MAJOR RESEARCH PAPER TOPIC THE IMPACT OF EVFTA ON VIETNAM’S GARMENT INDUSTRY Hanoi 2022 TABLE OF CONTENT ABBREVIATIONS 3 INTRODUCTION 4 I EVFTA AND ITS IMPACT ON VIETNAM’ S ECONOMY 5 The concept of a.
MAJOR RESEARCH PAPER TOPIC :THE IMPACT OF EVFTA ON VIETNAM’S GARMENT INDUSTRY Hanoi - 2022 TABLE OF CONTENT ABBREVIATIONS FTA Free Trade Agreement WTO World Trade Organization PTA Preferential Trade Agreements GSP EVFTA CPTPP Generalized System of Preferences EU Vietnam Free Trade Agreements Comprehensive and Progressive Agreement for Trans-Pacific Partnership EU European Union FDI Foreign Direct Investment GSP Generalized System of Preferences INTRODUCTION The EU - Vietnam Free Trade Agreement, effective from August 2020, promises to be the engine for growth of multiple industries, among which textile and garment, pharmaceuticals, food and beverage, as well as automotive are expected to enjoy greater advantages thanks to liberalized tariff and non-tariff barriers Nevertheless, such preferences are only granted if manufacturers are able to fulfill the standards and requirements set out by the EU and the Vietnamese governments The garment industry has been a major export industry of Vietnam since it opened the economy in the mid-1980s Both EU and TPP contracting parties are key export markets, accounting for more than two thirds of Vietnam’s annual textile and garment exports By signing the TPP and EVFTA, Vietnam will have greater access to expand its textile and garment exports to these traditional markets However, textile and 3 garment enterprises cannot enjoy duty preferences automatically, unless their products are qualified as “originating” under the agreements’ rules of origin Strategic investment promotion, administration procedures, and local enterprises’ capacity building require further improvements, to take advantage of the opportunities and create more added value in the textile and garment industry I EVFTA AND ITS IMPACT ON VIETNAM’S ECONOMY The concept and content of a free trade agreement Free Trade Agreement (FTA) is understood as economic cooperation agreements signed between two or more members in order to remove barriers to most trade activities while promoting exchange trade between member countries Trade barriers can be in the form of tariffs, import quotas, other non-tariff barriers such as technical standards, sanitary and phytosanitary standards, etc Currently, there are many different terms used such as Economic Partnership Agreement, Regional Trade Agreement, but if the nature of the agreements are towards freedom, trade (including removing barriers and promoting trade), are understood as FTAs However, FTAs are different from WTO Agreements, bilateral trade and investment agreements between countries, or Preferential Trade 4 Agreements (PTA) Specifically, WTO Agreements often include commitments in specific areas of trade such as goods, services, intellectual property, investment, etc towards unifying common rules that create the foundation for trade globally, and has only stopped at reducing trade barriers Compared with the WTO Agreements, the FTAs have a higher degree of liberalization, aimed at not only reducing, but completely eliminating barriers to trade Meanwhile, unlike FTAs, bilateral investment trade agreements (for example, the Agreement on Promotion and Protection of Bilateral Investment, Agreement on Mutual Support and Cooperation in Customs, etc.) ) only focuses on commitments to create a common framework for investment and trade activities between the two countries, but does not include content on removing trade barriers Preferential Trade Agreements (PTAs) are unilateral trade commitments under which a developed country grants preferential tariff treatment to imports from developing countries, not on a reciprocal basis These agreements include the Generalized System of Preferences (GSP) There are pros and cons to trade agreements By removing tariffs, they lower prices of imports and consumers benefit However, some domestic industries suffer They can't compete with countries that have a lower standard of living As a result, they can go out of business and their employees suffer Trade agreements often force a trade-off between companies and consumers On the other hand, some domestic industries benefit They find new markets for their tariff-free products Those industries grow and hire more workers These trade-offs are the subject of endless debate among economists 5 The content of EVFTA EU-Vietnam Free Trade Agreement (EVFTA) is a new generation FTA between Vietnam and 28 European Union member states EVFTA and Trans-Pacific Partnership (TPP) are two of the largest new generation free trade agreements that Vietnam's largest ever negotiated On December 1st, 2015, the negotiation rounds of EVFTA was officially announced to be concluded, and its official full text was published on February 1st, 2016 On 26 June 2018, EVFTA was divided into two Agreements in terms of trade and investment