Effects of the european union (EU) vietnam free trade agreement (EVFTA) on export activities to the european union market of vietnam textile and garment industry

ACADEMY OF POLICY AND DEVELOPMENT INTERNATIONAL SCHOOL OF ECONOMICS & FINANCE GRADUATION THESIS Effects of the European Union (EU) - Vietnam Free Trade Agreement (EVFTA) on export activities to the European Union market of Vietnam textile and garment industry Supervisor: Ph.D Pham My Hang Phuong Student’s name: Nguyen Thi Nhat Lan Student ID: 5083106511 Class: KTĐN CLC 8.1 Hanoi, 2021 ACADEMY OF POLICY AND DEVELOPMENT INTERNATIONAL SCHOOL OF ECONOMICS & FINANCE GRADUATION THESIS Effects of the European Union (EU) - Vietnam Free Trade Agreement (EVFTA) on export activities to the European Union market of Vietnam textile and garment industry Supervisor: Ph.D Pham My Hang Phuong Student’s name: Nguyen Thi Nhat Lan Student ID: 5083106511 Class: KTĐN CLC 8.1 Hanoi, 2021 ACKNOWLEDGE This report would never have been possible without the consistent support and assistance of the people whom I approached during the various stages of writing this essay Firstly, I would like to express my heartfelt gratitude to my academic supervisor Mrs Hang Phuong lecturer of Academy of Policy and Development, for her valuable advice, encouragement, direction, and assistance Writing this essay would have been impossible without her guidance Next, I thank the ISEF teachers for their help and teach me valuable knowledge for 4 years That really helps me to complete the essay and use the skills I have learned to analyze more clearly and in more detail "Effects of the European Union (EU) - Vietnam Free Trade Agreement (EVFTA) on export activities to the European Union market of Vietnam textile and garment industry." is a scientific research project under the guidance of the instructor, Ms Pham My Hang Phuong – Lecturer at Academy of Policy and Development The figures and results presented in the report are completely honest All rationales for the research paper are fully cited with clear sources I take full responsibility before the department, faculty and school for this commitment Hanoi, June 1, 2021 The author of the topic Nguyen Thi Nhat Lan Contents PREFACE 1.The urgency of the research subject 2.Objectives of the research 3.Research scope 4.Research methods 5.Structure of the thesis Chapter 1: Overview of the free trade agreement and textile value chain 1.1 Overview of the free trade agreement 1.1.1 The concept of a free trade agreement 1.1.2 General features of trade agreements 1.1.3 Some terms used in free trade agreements 1.1.4 The effects of free trade agreements in general 1.2 Some theories on export activities and the value chain of the textile and garment industry 1.2.1 Overview of export activities 1.2.2 Overview of the value chain Chapter 2: Overview of the EVFTA and the value chain of Vietnam's textile and garment industry 2.1 General overview of the EVFTA agreement 2.1.1 The concept of EVFTA agreement 2.1.2 Progress of the EVFTA agreement 2.1.3 Basic contents of the EVFTA agreement 1 2.1.4 Impacts of EVFTA on export activities 44 2.2 Value chain of Vietnam's textile and garment industry .45 2.2.1 General comments on Vietnam's textile and garment industry 45 2.2.2 The position of Vietnam's textile and garment industry in the global textile value chain 49 Chapter 3: The effects of the EVFTA on exports to the European Union (EU) market of Vietnam's 52 textile and garment industry 52 3.1 Trade relations between Vietnam and EU 52 3.2 Trade share and growth rate 53 3.3 Assessment of the current situation of Vietnam's textile and garment industry 54 3.3.1 The production situation of the textile industry in the country 54 3.3.2 The export situation of the textile and garment industry in general 56 3.4 Effects of EVFTA on export activities to the European Union (EU) market of Vietnam's textile and garment industry 78 3.5 General assessment .87 Chapter 4: Solutions to promote the export of Vietnam's textile and garment industry to the European Union (EU) market .101 3.1 Conclusion 101 3.2 Solution .102 References 112 2 List of Figures Figure 1.1 Value Chain Map - Porter 21 Figure 1.2 Basic global value chain map 22 Figure 1.3 Global textile value chain 25 Figure 1.4 Value chain of textile production - trading 26 Figure 1.5 The graph shows the position and added value of the textile and garment industry value chain .27 Figure 1.6 Value of each production method of the textile industry 30 Figure 2.1 Global textile value chain Error! Bookmark not defined Figure 3.1 Correlation of Vietnam's garment exports to the EU in the 2016-2020 period……………………………………………………….