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EU-Vietnam Free Trade Agreement: How Vietnam exporters stand to gain

With Vietnam and the European Union deepening their trade ties, what opportunities lie ahead for the Southeast Asian country?
03 August 2020 •

As Vietnam embarked on its post-pandemic recovery, the Southeast Asian nation received a timely boost to jump-start its exports.

On June 8, Vietnam ratified a comprehensive trade pact with the European Union (EU), paving the way for the deal to come fully into force later this year.

The EU-Vietnam Free Trade Agreement (EVFTA) has been eight years in the making, with negotiations officially beginning in June 2012. To date, it is only the second free trade agreement (FTA) that the EU has signed with a Southeast Asian country, after Singapore.

“It sets the benchmark for other FTAs which the EU is currently negotiating, or will negotiate with other ASEAN countries,” said Raymond Yee, Vice President, Customs and Regulatory Affairs, DHL Express Asia Pacific.

“Any FTA or other type of trade arrangement that emphasizes the primacy of global trade is vital, particularly given increased domestic pressures for protectionism, nationalistic political agendas and instability at the World Trade Organization,” he added.

The council of the EU, the world’s largest trading bloc, has even described the deal as “the most ambitious [we have] ever concluded with a developing country.”

As the EU seeks to integrate more closely with the Asia-Pacific region, it is eager to create opportunities for its industrial and services exports through a closer partnership with Vietnam. But what is in it for Vietnam and its exporters?

Lower tariffs

The EVFTA will drive Vietnamese exports into the EU and help the country diversify its international markets. For a start, the deal will eliminate a whopping 99 percent of tariffs, though Vietnam will have a transitional period of up to 10 years for some imports from the EU, such as cars and beer.

The onus is on exporters to check their eligibility for lower tariffs under the agreement and prepare the necessary certification or documentation.

Vietnamese workers at a garment factory specializing in linen, silk, bamboo and fine cotton clothing
Vietnamese workers at a garment factory specializing in linen, silk, bamboo and fine cotton clothing

Products need to qualify under an FTA’s “rules of origin”, which requires intimate knowledge of the manufacturing process, sourcing as well as costing. “Once a customer has determined by themselves that they qualify, our role as a logistics provider is to ensure the paperwork accompanies the shipments so we know the appropriate duties to apply,” shared Yee.

The FTA will also reduce many of the EU’s non-tariff barriers with Vietnam, and open up Vietnamese services and public procurement markets to EU companies.

At the same time, Vietnamese consumers will gain easier access to reliable sources of high-quality products and services from the EU in sectors such as pharmaceuticals, healthcare, and advanced technology.

“For instance, under the new agreement, pharmaceutical manufacturers from the EU can now distribute products locally without having to do so via a local distributor like before,” said Tran Sang, Head of Value Added Services, DHL Global Forwarding Vietnam.

Stronger ties

The trade pact strengthens an already significant relationship between Brussels and Hanoi.

After China, the EU is Vietnam’s second-largest export market for agricultural, forestry, and fishery products, among others. According to Sang, DHL’s key exports from Vietnam include textiles, garments and electronics among others — most of which are bound for Germany, France and Netherlands.

In return, the EU is a major supplier of high-technology products to Vietnam, particularly electrical machinery and heavy equipment. With more companies looking to capitalize on Vietnam’s strategic location as a regional logistics hub, this sector is expected to grow further amid “an attractive investment environment” created by the FTA, added Sang.

Two-way trade between the EU and the Southeast Asian nation has risen steadily in recent years. In 2018, Vietnam exported US$42.5 billion (€38.2 billion) worth of goods and services to the EU, while the value of imports from the bloc to Vietnam reached US$13.8 billion, official data shows.

Changing standards

Although the EVFTA gives Vietnamese enterprises a host of opportunities to bolster their exports, they will need to meet strict requirements to fully capitalize on the deal. The Vietnamese government will also need to take steps to improve the business climate to match international practice.

“To meet its commitments, Vietnam will need to push ahead with certain institutional reforms. That includes revising legal frameworks, for example, to ensure that businesses strictly comply with the EVFTA’s regulations on investment procedures, rules of origin, quality standards, and product design,” said Dr. Chu Hoang Long, Associate Professor at the Crawford School of Public Policy, Australian National University.