At the same time, the legal review of Investment Protection Agreement (IPA) and EVFTA’s final text was formally concluded For EVFTA, after ratification, this Agreement has came into force on August 1, 2020 EVFTA is a new generation FTA, with a wide range and high degree of commitment Keys area of commitment in EVFTA include : - Trade in goods : general provision and specific tariff schedules - Rules of origin - Customs and trade facilitation - The Sanitary and Phytosanitary Measures ( SPS) - The Technical Barrier to Trade ( TBT) - Trade Remedies ( TR) - Trade in services - Investment - Competition - State-Owned enterprises - Government procurement - Intellectual properties - Trade and Sustainable Development - Legal - Institutional issues - Collaboration and capacity developement The impact of EVFTA on Vietnam’s economy in general The signing and participation in new generation FTAs will have a great impact on Vietnam's economy through the expansion of import and export markets, accordingly, import and export turnover to partner countries will increase, strengthen consolidate traditional markets, unlock many potential markets on the basis of promoting relations with important economic strategic partners Specifically: - Firstly, promoting export activities: Trade liberalization in general and new generation FTAs in particular have an impact on promoting export activities The provisions in these FTAs force member economies, including Vietnam, to restructure, open up new markets and create attraction for goods In the coming time, when the implementation of tariff reduction under FTAs enters the deep reduction phase, Vietnam's exports are expected to continue to grow strongly due to: The efforts of the ministries, related sectors in striving to achieve the export growth target of 7-8% set by the National Assembly;When the tax rate is reduced, especially for input materials for export production such as: textile raw materials, plastics, corn, rubber ; When the CPTPP and EVFTA Agreements 7 come into effect, it will be the driving force for Vietnam's exports in the coming time - Second, for domestic production: Joining new generation FTAs will make many products used as input materials for domestic production have lower prices, thus, production costs of enterprises will be lower The price of goods will be more competitive than that of imports, boosting domestic production for export The reduction of tariffs will make imported goods from other countries, especially EU countries, into Vietnam more due to low prices, rich and diverse designs, positive impacts on domestic production - Third, for the business environment: The participation in new generation FTAs such as EVFTA, CPTPP on institutional issues, policies and laws behind the border, etc will create favorable conditions and motivational opportunities for change , improve policies and laws towards more transparency, convenience and conformity with international practices New-generation FTAs will help Vietnam further strengthen the state apparatus, in the direction of accelerating administrative reform, enhancing responsibility and discipline of officials, thereby supporting the process of model renewal growth pattern and economic restructuring of Vietnam - Fourth, in terms of attracting foreign investment (FDI): In the new generation FTAs, there are commitments to equal treatment between domestic and foreign investors in the establishment, acquisition, expand, operate, deploy, operate, business That will create opportunities for foreign investors to access the 8 Vietnamese market faster New generation FTAs also have regulations on sustainable development, which help to reduce outdated technologies and promote the development of technologies using renewable and environmentally friendly energy sources These trends bring many benefits to the Vietnamese economy and to Vietnamese businesses II SITUATION OF VIETNAM’S GARMENT INDUSTRY IN EU With an annual import scale of over 250 billion USD of textiles and garments, the EU is an import market largest textile and garment importer in the world, accounting for about 34% of the total value of textile imports of the world market, with an average import growth rate of 3%/year While the export market share of Vietnam's textile and garment industry in the EU market only accounts for about 2.0%, leaving room for the textile industry Vietnam's increase in exports to the EU market after the EVFTA came into effect is huge In fact, the impact of EVFTA on Vietnam's garment exports in the current score is not much EVFTA is effective for garments in the long run, because the process tax reduction takes place according to the roadmap of 5-7 years, and before that time, Vietnamese garments have an advantage when taking advantage of tax incentives from GPS 9 10 Types First quarter of 2020 (million USD) Ratio to the first quarter of 2019 (%) First quarter of 2021 (Million USD ) Ratio to the first quarter of 2020 (%) Trousers 324,99 -11,66 