Textile, leather and footwear have additional opportunities for export

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The leather and footwear industry will have strong export growth motivation from EVFTA. Photo: N.Hue.

An immense chance

According to experts, with a roadmap of common tax reduction commitments from 3 to 7 years, nearly 100% of export tax lines from Vietnam to EU such as agricultural products, textiles and footwears will benefit.

Specifically, for the leather and footwear industry, according to Mr. Diep Thanh Kiet, Vice Chairman of Vietnam Leather and Footwear Association (Lefaso), the roadmap to reduce tax to 0% after 7 years, of which over 37% is estimated.

The number of leather and footwear products will be applied at 0% as soon as the EVFTA comes into effect, which will boost businesses in this industry. Particularly, bag exports will benefit immediately because the tax is reduced to 0% as soon as the FTA goes into implementation. In 2018, the EU market accounted for about 29% of the total 16 billion USD export turnover of the footwear industry. Therefore, right after the EVFTA was implemented the export growth of this sector in the EU market is expected to exceed 12% per year in the first year and will increase by 10% in the following years.

As for the textile and garment industry, according to the Ministry of Industry and Trade, as soon as the EVFTA is officially in force, the textile and garment industry will see the most benefits, whereby within 7 years the current tax rate (15%) will drop gradually to 0%. It is worth noting that if in the CPTPP on the "yarn forward" rules of origin are considered to be challenges for textiles, and then EVFTA rules only apply from fabrics. It means that the fabric applied to textiles and garments exported to the EU, meeting production conditions in Vietnam. In particular, with the principle of "aggregation of origin", raw materials of Vietnam's textile products imported from countries with bilateral agreements with the EU (typically Korea) will be exported to Europe and include incentives from the EVFTA.

Vietnam Textile and Apparel Association also stated that the EVFTA will create a driving force for export activities of the textile industry to the EU. In 2018, the textile and garment industry exported US $ 36 billion, but exports to the EU reached just over US $ 4 billion. With the EU market, until now, the market share of Vietnam’s textile and garment industry is still limited because the orders are still low and the designs change constantly so enterprises have not paid much attention. However, with the motivation to cut tariffs, the textile and garment industry expects to boost exports to this market.

Many challenges

Although opportunities are great, to take advantage of EVFTA, the textile and footwear industry faces many challenges. According to the analysis of Bao Viet Securities Joint Stock Company (BVSC), for the textile industry to receive tax reduction in accordance with the agreement, the products must strictly comply with the rules of origin, satisfying the two conditions is that the fabric used to create the finished product must originate from Vietnam or the EU and the cutting and sewing must be done in Vietnam or the EU. Therefore, although the rules of origin in EVFTA are looser than those of the CPTPP, there are still many challenges for Vietnamese textile enterprises. The reason is that most Vietnamese enterprises are only doing cutting and not producing fabric and yarn.

In addition, raw materials that most Vietnamese textile enterprises originated from China and Taiwan - are countries that do not have FTAs with the EU. Therefore, in order to maximize the benefits from the EVFTA, it is necessary to focus on developing the textile and supporting industries in the textile and garment industry in order to provide materials for garment-cutting enterprises.

In addition, early use of Korean-origin fabrics should be strengthened in order to take advantage of the EVFTA agreement while the supporting industry has not yet developed. In addition, businesses can take advantage of the EVFTA and import materials, especially fabrics, originating from Europe to improve the value and quality of products.

For the footwear industry, for many years, the EU has always been Vietnam's largest footwear export market. In the EVFTA, the EU pledged to eliminate import duties as soon as the agreement entered into force for 37% of the tariff lines for footwear. The remainder will be abolished according to the roadmap of 3 to 7 years. However, similar to the textile and apparel industry, the EU footwear product group is committed to eliminate the immediate tax, which is the product that Vietnam does not process or export to the EU. Therefore, Vietnam is expected to benefit less from this commitment group.

With the EU product group, it is committed to eliminate tariffs for 3-7 years, including the majority of footwear products that Vietnam is exporting to the EU. Currently, this group is enjoying an average preferential tax rate of 3-4% under the Universal GSP Preferential Tariff Regulation. When the EVFTA comes into effect, GSP will automatically terminate, import tariffs on footwear will gradually decrease to 0% from the MFN level (about 12.4%) according to the roadmap of 3-7 years.

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Thus, in the first few years of EVFTA implementation, most of the footwear products will not benefit from the EVFTA, and even may be adversely affected (due to the gradual reduction of tax rates from 12.4% will still be higher than 3-4% according to GSP).