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UEH UNIVERSITY UEH College of Economics, Law and Gorvernment Faculty of Development Economics EVFTA’s effects on Textile and Garments industry of Vietnam During the national innovation, along with other economic sectors, the garment and textile industry has made a significant contribution to the economic growth, creating jobs, increasing incomes for a large proportion of workers In the context of the current deep globalization, trade liberalization trend has increasingly developed and as an objective result, deep understanding about terms, which have been reached through trade agreement needs to be taken into consideration with formulating cutting-edge technology and finding the solution to adapt with competitive environment of the world’s market Keywords: EVFTA, textile and garment firms, technical barriers Ho Chi Minh City, 22 Novenmber 2021 UEH UNIVERSITY UEH College of Economics, Law and Gorvernment Faculty of Development Economics ASSIGNMENT Subject: International Economics Teacher: Class ID: Student: Batch - Class: Student ID: Ho Chi Minh City, 22 Novenmber 2021 Table of contents INTRODUCTION 1.1 The rationale of the research 1.2 Aims and objectives 1.2.1 Aims of the research 1.2.2 Objectives of the research BACKGROUND 2.1 Impact of FTA on trade 2.2 Circumstances of textile and garment industry in the world 2.3 Overview of Vietnam’s apparel export .7 2.4 Opportunities and challenges TECHNICAL BARRIERS ON TEXTILE AND GARMENT INDUSTRY OF VIETNAM .9 3.1 Definition of technical barriers 3.2 Classification of technical barriers 3.3 Impact of technical barriers on international trade .11 3.4 Measures to overcome the technical barriers to exporting garment and textile 11 CONCLUSION AND IMPLICATIONS 12 REFERENCES 13 LIST OF ACRONYMS 14 INTRODUCTION 1.1 The rationale of the research Liberalization has contributed to the rapid economic growth of the international economy and increased the competitiveness of all business sectors globally In terms of the Textile and Garment industries, it is one of the oldest and largest industries in the world Generally, textile and garments are one of the major export sectors of Vietnam, contributing dramatically to the economic growth of the country Textile is one of the most spearheaded industries in Vietnam, the industry has the second-largest export turnover accounting for 10 – 15% of GDP Given EU-Vietnam free trade agreement (EVFTA) full engagement, this research aims to penetrate the potential effects of EVFTA on Vietnam’s textile exporting to the EU, interpret various tariff liberalization scenarios, carry out appropriate solutions for different drawbacks 1.2 Aims and objectives 1.2.1 Aims of the research Studying the impacts of FTA on Textile and Garments industry of Vietnam citing on different categories Find out solutions for particular issues, to improve Vietnam Textile and Garment production for purpose of exporting to the EU market and increase market share in promising EU market 1.2.2 Objectives of the research To fulfill the aims of the research, the thesis has to perform the following duties: - Analyzing the status of EVFTA and the regulations effect on the Textile and Garment industries - Addressing problems through specific numbers and looking for appropriate solutions that can be used to tackle those obstacles BACKGROUND 2.1 Impact of FTA on trade By creating a more integrated trading area, FTAs eliminate trade barriers on goods between member nations Therefore, the agreement increases trade volume among the member countries through trade creation and diversion effects When the countries have reached a consensus over the FTAs agreement, rules in the contract will be put into practice, usually, reduce the import prices from partners and satisfying domestic demands This is achieved through the facilitation of consumer choices and increasing competition between foreign manufacturers and local producers Generally, the prices of imported commodities will become lower, which leads to a rising level of domestic demand for importing from a particular trading partner Thus, the benefits of tariff changes would be passed on to consumers The trade diversion effect can be explained by the fact that imports of goods from a member within the agreement are going to further increase due to the low tariff It means that trade is diverted from a more efficient exporter towards a less efficient one by the formation of a free trade agreement or a customs union According to Vietnam, there is a piece of very limited information about how specific FTAs would affect Vietnamese textile and garment exports Reports focusing on Vietnam’s textile and garment illustrated that the export of textile products was expected to be increasing significantly after the EU and Vietnam signed EU-Vietnam Free Trade Agreement (EVFTA) The impact of EVFTA on the Vietnamese economy was forecasted that textile and garment trade would be one of the most beneficial sectors as EVFTA comes into force 2.2 Circumstances of textile and garment industry in the world Total demand for textiles in major markets 300 250 200 150 100 50 2015 The USA 2016 EU China 2017 Japan Billion USD Korea 2018 Canada 2019 Others The EU is not only the world's largest textile and clothing importer but also the world's second-largest textile and clothing exporter after China, which accounts for 24% of the world's textile and clothing export sales EU countries import clothing from developing countries and export it to other EU countries As a result, EU textile and garment exports within the EU account for more than 40.1% of the total imports in the market, with about 60% of the imports coming from non-EU countries Among developing countries exporting to the EU, China, Turkey and Bangladesh are the three countries with the biggest export