Fabric origin a problem for textile firms seeking to benefit from EU trade deal
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With Vietnam not producing enough or competitively priced raw materials for the textile industry, its companies are struggling to fully benefit from the EVFTA. The lack of fabric production in the country means businesses are unable to meet origin requirements to enjoy tax incentives, SSI Securities Corporation said. To do so, they need to use domestically produced fabrics or imports from countries that have free trade deals with the E.U., it added.
But Vietnam depends on China for 60-70 percent of its textile feedstock, and fabrics imported from South Korea account for only 15 percent of the total requirement.
The E.U.-Vietnam Free Trade Agreement, which took effect on August 1, has strict rules of origin for goods exported to the bloc.
Under its provisions, 77.3 percent of Vietnam’s textile exports it will enjoy zero percent tax within the first five years while the rest follow a seven-year roadmap.
The EVFTA is the E.U.’s second trade deal with an ASEAN member country after one with Singapore, and one of the few with a developing country.
It will see Vietnam eliminate 99 percent of its import duties over 10 years and the E.U. doing the same over seven.
Before the deal was signed, Vietnam’s garment and footwear exports to Europe were given preferential treatment under the Generalized System of Preferences (GSP) program, with a 9.6 percent tariff on the former.
For the first two years enterprises can choose to continue to be taxed under the GSP program or EVFTA. From the third year, if a company does not meet the rules of origin as stipulated in the deal, the tariff rate will increase to 12 percent.
The Vietnam National Textile and Garment Group (Vinatex) said the tax incentives under EVFTA are not attractive enough for businesses to switch from Chinese to Vietnamese fabrics since the former are 10-40 percent cheaper and delivered faster due to the scale of production.
China’s textile and dyeing industry has a capacity of 80 billion meters of fabric a year while Vietnam’s is 2.5 billion meters against a demand of eight billion meters.
But SSI believed that in the long run Vietnam needs to develop its own industry and ensure sufficient scale to compete on cost with China.
There are around 6,800 textile and garment businesses in the country and their exports were worth $32.85 billion last year.
Questions & Answers
Q.Why are Vietnamese textile firms struggling to benefit from the EU trade deal?
Why are Vietnamese textile firms struggling to benefit from the EU trade deal?
Vietnamese firms cannot meet origin requirements for tax incentives because the country does not produce enough or competitively priced raw materials. They rely heavily on imports from countries like China, which are not part of the deal's free trade agreements.
Q.What happens if a Vietnamese company cannot meet the rules of origin under the EVFTA after two years?
What happens if a Vietnamese company cannot meet the rules of origin under the EVFTA after two years?
From the third year onwards, if a company fails to meet the deal's rules of origin, the tariff rate applied to their exports will increase to 12 percent. This would make their products less competitive in the EU market.
Q.What challenges do Vietnamese businesses face in switching from Chinese to domestically produced fabrics?
What challenges do Vietnamese businesses face in switching from Chinese to domestically produced fabrics?
Chinese fabrics are 10-40 percent cheaper and delivered faster due to their scale of production. Vietnam's fabric production capacity is significantly lower than its demand, making it difficult to compete on cost and speed.
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