Enterprises, meanwhile, will need to study the regulations to fully understand their commitments. “They will need to proactively seek cooperation opportunities with foreign partners, join global and regional supply chains, and enhance their governance to boost competitiveness,” Dr. Long added.

A female worker working in a garment factory within an industrial park in Ho Chi Minh City, Vietnam
A female worker working in a garment factory within an industrial park in Ho Chi Minh City, Vietnam

However, exporters in some sectors such as textiles may find that more challenging than others, according to Dr. Long. “The obstacles that this sector faces right now include unstable raw materials, rising labor costs, and stiff competition from enterprises in other countries, such as China and India.

“The role of trade associations, missions, trade promotion, and research institutions should also be strengthened to help companies understand their commitments under EVFTA and meet any new requirements.”

Human rights standards

Another significant feature of the trade pact is that it allows the EU to hold its trading partner to certain human and labor rights standards.

That is due to concerns raised by some EU lawmakers over Vietnam’s human rights record. They argued that the EU should not sign a deal until Vietnamese authorities take measures to address human rights violations and relax curbs on free speech in the country.

In response, the deal enables the EU to take what it terms “appropriate action” in the case of serious breaches of human rights.

To strike that balance is difficult because trade negotiations between countries invariably include geopolitical and larger considerations. “EU’s FTA negotiations with other ASEAN countries, for instance, have also stalled due to environmental concerns like palm oil. While these issues are important, we have always advocated, as an industry, that these be addressed separately from trade,” explained Yee.

The EU has also made provisions in the deal regarding intellectual property protection and sustainable development. For example, it commits Vietnam to implement specific International Labor Organization core standards and United Nations conventions — including those aimed at fighting climate change and protecting biodiversity.

A brighter future

Despite such challenges, the agreement comes at an opportune time for Vietnam’s post–Covid-19 recovery. As the country’s Ministry of Planning and Investment has pointed out, the EVFTA’s benefits will allow Vietnam to expand its export markets once economic activities resume.

Looking further ahead, the World Bank estimates that full implementation of the EVFTA could boost exports by 12 percent, increase Vietnam’s gross domestic product by 2.4 percent and lift 100,000 to 800,000 people out of poverty by 2030.

Maximizing the trade deal’s opportunities could also put Vietnam in a more powerful position on the global trade map, helping to reduce its dependence on China.

Thanks to the country’s favorable geographical location, it could serve as a gateway to ASEAN [the Association of Southeast Asian Nations] for EU and Australian trade and investment activities,” said Dr Long. “At the same time, it could become a processing center for ASEAN businesses looking to export to the EU.”

The agreement will also help to promote relations between the EU and ASEAN more broadly, potentially paving the way for the negotiation of an FTA between the two blocs in the future.

 

For customs and tariff issues relating to the EVFTA, speak with a customs brokerage expert from DHL Global Forwarding Vietnam today.

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As Vietnam embarked on its post-pandemic recovery, the Southeast Asian nation received a timely boost to jump-start its exports.

On June 8, Vietnam ratified a comprehensive trade pact with the European Union (EU), paving the way for the deal to come fully into force later this year.

The EU-Vietnam Free Trade Agreement (EVFTA) has been eight years in the making, with negotiations officially beginning in June 2012. To date, it is only the second free trade agreement (FTA) that the EU has signed with a Southeast Asian country, after Singapore.

“It sets the benchmark for other FTAs which the EU is currently negotiating, or will negotiate with other ASEAN countries,” said Raymond Yee, Vice President, Customs and Regulatory Affairs, DHL Express Asia Pacific.

“Any FTA or other type of trade arrangement that emphasizes the primacy of global trade is vital, particularly given increased domestic pressures for protectionism, nationalistic political agendas and instability at the World Trade Organization,” he added.

The council of the EU, the world’s largest trading bloc, has even described the deal as “the most ambitious [we have] ever concluded with a developing country.”