market share to the EU, accounting for nearly 36% of total imports, worthing $100 billion China takes the biggest market share, approximately 20% on the EU market, but in the past years, the double growth rate - CAGR of China's exports to the EU fell by 0.1%, while Bangladesh, Pakistan went up by 10%, Vietnam rose by 9%, especially Cambodia soared nearly 17% Except for China, which is the "dominant" of the industry, other countries such as Bangladesh, Cambodia, and Pakistan have the advantage of import tax incentives over Vietnam when exporting to the EU Bangladesh and Cambodia are exempted from import tax under the EBA program (which stands for Everything but Arm program -Exemption from all commodities except weapons), Pakistan is also exempted from import tax from the GSP program From: Trademap 60 25.00% 55.3 50 19.80% 20.00% 40 15.00% 30 25 20 7.20% 20 10 China Turkey 10.00% 9.00% 11.1 4.00% Bangladesh 7.5 2.70% India Pakistan 6.3 2.30% Vietnam 5.00% 2.20% Campodia 0.00% Billion USD Export turnover Export market share to the EU 2.3 Overview of Vietnam’s apparel export In Vietnam, textile and garment manufacturing is a labor-intensive industry helping create jobs for the society, contribute to the process of economic restructuring moving from agricultural to the industrial economy, and bring foreign currency to Vietnam through the promotion of exports Therefore, it plays an important role in Vietnam's socio-economic development Vietnam's government has concentrated on the development and export orientation of this industry since the industry has been considered as one of Vietnam's key industries This is one of the biggest economic sectors, comprising 4,000 corporations with a turnover of $20 billion a year, standing for 15% of GDP (VITAS, 2016) In 2015, Vietnamese textile products are exported to over 180 countries and territories in the world with total exports revenue of $21.4 billion Export structure: Vietnam’s garments and textile are mainly exported under the form of outsourcing for foreign countries and their materials are mainly imported from other countries In 2013, turnover from the export of garment and textile accounts for over 96% of the total export turnover, in which turnover from the export of outsourced products accounts for 75.3%, and turnover from the export of finished products accounts for 21.2% For export turnover: during 2011 – 2012, garment and textile is the industry gaining high export turnover, only following oil and gas industry Export of garment and textile has been continually expanded and it has become the industry of the highest export growth rate but its growth is mainly on quantity On average, the turnover from the export of garment and textile increases about 20% during this period Export markets: Vietnam’s garments and textile have been exported to 54 markets in the world and Vietnam is currently ranked on the top exporters in the world, the second biggest exporter to the US, the third-biggest exporter to Japan, and the ninth biggest exporter to EU In addition, Vietnam – Europe Free Trade Agreement (EVFTA) is expected to have a positive impact in the long run EVFTA has completed its legal review and undergone the internal approval process of its members, which can be approved as soon as possible in the National Assembly session on June 7, 2019, and take effect after month The EU is the secondlargest export market of Vietnam's textile and garment industry, with 42.5% of tariff lines applied to textile products will be reduced to 0% for a maximum of years as soon as the EVFTA Agreement comes into effect which helps Vietnamese goods become more competitive than Cambodia or Bangladesh The EVFTA agreement is quite important in opening up export promotion opportunities for the textile and garment industry 2.4 Opportunities and challenges By requiring specific manufacturing processes, EVFTA provides opportunities for Vietnam to attract more investment to upstream activities, increasing domestic added value, and strengthening Vietnam’s position in the global textile and garment value chains In the last five years, the textile and garment sector attracted 636 new foreign investment projects, with registered capital of more than USD 8.9 billion Notably, investment in spinning and weaving increased rapidly from 13 projects with 0.4 billion USD in 2011 to 82 projects with 2.1 billion USD in 2015, and total registered capital over the last five years reached 6.3 USD billion, equivalent to 71 percent of the total registered capital in the textile and garment industry In addition, it is also expected that Vietnam’s textile and garment businesses will take this opportunity to restructure their production networks and diversify their material sources, to improve their productivity and competitiveness However, opportunities and challenges are two sides of the same coin The RoO in the EVFTA also brings about several challenges that require the attention of the relevant stakeholders Firstly, the rules are barriers that not all local enterprises can overcome easily since most of them are small and medium-size, engaged only in the cutting/sewing process, and highly dependent upon materials from non-EU sources Secondly, whilst weaving, dyeing, and finishing processes create high added value, they are technology and capital intensive, and also discharge large volumes of wastewater that can be harmful to the environment and people, unless the businesses involved implementing social responsibility policy, installing environmentally-friendly equipment and technologies Thirdly, a larger number of regulations on RoO in these FTAs compared to other FTAs may lead to more complicated administrative procedures to certify origination, leading to further costs for textile and garment exporters TECHNICAL BARRIERS ON TEXTILE AND GARMENT INDUSTRY OF VIETNAM 