DISSERTATION THE EU VIETNAM FREE TRADE AGREEMENT (EVFTA) AND ITS IMPACTS ON VIETNAM FOOTWEAR INDUSTRY

MINISTRY OF EDUCATION AND TRAINING FOREIGN TRADE UNIVERSITY DISSERTATION THE EU-VIETNAM FREE TRADE AGREEMENT (EVFTA) AND ITS IMPACTS ON VIETNAM FOOTWEAR INDUSTRY Major: Master of International Trade Policy and Law Student: Nguyen Khanh Chi Supervisor: Assoc Prof Dr Nguyen Thi Tuong Anh Hanoi - 2016 I ACKNOWLEDGEMENT I would like to express my deepest appreciation to all people who gave me help, support and encouragement so that I can complete this Master‟s thesis First of all, I would like to show my heartfelt gratitude to my direct supervisor, Ms Nguyen Thi Tuong Anh, Assoc Prof Dr Thanks to her care and guidance, I could understand, develop and complete my thesis From the bottom of my heart, I wish all the best things will come to her Next, it is an honor for me to thank all professors of the International trade law and policy program, Foreign Trade University in cooperation with the World Trade Institute of Berne, Switzerland for the knowledge and support Finally, I owe my warm thanks to all members in my family and friends who always supported and encouraged me to fulfill the thesis COMMITMENT I hereby confirm that the thesis is my own research under guidance of Assoc Prof Dr Nguyen Thi Tuong Anh Contents and result of the research are true Information and data, collected from various sources for analysis and evaluation, have been stated in references of the thesis Student Nguyen Khanh Chi II TABLE OF CONTENTS INTRODUCTION .1 CHAPTER I: THEORETICAL BASIS OF FREE TRADE AGREEMENT AND INTRODUCTION TO THE EVFTA 1.1 Theoretical basis of FTA .6 1.1.1 Concept of the FTA 1.1.2 Types of the FTA .7 1.1.3 Main content of the FTA 1.1.4 Role of the FTA .13 1.2 Impact of a FTA on an industry and an economy of a country .14 1.2.1 FTA’s impact on member countries 14 1.2.2 FTA’s impact on an industry 18 1.3 Overview of the EVFTA 20 1.3.1 Introduction to the EU 20 1.3.2 Context of the EVFTA .21 CHAPTER II: IMPACTS OF THE EVFTA ON VIETNAM FOOTWEAR INDUSTRY 31 2.1 Overview of global and Vietnam footwear industry 31 2.1.1 Circumstances of footwear industry in the world 31 2.1.2 Background of footwear industry in the EU 34 2.1.3 Situation of footwear industry in Vietnam 40 2.2 Impacts of the EVFTA on Vietnam’s footwear industry 52 2.2.1 Positive impacts 52 2.2.2 Negative impacts 64 2.3 General assessment 66 CHAPTER III: RECOMMENDATIONS FOR VIETNAM FOOTWEAR INDUSTRY IN THE CONTEXT OF THE EVFTA 68 3.1 Forecast of the world footwear situation 68 III 3.2 Orientation of Vietnam government towards development of Vietnam‘s footwear industry 72 3.2.1 Orientation for Vietnam footwear industry 72 3.2.2 Orientation for Vietnam footwear supporting industry 75 3.3 Recommendations for Vietnam’s footwear industry in the context of the EVFTA .76 3.3.1 For the government 77 3.3.2 For Vietnam footwear association 81 3.3.3 For Vietnam enterprises 83 CONCLUSION 88 REFERENCES i APPENDIX viii IV LIST OF TABLES Table 2.1 Amount of footwear produced by Vietnam between 2012 and 2014 .40 Table 2.2 Scale of Vietnam footwear industry (in 2013) 41 Table 2.3 GSP rules of origin – Chapter 64 53 Table 2.4 Annex 4a of the EVFTA 53 Table 2.5 EU‟s tariff on shoes imported into the EU 56 Table 3.1 Shoes production and average growth, 2020 74 V LIST OF FIGURES Figure 2.1 World Top 10 footwear producing countries, 2015 (million pairs) 31 Figure 2.2 World top 10 footwear consumers, 2015 (million pairs) 32 Figure 2.3 World top 10 exporters, 2015 (million USD) 32 Figure 2.4 World top 10 importers, 2015 (million USD) 33 Figure 2.5 EU footwear exports, top ten EU countries (million USD) 35 Figure 2.6 EU exports of footwear by leading countries (million USD) 36 Figure 2.7 EU footwear imports, top ten countries, 2011 -2015 (million USD) 37 Figure 2.8 EU imports of footwear by leading countries (million USD) 37 Figure 2.9 The EU‟s turnover of shoes imported from Vietnam (million USD) 44 Figure 2.10 Vietnam's top 07 imports in 11 months of 2016 (billion USD) 45 Figure 2.11 Vietnam's top 07 imports from the EU in the first half of 2016 (million USD) 46 Figure 2.12 Global value chain of footwear .47 Figure 3.1 Forecast of the world footwear development, 2011-2018 .69 Figure 3.2 Footwear retail sales through store, 2011-2018 (million USD) 69 Figure 3.3 Asia-Pacific footwear market forecast, 2011-2018 (million USD) 70 LIST OF GRAPH Graph 2.1 Smiling curve of Stan Shih 63 VI LIST OF ABBREVIATIONS ASEAN CITES Association of Southeast Asian Nations Convention on International Trade in Endangered Species of Wild Fauna and Flora CSR Corporate Social Responsibility EC European Commission EMAS Eco-Management and Audit Scheme ENs EU Standardization and standards EU European Union EVFTA EU-Vietnam free trade agreement FDI Foreign direct investment FTA Free trade agreement GATT General Agreement on Tariffs and Trade GPSD General Product Safety Directive 2001/95/EC GSP Generalized Scheme of Preferences IPRs Intellectual Property Rights LEFASO Vietnam leather, footwear and handbag association MFN Most-favored-nation MUTRAP The Multilateral Trade Assistance Project PCA Partnership and Cooperation Agreement REACH Registration, Evaluation, Authorization and Restriction of Chemicals ROOs Rules of origin SPS Sanitary and