As the EU seeks to integrate more closely with the Asia-Pacific region, it is eager to create opportunities for its industrial and services exports through a closer partnership with Vietnam. But what is in it for Vietnam and its exporters?

Lower tariffs

The EVFTA will drive Vietnamese exports into the EU and help the country diversify its international markets. For a start, the deal will eliminate a whopping 99 percent of tariffs, though Vietnam will have a transitional period of up to 10 years for some imports from the EU, such as cars and beer.

The onus is on exporters to check their eligibility for lower tariffs under the agreement and prepare the necessary certification or documentation.

Vietnamese workers at a garment factory specializing in linen, silk, bamboo and fine cotton clothing
Vietnamese workers at a garment factory specializing in linen, silk, bamboo and fine cotton clothing

Products need to qualify under an FTA’s “rules of origin”, which requires intimate knowledge of the manufacturing process, sourcing as well as costing. “Once a customer has determined by themselves that they qualify, our role as a logistics provider is to ensure the paperwork accompanies the shipments so we know the appropriate duties to apply,” shared Yee.

The FTA will also reduce many of the EU’s non-tariff barriers with Vietnam, and open up Vietnamese services and public procurement markets to EU companies.

At the same time, Vietnamese consumers will gain easier access to reliable sources of high-quality products and services from the EU in sectors such as pharmaceuticals, healthcare, and advanced technology.

“For instance, under the new agreement, pharmaceutical manufacturers from the EU can now distribute products locally without having to do so via a local distributor like before,” said Tran Sang, Head of Value Added Services, DHL Global Forwarding Vietnam.

Stronger ties

The trade pact strengthens an already significant relationship between Brussels and Hanoi.

After China, the EU is Vietnam’s second-largest export market for agricultural, forestry, and fishery products, among others. According to Sang, DHL’s key exports from Vietnam include textiles, garments and electronics among others — most of which are bound for Germany, France and Netherlands.

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The Covid-19 pandemic is shaking up global supply chains, but one country will remain a force.

In March, the United States government made an about-turn and exempted some China-made medical products from tariffs to battle the rapidly growing coronavirus disease (Covid-19) outbreak. That same month, many countries moved to restrict exports of personal protective equipment (PPE) such as face masks.

This global race for face masks and other medical supplies highlighted how a slowdown in China’s production can disrupt global supply chains.

China produces 20 million sanitary face masks a day, or about 50 percent of the world’s supply. Even before this scramble, companies had already been caught off-guard when China’s factories halted production before the Lunar New Year to stem the spread of the pandemic.

Being the world’s largest manufacturer, China’s slowdown in production has disrupted supply chains worldwide — a study by global data analytics firm Dun & Bradstreet suggests that as many as 5 million businesses could be affected globally.

Manufacturing relocation expected, but not without challenges

For many companies, the disruption in China’s manufacturing system is a wake-up call to build more resilient supply chains. Analysts expect it to speed up efforts to diversify from China, a trend that started at the height of the U.S.-China trade war.

“The whole concept of single-source distribution and manufacturing is definitely in place in some organizations across different industries. But over the last five years or so, they have distributed their inventory and their manufacturing sites, some of them in a rather immediate way during February because of the pandemic,” said John Pearson, CEO, DHL Express.

A production line in a Chinese factory
A production line in a Chinese factory

“The trend will likely continue and to some extent accelerate as Covid-19 exposes the vulnerabilities of the current global supply chains,” said Cyn-Young Park, Director for Regional Cooperation and Integration at Asian Development Bank’s Economic Research and Regional Cooperation Department.

Park attributes these vulnerabilities to the consolidation of manufacturing and distribution, just-in-time and lean practices, and heavy reliance on outsourcing.

Lora Cecere, CEO of research firm Supply Chain Insights, expects supply chains to become localized until a coronavirus vaccine becomes available. “The world has moved past the lowest cost of labor,” she said.

Japan offers one such example of how localizing supply chains might work. In April, the Japanese government set aside more than ¥240 billion (€2 billion) to help businesses bring back the production of products or components that are highly dependent on one country.

Consumer goods maker Iris Ohyama, the first recipient of the subsidy, will produce face masks at a new factory in Japan’s Miyagi Prefecture without using any overseas suppliers.