137,54 1,6 T- shirts 242,45 -8,73 120,86 15,07 Jacket 466,79 -14,69 107,55 -11,09 Underwear 91,31 -37,93 54,37 20,17 Shirts 105,01 -15,43 44,79 -9,6 Shorts 66,6 -6,66 48,5 26,02 Swimsuit 40,33 -34,9 29,05 34,4 Children clothes 69,8 -9,53 22,87 6,03 Dress 42,03 -33,66 21,5 -7,56 Gloves 43,13 -9,49 19,19 32,19 Vest 28,31 -4,19 9,8 -29,4 Socks 12,7 4,27 7,84 26,73 Garments 12,3 -25,94 -31,46 Gile 5,89 -11,1 2,44 16,94 10 In recent years, the textile industry in general and Vietnam's garment industry in particular have made significant progress In the 2006-2011 period, our country's textile and garment industry grew at a rate of around 20% per year, export turnover accounted for 15% of the country's export turnover Industrial production value of the textile industry in 2010 increased by 14.5% compared to 2009 The main products increased such as whole yarn increased by 11%, finished silk fabric increased by 8.9%, ready-made clothes up 12.6%/ The impressive development of the textile and garment industry has contributed to making Vietnam one of the nine largest garment exporters among 153 garment exporting countries worldwide Garment is rising and participating in export products with export turnover of over billion USD of Vietnam, An important part of our outstanding development is because we have strongly expanded the export market Especially the strong development of exports to the EU market with export turnover in 2007 skyrocketed to 1.5 billion USD (accounting for 19.2%) 12 12 13 13 Garment export turnover to the EU market increased for consecutive years 2007 and 2008 During this period, the turnover increased sharply and the growth rate was very high However, entering 2009, export turnover dropped sharply to 1869 million USD, equivalent to a decrease of - 8.74% This was the time when the financial crisis began to have a profound effect on the whole world, causing a negative impact on import and export activities of the whole world, including Vietnam However, with the timely adjustment policies of our state, plus the continuous launch of consumer demand stimulus packages by EU countries, along with many other crisis-resolving policies, the growth rate of export turnover has increased significantly had a slight increase of 3.37% reaching USD 1932 million in 2010 CORRELATION BETWEEN VIETNAM'S GARMENT EXPORTS TO EU FROM 2016-2020 2016 2017 2018 2019 2020 The garment turnover to EU 2,79 3,02 3,33 3,48 3,07 Share of export turnover in total export turnover of Vietnam 11,73 11,58 10,93 10,81 10,47 Export structure of the garment industry The export value of garments to the EU increased continuously in the period 2001 - 2006 In 2015, export turnover reached 3.63 billion USD, up 5.3 times from 0.68 billion USD in 2001 2016 , garment export turnover increased by 100 million USD to 3.73 billion usd This steady 14 14 increase is partly due to the fact that apparel is a basic consumer good, which has not been severely affected during the economic crisis During this period, the EU remains the second largest garment export market in Vietnam In the categories of garment products exported to the EU, most of the textile enterprises only focus on easy-to-make products, hot products such as 2-layer or 3-layer jackets, skirts and shirts Especially, jackets always occupy the leading position in the structure of garments exported to the EU As for difficult-to-make products such as casual pants and vests, a small percentage of businesses are invested in technological innovation to be able to meet production requirements However, so far, there have been many positive signs in changing the structure of garment exports The proof is that now jackets only 15 15 account for 33% of total exports instead of 60% in 2007 Fashionable and stylish items are gradually gaining a foothold at 5% III THE IMPACT OF EVFTA ON THE VIETNAM’S GARMENT INDUSTRY The positive impact of EVFTA The EVFTA Agreement, which was approved by the European Parliament on February 12, 2020, is quite important in opening up opportunities to promote exports for the textile and garment industry, especially in the context that the textile and garment industry has been affected There is a significant impact of the US-China trade war over the past year and a half and recently the Covid 19 epidemic It is expected that Vietnam and the EU will complete the ratification process for the Agreement to officially take effect in July 2020 With the EVFTA Agreement, 100% of Vietnam's textile and garment products will be reduced to 0% import tax after up to years from the date of entry into force of the Agreement Specifically, according to statistics of the Ministry of Industry and Trade for textiles, the EU will eliminate tariffs with 77.3% of Vietnam's export turnover after years and the remaining 22.7% of the turnover will be removed quit after years Thus, the tax competitive advantages of competing countries such as Bangladesh, Cambodia, and Pakistan will no longer exist in the near future