………………… .54 Figure 3.2 Producing the main product groups of the textile industry .56 Figure 3.3 Vietnam's textile and garment export turnover Error! Bookmark not defined Figure 3.4 Profits in 2021 of some textile enterprises Figure 3.5 Vietnam's textile and garment export turnover in the first 2 months of 2021 Figure 3.6 Import turnover of Vietnam's textile and garment industry Figure 3.7 Export market share to the EU market…………………………… 63 Figure 3.8 Evolution of Vietnam's textile and garment export turnover to the EU Unit: Million USD) Figure 3.9 EU-27 T&C Turnover Figure 3.10 EU T&C Business confidence indicator 3 Figure 3.11 Growth Rate of EU-Vietnam Trade (August – February) .75 Figure 3.12 Growth Rate of the EU trade with Vietnam and extra-EU globally by value (08/19-02/21; 08/20-02/21) 76 Figure 3.13 Growth Rate of the EU trade with selected Southest Asian Countries by value (08/19-02/21; 08/20-02/21) 77 Figure 3.14 EU-Vietnam Trade by Volume (Million Ton) and 78 Value (Million Euro) 78 Figure 3.15 Textile and garment market share in Korea of Vietnam and Myanmar 78 Figure 3.16 Business Confidence Index in the EU Retail Sector 83 Figure 3.17 Export turnover of textiles and garments to France over the months Unit: Million USD 89 Figure 3.18 Comparison of export turnover of the textile and garment industry of domestic enterprises and FDI enterprises in the period 2010 - 2019 (Unit: Million USD) .93 Figure 3.19 Textile and garment market share in the EU of Vietnam and Myanmar (Source: Textile industry analysis report) 95 Figure 3.20 Revenue share of EU and Korean markets of some enterprises (Source: Textile industry analysis report) 95 Figure 3.21 EKC Curve of Textile & Apparel Industry Production .108 List of Tables Table 2.1 Summary of FTAs of Vietnam 34 Table 2.2 Progress of EVFTA agreement 35 4 Table 2.3 – Summary of EU open-door commitments for some important commodity groups of Vietnam 38 Table 2.4 Vietnam Textile and Garment - Comparison between 2000 and 2018………………………………………………………………………… .42 Table 3.1 Products exported to the EU market before and after the effective EVFTA Agreement .58 Table 3.2 List of a number of Asian countries that compete in textiles and apparel to enjoy EU tax incentives 63 Table 3.3 Importing textiles into EU-28 from main sources 64 Table 3.4 Export market share to the EU market 66 Table 3.5 Estimated garment exports of Vietnam to the EU in 2020 67 Table 3.6 Estimated categories of garment exports of Vietnam to the EU .69 Table 3.7 Taxable groups Error! Bookmark not defined Table 3.8 Dutch apparel imports from some key supplying markets .88 Table 3.9 Sweden's apparel imports from some major supplying markets .92 5 List of Abbreviations EVFTA European Union – Vietnam Free Trade Agreement FTA Free Trade Agreement SPS Sanitary and Phytosanitary Measures SWOT Strength, Weakness, Opportunity, and Threat TBT Technical Barriers to Trade VCCI Vietnam Chamber of Commerce and Industry WTO World Trade Organization SWOT Strength, Weakness, Opportunity, and Threat 6 PREFACE 1 The urgency of the research subject In the context of globalization, international economic integration is seen as the key for each country to have the opportunity to participate more deeply in the global value chain, enhance its economic potential and develop the country Therefore, the proactive and active international integration has made an important contribution to enhancing Vietnam's position in socio-economic development and raising people's incomes, while creating pressure and conditions for economic integration actively improve economic institutions, strive to improve national competitiveness, and develop enterprises Since August 1, 2020, the EVFTA Agreement has officially come into force after it has been ratified by the National Assembly of the two sides It can be said that EVFTA is one of the new-generation Free Trade Agreements that Vietnam has joined, with many deep and broad commitments, including both traditional and non-traditional contents However, joining the new generation Free Trade Agreement EVFTA will open up great opportunities and challenges for several of Vietnam's import and export industries, including some industries such as textiles and garments, electronics, agricultural products because Vietnam is a country in the process of participating more deeply in the global value chain Vietnam's textile and garment industry is one of the key export industries, playing an important role in promoting economic development, so with an annual import scale of over 250 billion USD in textile and garment, the EU is the world's largest textile and garment import market, accounting for 34% of the world's total textile and apparel import turnover, with the total garment demand growing at an average 7 policies to support adjacent localities that need to coordinate so that the locations of industrial parks that attract many workers are not located in the contiguous areas Eliminate production difficulties Firstly, to remove the bottlenecks on the rules of origin in the EVFTA, localities need to attract investment in supporting industries and encourage the development of raw material supply centers that are the focal points for the supply of raw materials of textile and garment manufacturing enterprises to actively source input materials Secondly, the EU is tightening standards on environmental protection in the production process, controlling the source of raw materials and substances harmful to the environment generated from the production of fabrics, raw leather, processing, fabric, finished footwear, processes of weaving, dyeing, printing, footwear processing, etc To meet the regulations and set requirements for the development of combined leather and textile dyeing and tanning industrial zones, thus building a modern general specialized waste treatment system including the treatment of both solid and liquid waste and collecting fees from businesses on demand for waste treatment is also an orientation that localities may be interested in promote With the current development of science and technology, the State and enterprises jointly