Phytosanitary Measures TBTs Technical barriers to trade UK United Kingdom US United states VCCI Vietnam Chamber of Commerce and Industry WTO World Trade Organization INTRODUCTION Rationale International economic integration and globalization which speed up bring benefits and economic development for countries, on the basis of fair trade and investment With an increasing number of free trade agreements which Vietnam has signed with other countries or regions, Vietnam has more favorable opportunities for development of domestic industries, including footwear industry Footwear industry, among national key industries, is planned in Vietnam‟s export strategy to the world market Through footwear export activities, Vietnam has gained a considerable amount of foreign currency Exported footwear plays an important part in Vietnam Export turnover of footwear industry ranked fourth in Vietnam total export turnover in the first eight months of 2016 Vietnam is the world‟s second largest shoes exporter and third largest shoes producer in 2015.With rapid growth and high export turnover in many years, Vietnam's footwear industry has exported shoes to many countries and regions around the world, and become a partner of various developed economies, especially the United State (US), European Union (EU), Japan, Korea, etc Among these export markets, the EU is considered to be a large market with its potentiality of shoes expansion and development Despite the industry‟s development, there are still existing unfavorable factors affecting sustainability of the industry‟s development, for example, backward technology, unskilled workers, undeveloped supporting industry, etc In the context of participation in a free trade agreement (FTA) between the EU and Vietnam, it is expected that the EU-Vietnam free trade agreement (EVFTA), a new generation and comprehensive agreement will offer Vietnam footwear industry good chances to open export markets Therefore, it is necessary to study, forecast and evaluate potential impacts of the EVFTA on Vietnam footwear industry By implementing these tasks, Vietnam government and relevant enterprises may foster efficient footwear industry development as well as achieve short-term and long-term objectives to actively promote Vietnam shoes‟ position in both export markets and domestic market Thus, it is decided that research of “The EU-Vietnam free trade agreement and its impacts on Vietnam footwear industry" will be implemented Literature review The official negotiations of free trade agreement between Vietnam and the EVFTA have been gaining attention from not only Vietnamese but also foreign media, researchers and enterprises Currently, there are a number of papers and research reports addressing EVFTA-related issues from different perspectives such as:  “The free trade agreement between Vietnam and the European Union: quantitative and qualitative impact analysis” report was published by The Multilateral Trade Assistance Project (MUTRAP) team in October, 2011 The research report was conducted by national and international experts under the framework of MUTRAP III so as to assess possible impacts of the EVFTA on Vietnam‟s economy in the future In addition, the report analyzed the possible impacts on Vietnam‟s key industries such as textile, footwear, electronics, machinery and banking It also provided recommendations for Vietnam to have sustainable economic growth In the matter of footwear, quantitative assessment through SMART simulation methodology was used in the report to evaluate the impact of the agreement on Vietnam footwear industry The quantitative analysis was implemented with four different scenarios and the results of the four scenarios were that the FTA would enhance Vietnam‟s shoes export activities and promote market shares of the country in the EU‟s market However, it was mentioned in the report that the impact of the EVFTA on domestic footwear industry might not fully be evaluated since the author did not include in the assessment impact of institution and regulation reform when the agreement came into effect  Vietnam Chamber of Commerce and Industry (VCCI) issued the report “Vietnam enterprise community‟s recommendations on outlook of the EVFTA” based on public opinions, researches of the chamber‟s Committee on International Trade Policies and recommendations of relevant Vietnam industry associations in 2011 The report analyzed the benefits and disadvantages that the EVFTA might bring to domestic economy and recommended FTA negotiation options which would be most beneficial for Vietnam However, the report just provided general recommendations for the country and did not cover specific recommendations for Vietnam industries  The paper “Future Vietnam-EU free trade agreement (Vietnam-EU FTA): an analysis of trade creation and trade diversion effects” of Nguyen Binh Duong and Nguyen Thu Trang, co-author was released in 2014 In the report, the authors used theory of trade creation and trade diversion in international trade to evaluate impacts of EVFTA on Vietnam‟s welfare With the usage of gravity model and implementation of national data analysis, the report showed that when the EVFTA took effects, application of tariff elimination or decrease would have positive impacts on bilateral trade between Vietnam and the EU  In 2014, MUTRAP