While reducing dependence on China can strengthen supply chains, it takes time to develop production capabilities and infrastructure, as well as to find a skilled workforce. Then there is the question of scale: China’s manufacturing capacities are just too massive to ignore. In 2018, it accounted for 28 percent of global manufacturing output.

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Trade war accelerates shift of production from China
Countries in Southeast Asia have emerged as alternative manufacturing hubs to China as companies seek to avoid hefty U.S. tariffs.

Most businesses have developed complex interdependencies, resulting in a deep tiering of supply chains, according to Harvard Business School Professor Willy Shih. Manufacturers depend on first-tier suppliers which, in turn, rely on a second tier and so on.

“Visibility into third, fourth, and more distant tiers is challenging, making wholesale replacement of anyone in the chain, let alone the entire chain, extremely difficult,” said Shih.

Alternatives to China

Park agrees that relocating factories or replacing all Chinese suppliers would not be feasible in the short term.

“Nevertheless, many firms will consider shifting manufacturing out of China or diversifying suppliers in the longer term given China’s steadily rising labor and other costs, as well as the higher uncertainty in a single source or the concentration of production centers,” said Park.

But what are the alternatives to China for businesses hoping to diversify their operations into other parts of Asia?

“Low-cost economies in Southeast Asia will benefit from more future shifts given their proximity [to China] and existing ties to the global supply chain infrastructure,” said Park.

A modern garment factory in Ho Chi Minh City, Vietnam
A modern garment factory in Ho Chi Minh City, Vietnam

“Vietnam is a preferred choice, thanks to its strategic location along regional shipping routes, lower labor costs and a young, growing workforce,” explained Shoeib Reza Choudhury, Country Manager and General Director of DHL Express Vietnam.

With the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in place and new free trade agreements (FTA) such as the one with the European Union (EU) coming into effect, the attractive tariff reliefs may encourage more companies to set up their manufacturing operations in the country, shared Choudhury.

Added Park: “Vietnam is positioned strongly to receive more foreign direct investment and attract relocation as it has weathered the Covid-19 pandemic relatively well compared to other economies.”

Apple is one of the companies that has explored moving production from China to Vietnam for its wireless AirPods headphones. According to Jeff Luo, Director at Taipei-based Isaiah Research, Apple and its final assembly partners decided to move the AirPods assembly capacity to Vietnam early in the U.S.-China trade war. “In the third quarter of 2019, we checked [that the assembly partners’] capacity in Vietnam was almost ready for verification by Apple.”

Luo sees the cost of moving as a significant disadvantage of Apple’s decision to shift production out of China. “Even the biggest assembly company in the world with such economy of scale is still only reporting around 10 percent gross margin,” he said.

Apple AirPods
Apple AirPods

“The mindset of every assembly company is to reach as much economy of scale as possible, so that any extra investment for already mass-produced products is very burdensome,” added Luo.

Malaysia is also an attractive alternative and has benefited from the U.S.-China trade war. Early this year, the government’s investment promotion agency set up a special channel to facilitate investments from China, with the target of attracting RM10 billion (€2.1 billion) from investors in the East Asian nation over the next two years.

“South Asia can also [benefit from] this trend over the medium to long term if its markets improve their infrastructure connectivity and doing business indicators further,” said Park.

India has already been attracting manufacturers. Samsung, for example, has expanded its smartphone production in India as it stopped producing mobile phones in China last year.

Even as businesses diversify production or supply sources, one thing remains clear. That China will continue to be an important market — as a manufacturing hub and for its huge consumer base — after the pandemic.

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In March, the United States government made an about-turn and exempted some China-made medical products from tariffs to battle the rapidly growing coronavirus disease (Covid-19) outbreak. That same month, many countries moved to restrict exports of personal protective equipment (PPE) such as face masks.

This global race for face masks and other medical supplies highlighted how a slowdown in China’s production can disrupt global supply chains.

China produces 20 million sanitary face masks a day, or about 50 percent of the world’s supply. Even before this scramble, companies had already been caught off-guard when China’s factories halted production before the Lunar New Year to stem the spread of the pandemic.

