Not ready for bigger market
According to Eurostat and EUCOM, the total bilateral trade between Vietnam and EU reached EUR 49.3bn in 2018, an increase of 310% YoY. In which Vietnam exported EUR 38.19bn to EU and imported EUR 11.1bn from this region. The trade surplus of Vietnam with EU rose to EUR 27.08bn from EUR 4.08bn in 2009, an increase of 562.75%.
The main products which Vietnamese enterprises exported to EU included mechanical and consumer products (EUR 20.14bn, 52.7% of total exports from Vietnam to EU), shoes and hats (EUR 4.03bn, 10.6% of total exports from Vietnam to EU), textile and garment products (EUR 3.73bn, 9.8% of total exports from Vietnam to EU), vegetables and fruits (EUR 2.24bn, 5.9% of total exports from Vietnam to EU) and other mechanical products (EUR 1.49bn, 3.9% of total exports from Vietnam to EU).
However, Vietnam just constituted 1.3% in total global trade value of EU, ranking 16 in terms of bilateral trade.
Currently, Vietnamese products exported to EU are being imposed the GSP tariff (Generalized System of Preferences) which is lower than the MFN tariff (Most Favored Nation) that EU applies on products of other countries like Malaysia and Brunei. This increases the competitiveness of Vietnamese products.
However, based on the ‘Everything but Arms’ initiative of EU, all imports to EU from the least developed countries, such as Laos, Cambodia and Myanmar, are duty-free.
Hence, when EVFTA becomes effective, the advantages of Vietnamese products compared to products from GSP and MFN countries, will increase significantly. The tax differentiation between Vietnamese products and products from least developed countries will also narrow down.
Besides some industries that will receive direct benefit from EVFTA, the other sectors like logistics, infrastructure, construction and industrial zone development will also benefit indirectly from the Free Trade Agreement.
Furthermore, 42% of textiles and garments and 37% of footwear products will be duty-free when exported to EU. The tax rate on other products will be cut to 0% in 3-7 years.
Need to overcome challenges
Right after the above information was announced, trading activities of stocks of benefiting sectors like textiles and garments have quickly been improving. However, according to Bao Viet Securities (BVSC), to get tax advantages, Vietnamese products have to qualify on the list of rigid requirements of origin.
For example, to get tax rate of 0%, the textiles and garments have to qualify for two standards. First, the fabric which is used to make the finished garment must be manufactured in Vietnam or EU. Second, all the cutting and sewing activities must be done in Vietnam or EU.
Although the requirement for origin by EVFTA is less strict than the requirements of CPTPP, it still challenges Vietnamese companies. Currently, most Vietnamese companies do not produce fabric or yarn, they just do the cutting and sewing. Furthermore, most fabrics which are used by the garment sector are currently imported from China and Taiwan.
To utilize the benefits of EVFTA, Vietnam needs to develop the textile and garment sector much more widely. Vietnam needs to focus more on supporting activities to fully supply materials to cutting and sewing companies. Furthermore, Vietnamese enterprises should consider importing materials from EU to improve quality of products.
For footwear products, after EVFTA becomes effective, the advantage from GSP tax rate (3-4%) will be removed. The new tax rate will be applied. Accordingly, tariff on footwear will be cut gradually from 12.4% (MFN tariff) to 0% in 3-7 years. Hence, in the first few years, Vietnamese footwear will not benefit from EVFTA as the tax rate is higher than GSP tariff.