team announced “Sustainable impact assessment: EUVietnam FTA” report in 2014 The report presented an overview of overall impacts from the Vietnam – EU FTA using standard framework to implement evaluation The report which was conducted per request of the Government of Vietnam used quantitative methods (through economic modeling and data analyzing) and qualitative methods (through surveys, consultations and research) It also listed a number of opportunities and challenges that Vietnam footwear industry could meet as well as provided some recommendations for the industry  In 2004, “Free trade agreement between the EU and Vietnam: difficult partnership” paper of Rabea Brauer, Vu Dang Tuan and Natalie Frey analyzed the benefits and challenges that the EVFTA might pose to Vietnam„s economy It was concluded that because the agreement might bring Vietnam more opportunities (enhance trade relation with the EU, maintain its political position, etc.) than challenges and challenges was supposed to be a part of the growth process that Vietnam had to experience, it was necessary for Vietnam to enter a free trade agreement with the EU  The paper “Vietnam-EU free trade agreement: Impact and policy implications for Vietnam” was published by Nguyen Binh Duong on June 2016 The paper evaluated effect of EVFTA on trade between Vietnam and the EU With decrease of xiv Appendix EU footwear import policies and regulations The EU has no specific legal regulations on footwear, however, footwear must satisfy the EU‟s general regulations on consumers‟ health safety, environmental and consumer protection related to use of chemicals, hazardous substances and animal products EU Standardization and standards (ENs) EU member states agreed to create system of common standards (EN standards) which would be uniformly implemented in the bloc and set off additional provisions in line with their specific national conditions Each member states create their own standards based on EN standards, for instance, NEN standards of The Netherlands, DIN standards of German, BSI standards of the United Kingdom and AFNOR standards of France The EN standards of the EU are established by three European standardization bodies: the European Committee for Electro technical Standardization, the European Committee for Standardization and the European Telecommunication Standards Institute The EN standards are not mandatory for imported goods However, because it is a set of common standards applicable in the EU domestic markets, if exporters want their goods penetrating EU markets successfully, they need to adhere to standards There is strong harmonization between EN standards and international standards In case, the EU set whole content of international standards into its own standards without modification, these standards will be named as EN ISO, EN IEC, etc along with numbers In regard to EU member states, when they put these standards into their own standards, their standards will be named as DIN EN ISO (Germany), BS EN ISO (the United Kingdom), etc along with standard numbers Thereby it can see that harmonization with international standards has become a trend in development of European standards ISO Quality Management Standards The EU has decided that ISO 9001 will be applied in the bloc Although imported goods are not subject to the standard, foreign exports with ISO 9001 may xv have advantages when importing goods to the EU International Organization for Standardization published ISO 9001 in 1987 ISO 9001 provides management system standards which can be widely applied in sectors such as manufacturing, sales and service Manufactures can use the standard to set up or apply quality assurance systems in their companies The standard can also be used by importers to check production stability and product quality before they sign contracts with exporters Thanks to its practical content, ISO 9001 created a turning point in global standards activity and quality User health and safety regulations 3.1 Labeling • CE marking CE marking is legally mandatory for goods and can be considered as trade passport for imported goods to enter EU markets Products which have CE marks will have advantages over products of the same category since they can gain consumers‟ trust This will help facilitate products‟ circulation in the market However, CE mark is not a sign of approval or quality certification, CE marks, instead, focus on consumer safety and environment protection Most of industrial products are subject to CE marking requirements To make sure that only safe products will enter EU markets, the EU has issued a list called New Approach Guide which includes more than 20 product groups (including footwear) which are required to have marking cover If a product falls into any product group, the product will be required to comply with national laws of relevant countries Each product groups has to adjust to relevant specific directives which describe fundamental factors for the product and concerned risks • Directive 94/11/EC of 23 March 1994 on the approximation of the laws, regulations and administrative provisions of the Member States relating to labeling of the materials used in the main components of footwear for sale to the consumer With respect to footwear, requirements for labeling are stated at Directive 