Being the world’s largest manufacturer, China’s slowdown in production has disrupted supply chains worldwide — a study by global data analytics firm Dun & Bradstreet suggests that as many as 5 million businesses could be affected globally.

Manufacturing relocation expected, but not without challenges

For many companies, the disruption in China’s manufacturing system is a wake-up call to build more resilient supply chains. Analysts expect it to speed up efforts to diversify from China, a trend that started at the height of the U.S.-China trade war.

“The whole concept of single-source distribution and manufacturing is definitely in place in some organizations across different industries. But over the last five years or so, they have distributed their inventory and their manufacturing sites, some of them in a rather immediate way during February because of the pandemic,” said John Pearson, CEO, DHL Express.

A production line in a Chinese factory
A production line in a Chinese factory

“The trend will likely continue and to some extent accelerate as Covid-19 exposes the vulnerabilities of the current global supply chains,” said Cyn-Young Park, Director for Regional Cooperation and Integration at Asian Development Bank’s Economic Research and Regional Cooperation Department.

Park attributes these vulnerabilities to the consolidation of manufacturing and distribution, just-in-time and lean practices, and heavy reliance on outsourcing.

Lora Cecere, CEO of research firm Supply Chain Insights, expects supply chains to become localized until a coronavirus vaccine becomes available. “The world has moved past the lowest cost of labor,” she said.

Japan offers one such example of how localizing supply chains might work. In April, the Japanese government set aside more than ¥240 billion (€2 billion) to help businesses bring back the production of products or components that are highly dependent on one country.

Consumer goods maker Iris Ohyama, the first recipient of the subsidy, will produce face masks at a new factory in Japan’s Miyagi Prefecture without using any overseas suppliers.

While reducing dependence on China can strengthen supply chains, it takes time to develop production capabilities and infrastructure, as well as to find a skilled workforce. Then there is the question of scale: China’s manufacturing capacities are just too massive to ignore. In 2018, it accounted for 28 percent of global manufacturing output.

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Trade war accelerates shift of production from China
Countries in Southeast Asia have emerged as alternative manufacturing hubs to China as companies seek to avoid hefty U.S. tariffs.

Most businesses have developed complex interdependencies, resulting in a deep tiering of supply chains, according to Harvard Business School Professor Willy Shih. Manufacturers depend on first-tier suppliers which, in turn, rely on a second tier and so on.

“Visibility into third, fourth, and more distant tiers is challenging, making wholesale replacement of anyone in the chain, let alone the entire chain, extremely difficult,” said Shih.

Alternatives to China

Park agrees that relocating factories or replacing all Chinese suppliers would not be feasible in the short term.

“Nevertheless, many firms will consider shifting manufacturing out of China or diversifying suppliers in the longer term given China’s steadily rising labor and other costs, as well as the higher uncertainty in a single source or the concentration of production centers,” said Park.

But what are the alternatives to China for businesses hoping to diversify their operations into other parts of Asia?

“Low-cost economies in Southeast Asia will benefit from more future shifts given their proximity [to China] and existing ties to the global supply chain infrastructure,” said Park.

A modern garment factory in Ho Chi Minh City, Vietnam
A modern garment factory in Ho Chi Minh City, Vietnam

“Vietnam is a preferred choice, thanks to its strategic location along regional shipping routes, lower labor costs and a young, growing workforce,” explained Shoeib Reza Choudhury, Country Manager and General Director of DHL Express Vietnam.

With the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in place and new free trade agreements (FTA) such as the one with the European Union (EU) coming into effect, the attractive tariff reliefs may encourage more companies to set up their manufacturing operations in the country, shared Choudhury.

Added Park: “Vietnam is positioned strongly to receive more foreign direct investment and attract relocation as it has weathered the Covid-19 pandemic relatively well compared to other economies.”

Apple is one of the companies that has explored moving production from China to Vietnam for its wireless AirPods headphones. According to Jeff Luo, Director at Taipei-based Isaiah Research, Apple and its final assembly partners decided to move the AirPods assembly capacity to Vietnam early in the U.S.-China trade war. “In the third quarter of 2019, we checked [that the assembly partners’] capacity in Vietnam was almost ready for verification by Apple.”