Cambodia is facing the challenge of officially being excluded from the GSP preferential tariff program from August 2020 and Cambodia's 16 16 textile and garment import tax into the EU will increase again by 12% due to violations of a number of principles on regulatory compliance EU regulations THE DESCRIPTION FOR GARMENT PRODUCT IN EVFTA HS Description 6203 GSP EVFTA being track used suits, vest, jacket, blazer for male 2020 2021 2022 2023 mostly B5 10 A 0 0 stock 62013,19 different garment 6203,31 wool 6203,49 fiber B3 6203,11/ 12 synthetic B7 10,5 7,5 mostly B7 10,5 7,5 B5 10 9,6% 6202 ropes, jacket, blazer for female stock fiber mix 6202,139 synthetic 9,6% Along with the benefits of tariff elimination, the EVFTA with the rule of origin requiring "from fabric" combined with the requirement "from the yarn onwards" of the CPTPP Agreement will continue to promote the formation of a closed production chain from upstream to finished 17 17 garment cutting, increasing added value for the industry and gradually reducing dependence on the import of external raw materials Challenge Faced with the above fact, turning the market is the direction that many textile and garment enterprises are deploying According to the Vietnam Textile and Apparel Association, textile enterprises have switched to manufacturing orders to serve the domestic market The main products are mainly masks, workwear, medical and fast fashion aimed at the low-priced or mid-range segment It is predicted that from now to the end of the year, domestic consumption of garments will increase by about 5%, equivalent to about 200-250 million USD Currently, Vietnam's textile and garment products enter the EU about billion USD/year, equivalent to about 2% of the total import turnover of textiles and garments of the EU market Compared to Vietnam's 6th position in the world in terms of textile and garment exports, the above figure is very modest In order to enjoy the EU's tax incentives, Vietnamese garments must meet RoO requirements, whereby yarns used in garments must originate from the EU and Vietnam, or aggregate from EU countries that have signed FTAs This will be one of the obstacles for Vietnam in meeting RoO requirements because the Vietnamese textile industry is heavily dependent on yarn imports Therefore, although the EVFTA will promote garment exports, the capacity to take advantage of this will be limited if the Vietnamese side cannot meet the demand 18 18 Solution Making good use of the preferential tax rates from the EVFTA, domestic textiles and garments will be able to compete with Bangladeshi textiles Regarding the requirement of fast delivery, in addition to improving logistics capacity, businesses need the authorities to quickly cut administrative procedures, reduce clearance time, especially thoroughly reduce specialized inspection The textile and garment industry needs to actively switch from importing raw materials from countries that have signed FTAs with Vietnam and signed FTAs with the EU to take advantage of cumulative rules of origin In addition, providing specialized, high-tech, multi-detailed textile products or labor, sports and medical protective gear In the longer term,enterprises need to take into account the transformation of production technology, improve management capacity and invest in social and environmental responsibility factors These are necessary directions for the textile and garment industry to have able to sustain itself in the context of the current complicated world economic situation Vietnam needs to actively import textiles and dyeing technologies that not generate industrial wastewater and master these technologies Moreover, textile and fabric dyeing factories need to be planned into large industrial zones instead of developing individually, aiming for 19 19 Vietnam to become a center for supplying high-grade raw materials for the world or at least for the world countries with FTAs with the EU Currently, Vietnam rarely has fairs about raw materials for garment and footwear We need an international exhibition area and trade zones for raw materials, so that suppliers and manufacturers can easily connect with each other, making Vietnam's garment industry effectively and closely linked tight In general, there is a lot of work to be done, but after removing each part completely, I think the future of the industry can be optimistic Prospect of the garment export to EU market Vietnam's garment exports to the EU are very high, more than 21% and much higher than the growth rate of Vietnam's total exports to the EU The EVFTA Agreement's "fabric onward" rule of origin is still a short-term challenge for Vietnam's textile and garment industry The fact that Vietnam's textile and garment industry does not have enough highquality fabrics for export to the EU, buying domestic fabrics with 10% VAT is more expensive than imported fabrics, making tariff reduction benefits not enough to compensate for Competitive price reduction