3.1 Definition of technical barriers Even though there are many definitions of technical barriers, in my point of view, technical barriers can be defined as following: Technical barriers to international trade are technical rules, standards, and measures used by the importing country to observe goods and services of foreign countries if the commodities meet the requirements to enter the markets of importing country 3.2 Classification of technical barriers At this time, there are different ways to classify the technical trade barriers For exporting garment and textile, the technical barriers are classified as technical barriers to exports in general they are: regulations, standards, and measures on product quality, human safety, and health, environment; social responsibility; garment and textile labeling; garment and textile origin… are often too high to be necessary, difficult to comply with for developing countries - Most technical barriers to textiles and garments are based on WTO commitments Nevertheless, some major textile and garment import markets such as the US, EU, Japan have many other technical barriers in the form of separate regulations Accordingly, overcoming technical barriers to textiles and garments is the implementation strategy, solutions to meet the requirements of importing countries, bringing textiles and garments from exporting countries into consumption in importing countries The main types of technical barriers to the textile and garment industry are as follows: - Product quality regulations These are the provisions of quality standards (ISO9000) the code of quality management issued by the International Organization for Standardization (ISO) This code includes the standards that specify the requirements of a quality management system that in order to be certified, enterprises in general and textile and garment enterprises in particular have to apply such as ISO9001/2/3; or ISO9000:2000, and other support standards - Human health and safety protection These measures include regulations on hazardous chemicals in textiles and garments dangerous for the health of consumers Hazardous chemicals include: aromatic amines that cause cancer (related to azo dyes), disperse dyes that cause allergies, heavy metals (cadmium, chromium, lead, mercury, nickel, etc.), organic tin compounds (MBT, TBT, TPhT ), chlorine-containing compounds (chlorine-containing organic loads such as chlorobenzene, chlorotoluene), flame retardants (PBBs, Peta- BDE, octo BDE ), formaldehyde, phthalate (DEHP, DINP ), total lead content in paint and coating surface Products that are considered dangerous substances will be banned from importing into developed countries' markets - Environmental regulations and standards The provisions of environmental protection (ISO14000): these specify the requirements of the environmental management system, with particular attention paid to legal provisions concerning impact and influence on the environment to enable textile and garment enterprises to systemize their environmental policies objectives ISO14000 includes ISO14001 and ISO14004, in which ISO14001 is the requirements for the system, and ISO14004 is the guiding documents for building the system according to those requirements - Social responsibility and regulations and standards Globalization and trade liberalization bring a lot of power to international customers and pose challenges to the role of trade unions and national laws, including a need for a new international legal framework such as the labor standards provisions in free trade agreements - Regulations on labeling of textiles and garments These regulations allow keeping export products safe It is a request for accurate labeling There are many regulations of developed countries on labeling textiles and garments - Regulations on origin of textiles and garments Regulations on origin of textiles and garments of countries, especially developed countries such as the United States, the EU, etc are very complicated, unclear and not transparent, and subject to very great influence from domestic manufacturers of these markets, turning the rule of origin into echnical barriers very difficult to meet for developing and less developed countries The EVFTA has relaxed fabric-forward rules, which require products to use woven fabric in Vietnam, or from the EU, or be of ASEAN or Korean origin (these countries have already signed FTAs with the EU) However, this would not eliminate the challenge for the domestic textile and garment industry, because as mentioned above, it is not spinning but weaving, dyeing and fabric finishing that are the weakest links in Vietnam’s textile and garment industry Normally, textile and garment exports from developing and less developed countries are entitled to Generalized System of Preferences (GSP) 3.3 Impact of technical barriers on international trade Due to their diversity and flexibility, the technical barriers have a great impact scope Most trade activities in the world have to face technical barriers The reality shows that the technical barriers have an impact on both importing countries and exporting countries in both positive and negative manners, on both importers and exporters 3.4 Measures to overcome the technical barriers to exporting garment and textile Overcoming the technical barriers to exporting garment and textile of one country depends on several factors which can be classified into two main groups: domestic and international factors The international factors include: globalization and international economic integration; development of science and technology in the world; globalization and coordination of transgovernment and global policies for a sustainable development The domestic factors are: the national development and IT level; management capacity of the Government; capacity