Luo sees the cost of moving as a significant disadvantage of Apple’s decision to shift production out of China. “Even the biggest assembly company in the world with such economy of scale is still only reporting around 10 percent gross margin,” he said.

Apple AirPods
Apple AirPods

“The mindset of every assembly company is to reach as much economy of scale as possible, so that any extra investment for already mass-produced products is very burdensome,” added Luo.

Malaysia is also an attractive alternative and has benefited from the U.S.-China trade war. Early this year, the government’s investment promotion agency set up a special channel to facilitate investments from China, with the target of attracting RM10 billion (€2.1 billion) from investors in the East Asian nation over the next two years.

“South Asia can also [benefit from] this trend over the medium to long term if its markets improve their infrastructure connectivity and doing business indicators further,” said Park.

India has already been attracting manufacturers. Samsung, for example, has expanded its smartphone production in India as it stopped producing mobile phones in China last year.

Even as businesses diversify production or supply sources, one thing remains clear. That China will continue to be an important market — as a manufacturing hub and for its huge consumer base — after the pandemic.

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In return, the EU is a major supplier of high-technology products to Vietnam, particularly electrical machinery and heavy equipment. With more companies looking to capitalize on Vietnam’s strategic location as a regional logistics hub, this sector is expected to grow further amid “an attractive investment environment” created by the FTA, added Sang.

Two-way trade between the EU and the Southeast Asian nation has risen steadily in recent years. In 2018, Vietnam exported US$42.5 billion (€38.2 billion) worth of goods and services to the EU, while the value of imports from the bloc to Vietnam reached US$13.8 billion, official data shows.

Changing standards

Although the EVFTA gives Vietnamese enterprises a host of opportunities to bolster their exports, they will need to meet strict requirements to fully capitalize on the deal. The Vietnamese government will also need to take steps to improve the business climate to match international practice.

“To meet its commitments, Vietnam will need to push ahead with certain institutional reforms. That includes revising legal frameworks, for example, to ensure that businesses strictly comply with the EVFTA’s regulations on investment procedures, rules of origin, quality standards, and product design,” said Dr. Chu Hoang Long, Associate Professor at the Crawford School of Public Policy, Australian National University.

Enterprises, meanwhile, will need to study the regulations to fully understand their commitments. “They will need to proactively seek cooperation opportunities with foreign partners, join global and regional supply chains, and enhance their governance to boost competitiveness,” Dr. Long added.

A female worker working in a garment factory within an industrial park in Ho Chi Minh City, Vietnam
A female worker working in a garment factory within an industrial park in Ho Chi Minh City, Vietnam

However, exporters in some sectors such as textiles may find that more challenging than others, according to Dr. Long. “The obstacles that this sector faces right now include unstable raw materials, rising labor costs, and stiff competition from enterprises in other countries, such as China and India.

“The role of trade associations, missions, trade promotion, and research institutions should also be strengthened to help companies understand their commitments under EVFTA and meet any new requirements.”

Human rights standards

Another significant feature of the trade pact is that it allows the EU to hold its trading partner to certain human and labor rights standards.

That is due to concerns raised by some EU lawmakers over Vietnam’s human rights record. They argued that the EU should not sign a deal until Vietnamese authorities take measures to address human rights violations and relax curbs on free speech in the country.

In response, the deal enables the EU to take what it terms “appropriate action” in the case of serious breaches of human rights.

To strike that balance is difficult because trade negotiations between countries invariably include geopolitical and larger considerations. “EU’s FTA negotiations with other ASEAN countries, for instance, have also stalled due to environmental concerns like palm oil. While these issues are important, we have always advocated, as an industry, that these be addressed separately from trade,” explained Yee.

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Vietnam’s textile manufacturing industry is on the rise, fueled by free trade agreements like the historic Comprehensive and Progressive Agreement for Trans-Pacific Partnership.

As the world grapples with the effects of the escalating trade war between the United States and China, one nation is benefiting from it: Vietnam.

The Southeast Asian country, famously known as the “Land of the Ascending Dragon”, is reaping the benefits of the trade diversion as the world’s two largest economies look elsewhere in search of alternative sources for imports.

