helping to strengthen the trade relations between Vietnam and the EU, and expanding more markets for Vietnam’s export products, said Minister Tran Tuan Anh.
However, Minister Tran Tuan Anh admitted that Vietnamese enterprises will also encounter various challenges as the EU is the most choosy market in the world. Passing the tariff barriers does not mean that Vietnamese goods and services will be accepted by the EU market. The EU has many regulations not only relating to the product standards but also to the production process of that product. Or requirements on labor and environmental protection are the strictest in the world. Therefore, Vietnam’s associations and enterprises must constantly strive to be able to overcome challenges and exploit the opportunity brought by the agreement. He said that Vietnam needs to improve the quality of the agricultural sector, ensuring traceability at the request of the EU.

Large playground for garment and textile industry

According to the SSI Securities Company, the EVFTA is expected to expand the export of garment and textile products of Vietnam to the EU, the second largest market of Vietnamese products. Last year, the EU imported $4.4 billion worth of garment, textile products of Vietnam, an increase of 2.2 percent compared to the previous year. Garment products accounted for roughly 10 percent of the total imports of the EU from Vietnam.

Vietnam receives benefit from the Generalized Scheme of Preferences (GSP) of the EU for products coming to the EU from vulnerable developing countries with the preferential import tariff of 9 percent for some limited tax lines. After the EVFTA becomes effective, the most-favored-nation (MFN) tariff will automatically replace the tariff under the GSP. This means that in the first two years, most domestically-made garment products will not receive any benefit from the EVFTA, because the MFN tariff for these products is higher than the GSP tariff of 9 percent. Particularly, most Vietnamese products exported to the EU will see the export tariffs gradually being eliminated from the MFN tariffs from 12 percent to zero percent in three to seven years after the EVFTA takes effect. The products that will receive immediate tax reduction are those that are not Vietnam's main export products to the EU like yarn.

According to the rules of origin in the EVFTA, fabric materials used in garment production must originate from Vietnam or the EU, and all the processes must be done in Vietnam. Garment products made in Vietnam from fabric materials produced in South Korea are also qualified to receive tariff exemption. However, more than 60 percent of fabrics imported into Vietnam are from China and Taiwan, whose prices are much lower than those imported from South Korea. This makes Vietnamese enterprises face many obstacles in taking advantage of the preferential tariffs.

According to SSI, in fact, just a few Vietnamese enterprises are able to fully enjoy the benefit from the EVFTA due to the rules of origin. Among domestically-listed yarn manufacturing enterprises, none has the export market share to the EU. In the short term, the garment and textile industry continues to face a shortage of raw materials imported from China due to the Covid-19 outbreak. Many factories in China have extended the closing time since the lunar New Year, causing a delay in fabric production, affecting the export of fabric to Vietnam. As a result, many orders of Vietnamese enterprises failed to fulfill on time, affecting the business performance of most garment enterprises.

Mr. Vu Tien Loc, Chairman of the Vietnam Chamber of Commerce and Industry, said that big opportunity is opened up but competition will also be extremely fierce. In theory, in the sectors where there is direct competition between Vietnamese and European enterprises, the competition under the EVFTA will be more complicated. However, in general, the economic structures of Vietnam and European countries are complementary and supportive of each other so there is less direct competition. The cutthroat competition will happen in some fields that Vietnamese enterprises remain weak while European counterparts are strong, including logistics, and animal husbandry. However, even as for these industries, Vietnamese enterprises should not worry as market-opening commitments in the agreement are moderate with a long enough planning, accommodated to the rise of domestic enterprises. Vietnam’s highly-competitive industries are currently non-subsidized ones, engaging in competition, openness, and integration.

According to Ph.D. Nguyen Thi Thu Trang, Director of WTO and International Trade Center, realizing opportunity from free trade agreements is always a difficult problem for Vietnam. For enterprises, it is essential for them to comprehend the commitments to take appropriate actions to make use of the opportunity and improve the capacity of enterprises to strengthen competitiveness. To do these two things, the activeness of enterprises the prerequisite.

By Ngoc Quang, Van Phuc – Translated by Thanh Nha

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