with other countries Assuming the import tax rate is reduced by 1%, export revenue increases by 2% (excluding normal export growth annually), it is 20 20 forecasted that export turnover to the EU in the period 2020-2025 will increase further as follows: THE GARMENT EXPORT PROSPECT IN YEARS Export turnover increased ( million USD) 2020 2021 2022 2023 2024 2025 157 342 527 711 876 1041 Along with the above analysis, in the short term, it is difficult for the EVFTA Agreement to create a strong push for Vietnam's textile and garment industry like the period of joining the WTO or signing the BTA with the US The EVFTA is expected to bring long-term benefits to Vietnam Vietnam's textile and garment industry in increasing its export market share to the EU market, helping to reduce dependence on the US market and limit risks when the US market fluctuates due to the USChina trade conflict The issue of Brexit also needs to be noted because the UK has officially left the EU from January 31, 2020 with the transition period, the deadline is December 31, 2020 The UK is still considered a member of the EVFTA Therefore, from now until the end of the year, assuming the EVFTA comes into effect this year, businesses can still use imported British fabrics for production and still meet the EVFTA rules of origin, but the story after December 31, 2020 is currently unclear, depending on the negotiations between the UK and the EU 21 21 CONCLUSION In general, EVFTA is one of the new-generation FTAs that Vietnam is participating in, bringing strategic benefits through the development of potential trade-investment relations Vietnam's legal system is undergoing positive changes to be compatible with the requirements of the EVFTA However, Vietnam is pursuing the strategy of “easy wins first, difficult tasks later" (equivalent to the western saying “low-hanging fruit”) It is foreseeable that the speed of legislative change (reform) in Vietnam will be slower than EVFTA requires Law enforcement will be high on the agenda The most notable areas include intellectual property, workers' 22 22 rights, state-owned enterprises, and environmental protection/climate change When the entire world is struggling with the COVID-19 pandemic, the supply chain is disrupted as countries lockdown and close borders to prevent the spread of virus Trade turnover between the EU and Vietnam still increased compared to the previous year One year after EVFTA entry into force, Vietnam’s exports earned 39.75 billion USD from the EU market, up 6.2% although the value of its key export products, including telephones and components, garments and textiles, decreased This growth was attributed to the EU’s economic recovery in the second quarter of 2021 At the same time, the tariff reductions helped boost exports of products covered in the EVFTA REFERENCES Sách EVFTA tác động lên kinh tế Việt Nam ( 2020) Cổng thơng tin điện tử Bộ Tài Chính, bảng xuất công nghiệp may mặc Cổng thông tin điện tử Công Thương https://trungtamwto.vn/file/20825/chuyen-san-evfta-voithuong-mai-viet-nam-q1.2021.pdf 23 23 https://investvietnam.gov.vn/en/professional-views.nd/evftaattracts-investors-in-fishery-and-garment-sectors.html https://ec.europa.eu/commission/presscorner/detail/en/IP_20_ 1412 https://www.vietnam-briefing.com/news/evfta-how-willeuropean-vietnamese-investors-benefit.html/ https://www.tradeeconomics.com/wpcontent/uploads/2019/07/Opportunities-and-challenges-forVietnams-Textile-and-garment-exports-in-TPP-and-EUVietnam-FTA-min.pdf https://shenglufashion.com/2020/06/12/eu-vietnam-free-tradeagreement-and-outlook-of-vietnams-apparel-export/ 10 https://baochinhphu.vn/co-hoi-lon-tu-hiep-dinh-evfta-noi-lo- nguyen-lieu-cua-det-may-102277728.htm 11 https://www.vietinbank.vn/sites/sme/viewpdf/1479358003675.p df 12 https://vinatex.com.vn/tac-dong-cua-hiep-dinh-evfta-doi-voi- nganh-det-may-viet-nam/ 13 https://vnanet.vn/vi/anh/anh-thoi-su-trong-nuoc-1014/evfta tac-dong-tich-cuc-cho-nganh-det-may-viet-nam-5587031.html 14 https://mbs.com.vn/en/research-center/market- overview/macro-insights/det-may-viet-nam-mo-rong-thi-phantai-eu/ 15 https://vneconomy.vn/det-may-viet-nam-huong-loi-trong-dai- han-nho-evfta.htm 16 http://www.fpts.com.vn/FileStore2/File/2018/01/11/FPTS- Textiles%20and%20Clothing%20Industry%20ReportDec.2017.pdf 24 24 17 https://www.thebalance.com/free-trade-agreement-types-and- examples-3305897 25 25 ... of total exports instead of 60% in 2007 Fashionable and stylish items are gradually gaining a foothold at 5% III THE IMPACT OF EVFTA ON THE VIETNAM’S GARMENT INDUSTRY The positive impact of EVFTA. .. developement The impact of EVFTA on Vietnam’s economy in general The signing and participation in new generation FTAs will have a great impact on Vietnam's economy through the expansion of import and... further improvements, to take advantage of the opportunities and create more added value in the textile and garment industry I EVFTA AND ITS IMPACT ON VIETNAM’S ECONOMY The concept and content of