94/11/EC Accordingly, it is mentioned in Subparagraph i, Paragraph 2, Article of xvi Directive 94/11/EC, the label must provide consumers full information on shoes and leather products, including information such as part of the upper, lining and sock and outer sole and image or wording descriptions The directive which sets out labeling requirements primarily related to materials used to manufacture the footwear is applied to all EU member states All types of footwear must comply with the directive except for the following types: “second-hand, worn footwear, protective footwear covered by Directive 89/686/EEC, footwear covered by Directive 76/769/EEC, toy footwear” (in accordance with Paragraph under Article of Directive 94/11/EC) Information about products‟ components which cover at least 80% of parts of products must be presented for consumers to see If there is no particular material for at least 80%, there must be labels which indicate two major materials used to create products (Paragraph 1, Article of Directive 94/11/EC) 3.2 Chemicals – prohibited substances The EU has limited the use of a large number of chemicals in EU markets because it can cause harm to consumers and environment Chemicals which are covered by Regulation (EC) No 1907/2006 of 18 December 2006 concerning the Registration, Evaluation, Authorization and Restriction of Chemicals (REACH) are restricted Enterprises before importing goods to the EU need to check whether chemicals they use in their production are banned by the regulation Specific substances, mixtures or articles are restricted under scope of REACH However, there are a number of substances such as pharmaceutical, food and radioactive materials not covered by the regulation because they have been stipulated in other regulations In the matter of footwear, because footwear‟s accessories are made of different materials, it is important to make sure that footwear and relevant materials meet the EU‟s legal requirements It is stated in Regulation EC 1907/2006: - Leather: xvii • Azo Dyes: if enterprises use dyed leather in their products, they must ensure products will not have azo dyes which emit any impurities of 22 banned amines The EU regulation provides list of restricted amines • Chromium VI: the EU adopted a regulation restricting the use of chromium (VI) in leather because it can cause allergic contact dermatitis Germany has separate national regulations to restrict the use of chromium (up to ppm) in leather products - Textile fabrics • Azo Dyes: the regulation also restricts azo dyes in regard to textile fabrics • Fire retardants: they are restricted to use for textile fabrics with direct skin contact such as tris (aziridinyl) phosphinoxide, tris (2,3 dibromopropyl) phosphate, polybrominated biphenyls and mercury compounds • Organostannic compounds: if there is PVC used in products, organostannic compounds are also not allowed to use • PVC contains other chemicals such as plastics stabilizers which are prohibited Although PVC is not restricted, many manufacturers have decided to not to put PVC in their products REACH is considered as one of the strictest and most complex chemical management regulations in the world 3.3 Product Safety In EU markets, products, regardless of their country of origin, must be safe to use subject to provisions of the General Product Safety Directive 2001/95/EC (GPSD) of the European Parliament and of the Council of December 2001 on general product safety Based on European standards, GPSD sets up provisions to determine conformity of products with general safety requirements Services and products used by suppliers of services when providing the service to consumers not fall under this regulation In case, products (such as toys, personal protective equipment and cosmetics, etc.) are subject to specific regulations, this regulation will not be applied According to the directive, if producers create products which xviii have a high level of safety and protection for consumers‟ health or not create any hazards, products will be considered to be safe and will be allowed to circulate in EU markets Therefore, footwear exporters must ensure their products meet the directive‟s requirements before exporting footwear to EU markets Criteria for environmental protection As the industry grows, issues related to pollution or human responsibilities for the environment are in big concern Developed countries in general and the EU countries in particular are pioneer countries in propagating and supporting environmental protection Environmental concerns and increasing pressure of society and laws are changing the way people business around the world Consumers and investors increasingly require products which are environmental friendly and provided by companies with social responsibility 4.1 Environmental management: Eco-Management and Audit Scheme (EMAS) is regulated under Regulation No 1221/2009 of the European Parliament and of the Council of 25 November 2009 on the voluntary participation by organizations in a community EMAS EMAS is a management tool for companies and other organizations to evaluate reports and improve their environmental performance This tool applied for all economic sectors including public and private sector Participation is voluntary and extends to organizations operating outside