invest more strongly in the development of science and technology Specifically, building a 3D design platform to respond to the fast-moving market; Besides, the human development factor still needs to be put on top: Building training quality human resources, fashion vision, foreign languages to update world fashion trends Because when Vietnamese businesses participate in integration, our human resources need to improve their education and skills to improve labor productivity At that time, new human resources can go deeper into higher stages in the textile value chain, create added value for the textile industry and keep up with the development trend of the world Not only that, but the 103 government should also encourage universities that provide training in the textile and garment industry to take advantage of opportunities to train human resources in line with the market to train quality teams for this potential market The Government needs to encourage enterprises in the textile and garment industry to cooperate to build a "value chain model - Value chain" among textile enterprises When businesses associate, they will have the opportunity to boost capital, improve human resources, and improve benefits to meet export requirements The government can encourage tax reduction, offer support packages for small and medium-sized enterprises with low-interest rates for enterprises to raise capital and expand a business For Vietnam Textile and Apparel Association The Vietnam Textile and Apparel Association need to do better as a bridge between member enterprises and domestic and foreign markets through trade promotion activities and international cooperation activities In particular, it is a bridge between businesses and state management agencies in receiving and reflecting from businesses to research, recommend and propose to remove difficulties and obstacles for businesses The Vietnam Textile and Apparel Association and manufacturing enterprises must enhance the value of their supply chains Breaking through barriers like De Minimis is only a temporary measure because in the future we also have the ambition to raise our export position to many other countries, especially in the context of global trade is facing instability, China is also struggling to maintain the No 1 position in the export of textiles and garments The sources of foreign direct investment capital in textile enterprises now needs to increase upstream raw materials such as yarn, fabric, cutting, and sewing stages In addition, it is necessary to prioritize investment projects in advanced textile dyeing technology 104 that do not cause adverse impacts on the environment, connect with domestic garment enterprises, and form linkages throughout the value chain In the long term, improving product quality is a key factor to ensure sustainable growth of exports To do this, businesses need to invest in innovation in production activities and improve the quality of human resources Firstly, businesses need to improve their production capacity in the direction of shifting the mode from outsourcing to FOB (purchase of raw materials - production - semifinished products) and ODM (design - manufacture - semi-finished products) to meet important changes in the world textile and garment market, moving towards building a closed value chain from raw materials, production to product consumption to optimize profits and take advantage of human resources For Businesses Enterprises make efforts to change to meet the requirements of the EU market In order to meet the quality standards of environmental protection as prescribed from the EU market and seek opportunities to penetrate deeper into the EU, in recent years many businesses need to make efforts to change and be prepared invest in new equipment to process and manufacture products in accordance with the requirements of the EU market For the textile and garment industry, many businesses have focused on new investments in yarn production - weaving accounts for a high rate of localization, many raw material production areas have been opened with outstanding large-scale, including both domestic and foreign enterprises, such as Thien Nam Yarn, Nam Dinh Yarn, Phu Bai Yarn, Yarn – Weaving,, Texhong Yarn Besides, businesses have also gradually shifted to importing raw materials to other countries markets with FTAs with the EU, meeting the requirements of the "cumulative origin" rule set out by the EVFTA, such as Korea or Japan 105 Innovate and modernize production lines focus on consolidating raw materials, boosting domestic production of raw materials The main goal of this direction is to meet enough input materials for the textile and garment industry, both for the domestic market and for export, by applying new and modern supporting technologies This direction not only helps to remove bottlenecks in raw materials for the garment industry but also helps develop the textile industry, ensuring the sustainable development of the industry With modern production lines, it will be possible to reduce dependence on imports, reduce order fulfillment time, especially help Vietnamese garments meet the requirements of rules of origin to enjoy preferential treatment taxes in key markets In the long run, the benefits will be huge: capital accumulation increases, technology application increases, workforce skills are improved, budget revenue