European Union-Vietnam Free Trade Agreement
Updated: Aug 19, 2020
By SPESA
The new European Union (EU)-Vietnam Free Trade Agreement (EVFTA) went into effect August 1, 2020, eliminating (eventually) almost 99% of customs duties on goods traded between the two sides. In consideration of Vietnam’s development needs, the country has been allowed a 10-year period to eliminate its duties on EU imports; the EU will do it in seven.
The European Commission asserts the agreement will also make doing business in Vietnam easier for European companies, which will now be able to invest and pitch for government contracts in Vietnam with equal chances as their local competitors. This is the most comprehensive trade agreement the EU has concluded with a developing country and includes provisions for intellectual property, sustainable development, and labor rights.
The European Commission also notes that the agreement represents an important milestone in the EU’s engagement with Asia. Vietnam is the EU's second largest trading partner in the Association of Southeast Asian Nations (ASEAN) after Singapore, with which it finalized an FTA last year. Vietnam's main exports to the EU are electronic products, footwear, textiles and clothing, as well as coffee, rice, seafood, and furniture.
While the agreement has largely been promoted as a promising opportunity for the Vietnamese textile and apparel industries, many local companies have been scrambling for the past year preparing to meet the rules of origin standards laid out in the new agreement. To receive duty-free treatment, products must originate “from fabric onwards,” meaning fabrics must be produced in Vietnam, the EU, or within countries that have free trade agreements with both parties such as South Korea. Thus far, Vietnam’s textile and apparel industries have been heavily dependent on imported machinery and raw materials.
Below is an excerpt from a recent Fibre2Fashion article outlining the challenge the industry is facing.
“Many domestic businesses have invested methodically into workshops, machinery and technology to meet the technical standards set by importers.
Despite this, with an export scale of approximately $5 billion per year to the bloc, the issue of how to make the textile and apparel industry meet the origin criteria to qualify for tax reductions remains a challenging issue, according to Vietnamese media reports.
The textile industry has failed to be proactive in sourcing fabrics that qualify for exports to the EU.
Additionally, the purchase of domestic fabrics is subject to 10 percent VAT, meaning that it is more expensive than imported fabrics, ultimately making the benefits of tariff reductions insufficient to offset the selling prices and to compete with items from other nations.”
On the flip-side, the EVFTA promises to offer Vietnamese textile enterprises the chance to import high-quality machinery. And some proponents of the agreements believe it brings an opportunity for restructuring the Vietnamese industry “in the direction in which companies cooperate with each other to build production chains of Yarn - Weaving - Dyeing - Sewing to meet origin standards, ensuring consumption and increasing the competitiveness of Vietnam’s textile and garment products.” This recent Hanoi Times article does a great job explaining some of the additional challenges/bottlenecks facing the industry as well as the opportunities for vertically-integrated supply chains.
Additional Reading:
Pandemic and Trade War Top Concerns for US Fashion Firms - Just-Style “Benefitting from U.S. fashion companies’ reduced sourcing from China, Vietnam and Bangladesh are expected to play a more significant role as primary apparel suppliers for the U.S. market.”
Cambodia May Gain from Shifts in Apparel Manufacturing, Says Fitch Solutions - Khmer Times “According to a recent report from Fitch Solutions, Cambodia, Vietnam and Myanmar are among a few Asian nations set to gain the most from shifts in apparel manufacturing. The report said that along with Bangladesh, a very large apparel producer and exporter, the three countries are able to expand their presence as suppliers to China and increase their market shares in North America and Europe at China’s expense.”