Despite being the biggest beneficiary of the EVFTA, garment enterprises in Vietnam still encounter many challenges while seeking perks from the EVFTA.
The upcoming EVFTA has created duel motives for garment enterprises in Vietnam. Accordingly, the content of the attached commitment is the basis for implementing the terms of expanding Vietnam’s textile and garment exports to the EU, which is the second-largest market for Vietnamese products.
Lacking sources of materials
The EFVTA is expected to boost Vietnam’s export turnover of textiles and garments to the EU, constituting up to about 60% by 2025 compared to the time without FTA.
However, in the context of post Covid-19 pandemic, the pace of global economic recovery is sluggish. The problem not only lies in the difficult process of importing raw materials yet the bigger one is the greatly reduced purchasing power of import markets (of up to 50% in the winter-spring 2020 – 2021). Therefore, garment enterprises will face the serious problem of lacking orders, leading to a shortage of jobs for Vietnamese workers. The warning period falls between October 2020 and April 2021.
Although most businesses expect orders to recover in the second half of 2020, the situation totally depends on the recovery of the world economic market. Sharing with the Business Forum, Mr. Nguyen Xuan Duong – Chairman of directors of Hung Yen Garment Joint Stock Corporation implied that although the EVFTA had been put into effect since August 2020, Vietnam’s textile and garment industry had not yet reaped the benefits of the agreement. There are even some product lines that have higher tax rates than the current tax rate, which may then decrease. In addition, only the fabric-based product lines are qualified to reap preferential tax rates while raw materials for garment exports are mainly imported from China.
As China is the market supplying raw materials for Vietnam’s garment industry with the most competitive quantities, quality and prices, Vietnam’s garment industry could only benefit from the agreement when the government has an exact plan of investment into the dyeing and textile sector apart from finishing each step to gradually replace sources of imported materials.
Regarding Rules of Origin, raw materials imported from Korea acceptable yet infeasible as the price of Korean cloth (most items) is much higher than that of China.
The tax reduction in the first 3 years (into the EU) is not adequate to compensate for the discrepancy in fabric prices between these two markets. Thus, the problem of increasing the amount of fabrics imported from Korea to Vietnam for export to Europe is not noticeable. Even the number of businesses adopting this is very rare.
Mr. Duong said: “Currently, the export rate of Hung Yen Garment Corporation into Europe constitutes approximately 20% of the total annual turnover (about US $ 15 million). After the EVFTA agreement, it is difficult to increase this rate which otherwise will certainly be decreased as the buying power of this market has been reported to significantly decrease”.
Sharing the same view, Mr. Le Tien Truong, General Director of Vietnam National Textile and Garment Group (Vinatex), estimated that the global aggregate demand for textile and apparel by 2020 will still decrease by 20-25%. The slow recovery process is directly proportional to the rate of employment of Americans and the EU.
According to Mr. Truong, economic situations, perceptions, beliefs and attitudes will be the key factors to the recovery process of consumer demand in this market.
Requiring practical solutions
According to the leaders of the Ministry of Industry and Trade, the expansion of export markets to Europe has a significant meaning as it reduces the dependence of Vietnam trade on the sole market.
However, it is necessary to ensure careful preparations, specific planning and thorough understanding of the regulations that the EVFTA requires such as product standards and the needs of consumers in each market. Commodities that want preferential tariff treatment must entail raw materials of a certain percentage of internal content (e.g. materials originating in the EU or Vietnam). This is a problem for businesses in Vietnam today.
While suggesting solutions to this issue, Chairman of the Vietnam Textile and Apparel Association, Mr. Vu Duc Giang, also put emphasis on encouraging the development of the textile industrial zones with modern wastewater treatment, so that the process of dying – sewing – completing products would be invested. This contributes to global supply and reducing import dependency. Only when being able to solve the material problem can garment enterprises in Vietnam can take full advantage of the incentives from the EVFTA and other Trade Agreements.
Therefore, the EVFTA not only brings tariff benefits to businesses but it also motivates Vietnam’s garment industry to soon found a practical basis to develop into a sustainable economic industry, thus being autonomous with a closed-loop manufacturing.
When assessing the ability of the upcoming period, with regards to Mr. Duong’s sharing, if enterprises want to integrate into the global market, they need to be outstanding in the domestic market beforehand. What does the government need to do to support businesses, especially during the hard time of economic recovery after the pandemic Covid-19?
On behalf of businesses, Mr. Duong proposed that the government should implement urgent solutions to support businesses at this time, for example, allowing exemption from social insurance and trade union fee for 1-2 years for enterprises, providing support for the unemployed and financially supporting vocational education. Moreover, he also suggested offering low-interest loans to businesses to invest in renewing equipment, postponing the decision to raise wages in 2020 and the following years, reducing corporate income tax for businesses and deferring all taxes and fees in 2020.