increases In particular, this approach will reduce the scale of the CMT stage, thereby reducing jobs in the industry, affecting social policies Consider increasing production scale, expanding value chain, focusing on R&D, Design, Marketing, Distribution, and Branding The benefit of this approach is that the profits will be very high However, the barriers in this direction are very high, in the context that Vietnam's textile and garment industry is still weak at all upstream and downstream stages in the value chain and has close but no experience in an upgrade to these stages Therefore, businesses should carefully consider whether to increase production scale, if choosing the right scale will bring high efficiency and increase labor productivity Enterprises need to aim for the value-added development of the textile industry Currently, Vietnam is mainly in the positions of processing and exporting so businesses need to develop strategies to bring Vietnam's textile and garment industry to stages such as supplying raw materials or distributing more 106 Because these stages have higher added value, bringing higher profits to Vietnam's textile and garment industry Implement "green growth" in the development of the textile and garment industry, without adversely affecting the environment, applying the circular economy The production processes of each stage will create problems such as environmental pollution, especially with the production of textiles, which is inevitable With steps such as R&D, product communication, etc., it does not pollute the environment like stages such as manufacturing, printing, dyeing chemical fibers Therefore, the problem of preventing and reducing environmental pollution, textile and garment enterprises need to develop strategies to rise up in the global value chain to not only add value but also reduce the level of pollution To propose the government build separate industrial zones for textile companies, wastewater treatment systems according to Vietnamese and international environmental laws This brings the potential of a sustainable textile ecosystem to the Vietnamese textile and garment industry and ensures the attraction of foreign investors 107 Enterprises need to apply digital transformation to sustainably develop the textile and garment industry and develop in parallel with improving the quality of human resources Figure 3.21 EKC Curve of Textile & Apparel Industry Production (Source: summaried by authors) Vietnamese textile and garment enterprises should switch to value-added activities instead of focusing on work at the stage of the production value chain of "cutting, sewing, and editing" as before To master the higher-value stages of the supply chain, businesses must invest heavily in digital transformation Textile enterprises in Vietnam currently invest 3%-5% of after-tax profits in R&D research and development, especially some enterprises that invest more than 16% However, the cases of strong investment in R&D are enterprises with foreign direct investment capital Research by the Vietnam National Textile and Garment Group 108 shows that the 4.0 model yarn factory reduces labor by 70% and reduces energy use by 25% Textile dyeing factory 4.0 reduces 30% of labor, 50% of the water used for dyeing, and 50% of energy consumption The applications of big data analysis technology help to stabilize the dyeing quality and increase the exact dyeing rate Previously, the first-time dyeing accuracy rate was only from 70%, now thanks to technology, the first-time dyeing accuracy rate can be up to 98% Another important application of 4.0 technology is 3D printing technology that helps to effectively shape each product in the design stage According to the World Economic Forum, by 2025, the rate of machines replacing humans in the textile industry in the US will be 40%, while in developing countries like Vietnam, this rate will be more than 10% Focusing resources on technological innovation, cutting production costs, improving models, diversifying products according to tastes, and selecting a number of high-end products to build brands to personalize needs of a segment of high-paying customers Producing highquality and high-value garments requires a team of skilled, creative, and adaptable human resources to technology transfers, so the training and development of human resources meets the Industry 4.0 needs special attention Associations and businesses can combine with training institutions to design lectures in the direction of technology associated with practice, training human resources in accordance with development requirements Improve the ability to meet market standards through investment in technology, control and improve product quality, upgrade its own competitiveness base in terms of business model, strategy, management, human resources, quality of goods and services according to European standards… Besides, in order to realize the great opportunities that EVFTA brings, businesses need to firmly grasp, fully and accurately commitments in the 109 EVFTA related to their fields and business activities, from which to have a foundation, basis for action, prepare resources, develop and implement plans to exploit opportunities from the EVFTA effectively most fruitful For example, for the textile and garment group alone, Vietnamese enterprises that are oriented to export to the EU market need