Vietnam’s National Assembly officially approved the EU-Vietnam Free Trade Agreement (EVFTA) on 8 June 2020, which is expected to take into effect as early as in August 2020.
EVFTA will eliminate nearly all tariffs (over 99%) between the EU and Vietnam. However, textile and apparel (T&A) are among a few exceptions that will not be able to enjoy duty-free treatment on day one. Specifically:
- The EU will eliminate duties with more extended staging periods (up to 7 years) for some sensitive products in the textile apparel and footwear sectors (see the graphs above).
- By adopting the fabric-forward rules of origin (or the so-called “double transformation”) for apparel items, EVFTA intends to prevent products from a third party (such as China) from flooding the EU market. Specifically, to benefit from preferential access, garments will need to use fabrics produced in Vietnam or the EU. However, through the EVFTA cumulation provision, fabrics originating in South Korea or other ASEAN countries with which the EU has a free trade agreement in force will be considered as originating in Vietnam. (Note: South Korea is a free trade agreement partner of the EU). While China remains the top textile supplier for Vietnam, the EVFTA apparel-specific rules of origin will provide more incentives for Vietnam to reduce its China dependence and restructure its textile and apparel supply chain. On the other hand, the totality of EU textile fabric exports to Vietnam will be liberalized immediately when the agreement enters into force.
- Statistics show that Vietnam was EU’s sixth-largest extra-region apparel supplier in 2019 (after China, Bangladesh, Turkey, India, and Cambodia), accounting for 4.3% in value (or US$4.3 billion). Many of Vietnam’s primary competitors already enjoyed duty-free market access to the EU, such as Turkey (through the Customs Union), Bangladesh, and Cambodia (through the EU Everything But Arms program). EVFTA will provide a level playing field for Vietnam, which is expected to see a continuous robust growth of its apparel exports to the EU and gain additional market shares in the years to come. Meanwhile, not eligible for any EU preferential duty benefit, apparel exports from China are likely to face intensified competition in the EU market after the implementation of EVFTA.
- EVFTA may further encourage investment in Vietnam’s textile industry. Notably, EVFTA and CPTPP together will make Vietnam one of the very few apparel exporters in the world that can enjoy duty free market access (though not immediately) to both the EU and Japan (or 40% of the world’s total apparel import market). That being said, restrained by the country’s relatively small population, the apparel industry is increasingly facing the challenge of competing for labor with other export-oriented sectors in Vietnam, which may also try to expand their production and export by taking advantage of the CPTPP and EVFTA.
8 thoughts on “EU-Vietnam Free Trade Agreement and Outlook of Vietnam’s Apparel Export”
It is interesting that while EVFTA was created to eliminate nearly all tariffs between the EU and Vietnam, the textile and apparel industry will not benefit from the trade agreement for some time. As seen in the second graphic, items will slowly be reduced to a 0% tariff level but for many products, it will not happen for several years. Despite the tariff decrease over several years, it seems that the EVFTA is somewhat beneficial for the T&A industry as the fabric- forward rule of origin that is being adopted is beneficial. This helps to limit imports from other apparel producing countries in favor of Vietnam.
Since EVFTA will be adopting the fabric-forward rules of origin, it will be interesting to see the shift in Vietnam’s textile imports. With about 54% of those imports coming from China, a third party not approved under the fabric-forward rule, Vietnam will have to undergo a massive shift in their supply chain. Since Vietnam is not able to support internal textile production, it will be interesting to see how they adapt and the impact this will have on their outsourcing.
The EVFTA seems to have many benefits to Vietnamese exports, especially because the trade expends to other trade agreements within the EU such as South Korea or other ASEAN countries. However, since Vietnam has been so reliant on textile imports from China, the fabric forward rules of origin in the EVFTA will challenge Vietnam to find a new textile supplier to gain the tariff free trade they want. With having around 5 years to do so though, I believe it is empowering Vietnam to become a very strong export competitor because they now have duty free access to both the EU and Japan.
I think it’s interesting to see that some countries are chosen to not have to necessarily adhere to rules that others may be, however, I do believe this is something that is done to keep countries on a leveled playing field. It does make sense to me that Vietnam, although it will not immediately be given the opportunity to trade without tariffs initially, would be given the option to trade freely with the EU so that other third-party countries do not flood the market. I think this gives countries equal opportunities for trade, and regulations such as these are what keep the industry progressing.
I think imposing the EVFTA will be very beneficial to Vietnam and the EU. It will allow EU to diversify the origin of their imports. The yarn forward section of this agreement will do wonders for Vietnam by encouraging them to decrease their reliance on China and import textiles from nations within the ASEAN. The competition that will be created by EVFTA within the EU for apparel importing will highly benefit Vietnam. This will hopefully bring more capital to Vietnam’s T&A industry, causing them to shift towards capital-intense textile production. Because of their small population, labor-intense apparel production is not necessarily the best option for Vietnam, a shift towards textile production might be better their economy.
I thought it was interesting how the EVFTA was created to eliminate nearly all tariffs (over 99%) between the EU and Vietnam, but the textile and apparel (T&A) are some exceptions that will not be able to enjoy duty-free treatment on day one. With about half of Vietnam’s textile imports come from China, the fabric forward rules of origin in the EVFTA, Vietnams will have to change their supply chain to find a textile supplier under the tariff free trade. Although it make time time, this means Vietnams will have less dependence on China and can restructure its textile & apparel supply chain to help the country become more independent and developed.