Footwear: EU free trade benefits don’t outweigh the costs

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Footwear: EU free trade benefits don’t outweigh the costs.

The nation’s footwear exports subsequently jumped 15% year-on-year in 2015, crossing the US$12 billion benchmark, according to statistics of the Vietnam Leather, Footwear and Handbag Association (Lefaso).

Roughly 70% of the nation’s footwear exports are sports shoes, said Phan Thi Thanh Xuan, secretary general of Lefaso, with the US and the EU the two largest markets accounting for a 33.9% and 33.1% market share, respectively.

China with a 6.3% market share and Japan at 5% follow far behind as the third and fourth biggest export markets.

The increase in overseas sales for 2015 were largely attributable to an increase in the allotted sales quotas for the EU, said Mr Xuan.

Now with the Vietnam-EU free trade agreement having been signed and moving through the ratification process with a 2018 target date for implementation, prospects for the market appear bright.

About 79% of the nation’s footwear exports are attributable to the foreign manufacturing sector, principally companies based out of Taiwan and Republic of Korea (RoK), with the domestic sector accounting for the balance of 21%.

With regards to home retail market, the domestic manufacturing sector has roughly a 50% market share with the remaining 50% comprised of imports from China, Thailand and a handful of other countries.

Due to increasing production costs in China, a large number of foreign manufacturers have been relocating their existing facilities out of China to Vietnam over recent years, said Mr Xuan.

This redirection of sales away from China to Vietnam was the primary factor explaining the increase in the nation’s exports for 2015.

To a more limited extent the nation has seen an increase in foreign direct investment and sales as companies reposition themselves to take advantage of the Vietnam-EU free trade agreement.

Pursuant to that agreement, about 80.3% of import tariffs on footwear will be eliminated immediately upon the creation of the free trade region with the remainder phased out over the subsequent seven years.

The biggest challenge facing footwear said Duong Le from Lefaso is that the rapid development of leather and footwear manufacturing is creating environmental pollution concerns and tremendous added cost.

Particularly with regards to leather tanning and fabrics for shoes, he said. Making the leather and synthetic materials in Vietnam entirely too costly if one figures in the additional cost to safeguard the environment.

From a cost benefit perspective, it may be best for shoe manufacturers to continue buying raw materials from China and the RoK and forgo all tariff reductions afforded by the Vietnam-EU trade deal.

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Currently the domestic manufacturing sector can satisfy just 30% of the demand for tanned leather, however foreign investors don’t find it cost effective to construct more tanning and fabric facilities as the benefits just aren’t there.