to have more focused production adjustments, targeting products with high potential in HS 61 and HS 62 such as jackets, coats, suits, shirts, tights, T-shirts Regarding the organization of export activities, the common solution is to reduce the cost and time to participate in the market for production and business investors; improve the business investment environment to mobilize resources for production Continue to promote the simplification of administrative procedures, creating more favorable conditions for people and organizations to access Secondly, promoting the development of logistics services for the export of textiles, leather and footwear: Developing logistics services, attracting investment in this field, improving the capacity and connectivity of domestic logistics enterprises; Review investment, upgrade transport infrastructure, canals, warehouses and yards at seaports and customs clearance places for import and export goods; Improve logistics infrastructure associated with e-commerce, combine logistics with e-commerce according to current development trends in the world and in the region Third, continue to simplify and modernize the issuance of Certificates of Origin (C/O): organize the implementation and follow-up of the implementation of business streamlining in the priority C/O granting process treat; promote C/O level over the Internet Support Vietnamese enterprises to process, implement and review technically when there is a request for inspection and verification of origin from the EU in case of necessity to protect the legitimate interests of Vietnamese enterprises 110 Because the rules of origin in the EVFTA Agreement require a large participation of raw materials in the FTA area, Vietnamese enterprises need to improve production capacity, deep processing, search for raw materials in the region or develop domestic raw materials At the same time, businesses need to actively learn and participate in intensive training activities so that they can clearly understand and properly understand the regulations on rules of origin and confidently apply them Businesses also need to grasp the needs of each market in each specific situation to develop and produce suitable products For example, during the outbreak of Covid-19, businesses were ready to receive orders with low added value, switching from high-end suits, high-quality shirts to workwear, sewing knitwear, traditional shirts However, if the EU's vaccination process goes smoothly in the near future and the EU gradually lifts its distancing measures, the demand for traditional products will increase again, so businesses need to be flexible in building production plans so that they can take advantage of the situation of boosting exports, avoiding supply shortages for large orders 111 References 1 David Luff, (2011), Supporting Vietnam in negotiating Free Trade Agreements Multilateral Trade Support Project (MUTRAP) Nguyen Huu Khai (2005), Non-tariff barriers in international trade policy 2 Labor and Social Publishing House, Hanoi MUTRAP (2011), Free Trade Agreement between Vietnam and the European 3 Union: Quantitative and Qualitative Impact Assessment Multilateral Trade Support Project (MUTRAP) Hanoi David Hanson (2000), Barriers to Free Trade; Non-tariff barriers in the 4 European Union, Japan and the United States USA Government (2020), EVFTA, EVIPA Agreement Documents and Chapter 5 Summary Government (2020), General summary of the EU-Vietnam Free Trade 6 Agreement (EVFTA) Official Letter No 2669/TCHQ – GSQL on certification of origin of goods in 7 CPTPP and EVFTA Circular No 07/2021/TT-BTC regulating the time of submission of proof of 8 origin of imported goods in the EVFTA agreement 9 Circular No 30/2020/TT-BCT guiding the implementation of EVFTA on Trade Remedies 10 EU guidelines on self-recognition of origin under EVFTA 11 Newsletter: EVFTA with Vietnam's trade 1st quarter of 2021 – Textile and garment industry - Leather and footwear 12 Newsletter: Trade between Vietnam and EU in the first quarter of 2021 13 Import and export situation of some main products to EVFTA, CPTPP, UKVFTA member countries in the first quarter of 2021 112 14 General procedures for importing into the EU 15 EVFTA: Flexible origin for some export industries ngành 16 Some basic issues about free trade agreements (FTAs) 16 Website a http://www.mot.gov.vn b http://www.customs.gov.vn c www.wits.worldbank.org d http://mutrap.org.vn/ e www.ciem.org.vn f http://www.trungtamwto.vn g https://scholar.google.com/ h.https://www.imf.org/external/index.htm i https://vinatex.com.vn/ k https://euratex.eu/ l Statistictims.com/economy/projected-world-gdp-ranking.php m Gso.gov.vn/Default.aspx?tabid=217 n.https://www.bea.gov/data/intl-trade-investment/international-trade-goods-and- services 113 114 ... and in more detail "Effects of the European Union (EU) - Vietnam Free Trade Agreement (EVFTA) on export activities to the European Union market of Vietnam textile and garment industry. " is a scientific... the EVFTA Agreement on export activities of Vietnam'' s textile and garment industry to the EU market Proposing solutions to promote exports of the textile and garment industry in the context of. .. and garment industry Chapter 3: The effects of the EVFTA on exports to the European Union (EU) market of Vietnam'' s textile and garment industry Chapter 4: Conclusion and proposed solutions to