the European EMAS incorporates the requirements of ISO 14001:2004, therefore when enterprises receive EMAS certification, they will not need to achieve ISO 14001: 2004 certification ISO 14001: 2004 is one of the most widely known standards in the world It provides a set of general requirements as a framework for organizations so that they can form their own environmental management system Through ISO 14001: 2004, it helps organizations approach new systematic management methods to achieve balance between maintaining profitability and reducing environmental impact ISO 14001:2004 which amended the former version of ISO 14001 was published by the International Organization for Standardization on November 15th, 2004 xix 4.2 Packaging and waste packaging All products imported into the EU must comply with the EU‟s Directive 94/62/EC of 20 December 1994 on packaging and packaging waste and relevant amended regulations on packaging standards Some of requirements are covered by the directive as follows: • The packaging materials can be reused, recycled or recovered; • The weight and volume of packaging materials are consistent with consumer safety requirements; • Heavy metals or other hazardous substances must ensure to use at a minimum level 4.3 Eco-label Regulation No 66/2010 of 25 November 2009 on the EU Eco-label was issued by the European Commission with the aim of promoting design, production, sale and use of green products or services, diminishing environmental impact of products throughout their entire life cycle (from the beginning of the process - when raw materials are used in the production to the end of the process – when products are disposed) and giving consumers information about green products The EU‟s eco-label with flower symbol is a European ecological trademark for goods or services (excluding food, beverage and pharmaceutical) The label is a sign for consumers to recognize goods which have less negative impact on environment than similar products Products with that label meet a set of environmental criteria announced by the EU member states Product groups (including footwear) will be chosen by the EU to provide eco-label Each product groups must be ensured to meet relevant criteria to receive eco-label After a period of 3-5 years, each product groups‟ criteria can be amended or revoked in order to check technical advance and assess negative impact it may cause to the environment Corporate Social Responsibility In addition to environmental issues, Corporate Social Responsibility (CSR) is a matter of EU consumers‟ interests Therefore, it is necessary for exporters to xx fulfill CSR requirements in order to penetrate the EU markets SA8000 standard which was issued by a US Social Accountability International organization in 1997 has become a code of conduct widely used in the world SA8000 standard certification is considered as a passport for foreign enterprises to export goods to the EU‟s and the US‟s markets in the field of enterprise social responsibilities SA8000 certificate is valid for years and inspections will be conducted once every six months Endangered species protection If enterprises exporting goods to the EU use the materials or material parts made from plants and wild animals (for example, made from crocodile leather) to make footwear products, they must ensure that the use of these materials is not banned under the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES) CITES regulates commercial activities related to animals (including skin and other parts) and plants which are in danger of extinction It is required by the EU that foreign exporters comply with CITES and EU‟s relevant regulations To enforce CITES, the EU also issued the two following regulations: • Council Regulation No 338/97 dated 9th December 1996 giving a detailed list of species (including the skin and parts thereof) which are prohibited or restricted to commercial transactions; • Regulation No 865/2006 lays down specific rules to implement Regulation No 338/97 and provides detailed administrative procedures and techniques to control trade of endangered species Appendix Vietnam's imports in the first months of 2016 3.1% 2.8% 2.8% 2.6% 3.6% 4.6% 5.9% 36.3% 6.2% 16 % 16.2% Machinery and equipments Computers and components Textile Telephones and parts thereof Iron and steel Plastics Textile/ footwear materials Petroleum products Other base metals Plastic products Others Source: General Department of Vietnam customs xxi Appendix 10 EU Tariff schedule on Vietnam’s footwear xxii xxiii xxiv xxv xxvi xxvii Source: Annex 2c of the EVFTA Categories “A, B1, B3, B5 and B7” are explained in Paragraph 1, Section under annex 2-[x] of the EVFTA as below: xxviii ... supporting industry, etc In the context of participation in a free trade agreement (FTA) between the EU and Vietnam, it is expected that the EU -Vietnam free trade agreement (EVFTA), a new generation and. .. I: Theoretical basis of free trade agreement and introduction to the EVFTA Chapter II: Impacts of the EVFTA on Vietnam footwear industry Chapter III: Recommendations for Vietnam footwear industry. .. negotiations on the basic content of the agreement After nearly months to handle technical issues and finalize the text of agreements, on December 2nd, 2015, Vietnam s Minister of Industry and Trade and