EVFTA paves the way for Vietnamese clothing to enter the EU market

EVFTA paves the way for Vietnamese clothing to enter the EU market

In the European Union, France is the third largest importer of Vietnamese textiles and clothing, after Germany and the Netherlands. From 2016 to 2020, the average annual growth rate of Vietnam’s textile and apparel exports to Germany and the Netherlands was 1.2% and 3.4%, and that to France was 7%. However, since the outbreak of the Covid-19 epidemic in the two countries in March 2020, Vietnam’s textile and apparel exports to France have fallen off the cliff, and exports in the first seven months of 2020 have fallen by 26.3% year-on-year.

In this context, the implementation of EVFTA will bring positive effects. Specifically, statistics from the General Administration of Customs show that eight months after EVFTA took effect, Vietnam’s textile and apparel exports to France increased by more than 19% compared to the previous period (August 2019 to March 2020).

Similarly, Belgium is Vietnam’s largest export market for footwear in the EU. Eight months after EVFTA came into effect, Vietnam’s footwear exports to Belgium increased by nearly 4% year-on-year which is a significant improvement from the 17.7% drop in the first seven months of 2020. Among them, the export value of commodities whose tax rate immediately dropped to zero after the entry into force of EVFTA has soared. Specifically, in the first quarter of 2021, footwear exports under the HS 640411 code amounted to USD 125.4 million, an increase of 35.3% year-on-year, and footwear under the HS 640590 code amounted to USD 474 trillion, an increase of 904.6% year-on-year. It can be seen that footwear companies exporting to Belgium have already made good use of the opportunities brought by EVFTA. Vietnamese footwear products have a firm foothold in the Belgian market.

Statistics from Eurostat show that in 2020, Vietnam will leapfrog China to become Belgium’s largest footwear exporter, with an export value of 1.02 billion U.S. dollars. It is expected that due to the preferential treatment in EVFTA and the revisiting of consumer demand in this market, Vietnam’s footwear exports to Belgium will continue to grow in the future. According to statistics from Belgium, in March this year, the country’s consumer demand increased by 15.2% year-on-year, of which the sales volume of textiles, clothing and footwear increased by 62%.

Investment in the production of raw and auxiliary materials

In the early stage of EVFTA’s entry into force, the tax rate on textiles and garments exported by Vietnam to the EU was still higher than the 9.6% preferential tax rate of the GSP. Therefore, many companies currently choose the GSP mechanism instead of the tariff mechanism in EVFTA when exporting textiles and clothing to the EU. However, the biggest shortcoming of the GSP mechanism lies in the “growth gate”, which is an obstacle to the expansion of export market share. Specifically, if textile exports to the EU account for more than 14.5% of the total market share, we will not be allowed to enjoy the GSP preferential tax rate for three years.

On the other hand, Vietnam’s main competitors are enjoying superior preferential treatment, such as Bangladesh and Cambodia enjoying duty-free treatment for all products except weapons (Everything but Arms), and Pakistan enjoying the EU’s Super Generalized System of Preferences (GSP) treatment.

However, according to EVFTA, the export tax rate of Vietnamese textiles and clothing will be reduced to zero for at least 7 years after the agreement takes effect. At that time, the comparative advantage of tariffs between countries did not exist. Therefore, experts in the industry believe that EVFTA will bring long-term benefits to the Vietnamese textile and apparel industry, help increase export market share, enrich the market, and reduce risks in the context of turmoil in other export markets due to trade conflicts.

In addition, statistics show that Vietnam’s textiles and clothing accounted for 4.02% of the EU’s market share, and footwear accounted for 7.6%, which means that there is still a lot of room. However, in order to seize the opportunity, Vietnamese companies still have to face many challenges, especially to meet the rules of origin of goods in order to enjoy the preferential tariff treatment in EVFTA.

For the footwear industry, currently 60% of the raw materials used in production are imported from China. At the same time, the development of domestic raw and auxiliary materials is still mainly under appeal and relies on foreign-funded enterprises. The strength of domestic investors is still weak, so few companies are strong enough to invest in the production of raw materials. Similarly, rules of origin are still the biggest challenge for the textile and apparel industry, because the domestic fabric production fails to meet the textile and apparel industry’s export demand for various markets, including the European Union. Therefore, although the export value of textiles and clothing that adopts the European Community Certificate of Origin and enjoys EVFTA preferential treatment has increased, it only accounts for 30% of the total export value, which is not as expected.

The chairman of the Vietnam Textile and Apparel Association (Vitas) Wu Dejiang emphasized that companies should increase investment in the production of raw materials in order to make up for shortages and meet the rules of origin, so as to make better use of the opportunities brought by EVFTA. In addition, this is also a more proactive attitude of enterprises to market turbulence, especially in the current situation where the supply chain is interrupted due to the Covid-19 epidemic.