Rules of origin undermine the EU-Vietnam free trade pact

Trade in goods

Pursuant to the agreement, the Vietnam government will fully dismantle nearly all tariffs on imports from EU businesses except for a few tariff lines that are subject to duty-free tariff rate quotas.

Upon entry into force of the trade pact, roughly 65% of the value of EU imports (49% of tariff lines) will enter Vietnam duty free with substantially all the remaining 35% liberalized after 10 years.

The EU in turn will liberalize from day one 71% of the value of Vietnamese imports (84% tariff lines); and 99% will enter duty-free after seven years.

The agreement will support expanded unimpeded market access for commercial goods for businesses from both economies in each other’s markets.

Furthermore, the agreement foresees compliance with principles and rules across a large array of fields such as: rules of origin, technical barriers to trade, sanitary and phyto-sanitary measures, and customs and trade facilitation.

In addition, it provides a framework for liberalizing E-commerce and the establishment of a modern investment protection mechanism including an original investment tribunal system.

Other cross-cutting issues brought by the agreement are: government procurement, trade remedies, competition policy, commitments on state-owned enterprises, protection of intellectual property rights and geographical indications, trade and sustainable development, and cooperation and capacity building.

The agreements potential effects can touch upon all sectors – and the agreement specifically mentions among others – automotive, agribusiness, chemicals, pharmaceuticals, wine and spirits, fisheries, machinery, and textiles.

Rules of Origin

The rules of origin of the agreement indicate how to treat goods from sources that are not a party to the agreement.

This is one of the more troublesome aspects for the Vietnam clothing, textiles and footwear segments because of the lack of a well-developed in country supply chain— which results in most raw materials and intermediary goods being sourced from foreign countries.

The preferential rules of origin define when a product can be considered as sufficiently transformed in Vietnam to grant it a tariff preference as agreed to in the free trade agreement.

Only products originating in Vietnam can benefit from the references granted under the agreement. The following conditions must be met for goods exported from Vietnam to benefit from preferential treatment at the EU border.

Goods must: Originate in Vietnam, be accompanied by a certificate of origin, and fulfil certain additional requirements.

The protocol provides for bilateral cumulation. This means, for example, that EU textile producers may supply Vietnamese garment producers with fabrics originating in the EU.

The agreement also provides for other types of cumulation in two well targeted situations: Vietnam may benefit from extended cumulation with the Republic of Korea in relation to fabrics used for producing garments after complying with certain administrative requirements.

Vietnam will also benefit from cumulation with ASEAN countries with which the EU has a free trade agreement in force for two fishery products: squid and octopus.

A review clause foresees the possibility of agreeing to extended cumulation for more products and/or more countries with which both parties have a free trade agreement in the future.

Most of the basic agricultural products exported from Vietnam must be wholly obtained in the Southeast Asian country or in the EU.

The product specific rules for other products mostly require a change of tariff classification from processing in Vietnam or alternatively a limitation in value of non-originating materials between 50% and 70%.

Some products benefit from rules expressed in specific manufacturing operations. The product specific rules for textiles and garments require double transformation (from fibre to fabric or from yarn to garment).

Printed fabrics benefit from the so called ‘printing rule’. Vehicles must comply with the value limit of 45% of non-originating materials and vehicle parts with the value limit of 50% of non-originating materials.

Although this all sounds complicated, in simpler terms it means that segments such as clothing, textiles and footwear that import raw materials and intermediary goods exceeding 50% of the value of the export to the EU most likely will receive no benefit of reduced tariffs from the agreement.

That is, unless these inputs are sourced from either EU member countries or the Republic of Korea.