of the enterprises; cooperation among the Government - Enterpriese - Association, international connection and cooperation Overcoming the technical barriers to exporting garments and textile required an effort of the whole society which includes not only the enterprises but also the Government and domestic and international civil society organizations In which, main responsibility and cooperation of relevant parties to overcome the technical barriers can be carried in the following methods: Enterprise is the direct subject to overcome the technical barriers, meeting the technical requirements of the importing markets The Government creates a favorable environment, instructs and supports the enterprises to overcome the technical barriers Association is a bridge connecting the Government and enterprises so that they can work together to overcome the technical barriers to exporting garments and textiles Cooperation between the Government and the enterprise community forms an integral part to overcome the technical barriers imposed by the importing markets In addition, it is required to make use of international cooperation and support to overcome the technical barriers imposed by the importing countries CONCLUSION AND IMPLICATIONS In conclusion, the EVFTA may offer favorable opportunities for Vietnam's textile industry when import duties decline to 0% By highly attracting foreign investment, tremendously promoting the development of textile and market access, using eco-friendly and advanced technology in the production and formulating an efficient supply chain, etc., Vietnam's textile industry may gain benefits from the EVFTA and grow significantly in productive capacity and export turnover in the coming years Regardless of the outstanding change in textile and garment export of Vietnam to the EU, there is tiny attribution of trade creation compared to the size of trade diversion, with $268.6 million for the former and $981.3 million for the latter Although Vietnam textile will get more benefits than non-EVFTA members, it is not due to an effective allocation of resources Because of the vast majority of increases in the EU imports from Vietnam attributable to duty elimination “Therefore, some measures should be implemented to enhance the competitiveness of Vietnam’s textile and garment, to reduce the production cost, to gain competitive advantages for both parties (Vietnam and EU), such as investing more in fiber, yarn, and textile manufacturing, particularly for spinning and weaving, so the quality and quantity of apparel production is likely to improve Moreover, the Vietnamese government should provide supportive government policies to encourage the industry, begin with implementing major infrastructure projects, and introduce incentives for foreign producers to attract foreign direct investment.” “Although Vietnam's textile and garment industry is currently one of the top world largest exporters, the country does not yet have worldwide brands that produce high value-added., textile and garment enterprises should have a strategy to build strong brands as well as develop brand values to increase competitiveness in the global market.” “Besides, relating rules of origin, to benefit from EVFTA, after complying with certain administrative requirements, Vietnam’s textile and garment must meet the demand for “fabrics originating” At present, Vietnamese producers usually rely on fabric imported from China; however, with the EVFTA agreement coming into force, this trade could shift to other producers such as South Korean fabrics.” REFERENCES Vo Thanh Thu, Le Quynh Hoa, Hoang Thu Hang (2018) Effects of EVFTA on Vietnam’s Apparel exports: An application of WITS-SMART simulation model Journal of Asian Business and Economic Studies DOI: 10.24311/jabes/2018.25.S02.1 Duc Anh, Hoang Han (2020) Impact of the EVFTA Agreement on Vietnam’s Textile and Garment Industry Retrived from https://vannang-banok.com/en/tac-dong-cua-hiep-dinhevfta-doi-voi-nganh-det-may-viet-nam Vietnam’s Textile and Garment Industry In 2019 (2019) Vietnam Insider https://vietnaminsider.vn/vietnams-textile-and-garment-industry-in-2019/ Vu Thi Nhu Quynh, Tran Van Trang Overcoming the technical barriers to trade (tbt) of the EU market for Vietnam’s Textile and Garment products Pham Thi Lua (2014) Technical Barriers To Exporting Garment And Textile And Solutions Of Vietnam Doctoral Dissertation In Economics, Vietnam Institute For Trade Summary Vietnam – EU Freetrade Agreement WTO center Retrived from https://trungtamwto.vn/file/20204/ttwto-tom-luoc-evfta-final eng.pdf Nguyen Khanh Chi (2016) The EU - Vietnam Free Trade Agreement (EVFTA) And Its Impacts On Vietnam Footwear Industry Dissertation, Foreign Trade University, Hanoi Handbook on EVFTA to be released Trademap, www.trademap.org, ITC Market Analysis Tools LIST OF ACRONYMS FTA: Free Trade Agreement EVFTA: EU-Vietnam free trade agreement GDP: Gross Domestic Production EBA: Everything but Arm program -Exemption from all commodities except weapons GSP: Generalized System of Preferences RoO: Rules of Origin WTO: World Trade Organization ISO: International Organization for Standardization IT: Information technology ... are many regulations of developed countries on labeling textiles and garments - Regulations on origin of textiles and garments Regulations on origin of textiles and garments of countries, especially... garment and textile is the industry gaining high export turnover, only following oil and gas industry Export of garment and textile has been continually expanded and it has become the industry of. .. soon as possible in the National Assembly session on June 7, 2019, and take effect after month The EU is the secondlargest export market of Vietnam'' s textile and garment industry, with 42.5% of
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