A market report by Japanese banking group Nomura suggests that Vietnam is by far the largest beneficiary of the redirection, with a 7.9 percent boost expected for its gross domestic product (GDP).

An increase in U.S. imports, however, is not the primary reason Vietnam is slated to become a manufacturing powerhouse.

Pushed by rising labor costs in China, global retail giants have shifted textile and apparel production activities down south in recent years, while ongoing trade tensions have given a stronger impetus for manufacturers to act quickly.

To date, Vietnam has attracted over 6,000 textile manufacturing companies that employ some 2.5 million people combined.

And the numbers are set to rise. The Vietnam Textile and Apparel Association expects textile manufacturing to grow about 10 percent this year to hit US$40 billion (€35.74 billion) by end 2019 — which would propel the nation into the ranks of the top three exporters of textiles and garments worldwide.

Vietnam’s promise

Vietnam’s renaissance in manufacturing while other countries are seeing a slowdown goes beyond China and its role as a push factor.

Foreign companies are turning to Vietnam to leverage its low labor costs and proximity to key markets, which makes it an ideal hub for textile manufacturing.

The CPTPP is expected to help Vietnam build up a stronger supply chain for the textile industry.
The CPTPP is expected to help Vietnam build up a stronger supply chain for the textile industry.

“The geographic location is important. Vietnam is highly connected to China on the northern side, which makes the supply of raw materials quite easy for manufacturing, and through the South China Sea and Pacific, it’s also connected to North America,” said Shoeib Reza Choudhury, Country Manager & General Director, DHL Express Vietnam.

But perhaps the biggest carrot for manufacturers comes in Vietnam’s promise of free, open trade — a big draw given the increasingly uncertain global economic order.

Ho Chi Minh City Investment and Trade Promotion Centre (ITPC) director Pham Thiet Hoa believes that Vietnam’s garment and textile sector is set to expand its market share globally as it taps on free trade agreements (FTAs) to become “a manufacturer of the world’s established brands”.

He noted that more international buyers were, in fact, sourcing products from Vietnam because supply chains for locally made products had improved and the country had participated in more FTAs, including the highly anticipated Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

In January 2019, the agreement came into full force, removing duties on 95 to 98 percent of tariff lines, including footwear and textile exports.

“The CPTPP helps to reduce import tariffs on textile and garment products to several markets. It will also help to attract investment into Vietnam, which will help the country build up a stronger supply chain for the textile and garment industry,” explained Raymon Krishnan, Director of Corporate Advisory at Asian Trade Center.

“Compared to other big textile exporters such as China and India, this is a huge advantage that Vietnam enjoys.”

Nguyen Thi Thu Trang, Director of the WTO and Integration Center at the Vietnam Chamber of Commerce and Industry, added that the CPTPP will also help Vietnam access new markets it has not yet signed bilateral trade agreements with.

The CPTPP is expected to boost Vietnam’s export turnover by 4 percent — with CPTPP member countries becoming its second largest export market after the US — and lift the economy by 1.3 percent.

Foreign companies are turning to Vietnam to leverage its low labor costs and proximity to key markets, which makes it an ideal hub for textile manufacturing.
Foreign companies are turning to Vietnam to leverage its low labor costs and proximity to key markets, which makes it an ideal hub for textile manufacturing.

Other trade agreements like the EU-Vietnam Free Trade Agreement (EVFTA) are also playing a pivotal role in attracting investment and driving textile sales in Vietnam.

The EVFTA, which will remove tariffs on more than 99 percent of Vietnamese exports to the European Union (EU) and vice versa, is expected to bring in more orders from established international apparel brands when ratified in 2019 or 2022.

Smoothing out the knots

Globally, the textile market is projected to reach US$1.23 trillion by 2025.

The rising demand means textile manufacturers are inevitably facing several challenges. In Vietnam, one pressing problem has been the industry’s heavy reliance on imported raw materials.

Raymon pointed out that Vietnam imports 99 percent of cotton and 70 percent of the fiber used in textile production.

“In general, 80 percent of material supply for textile and garment production in Vietnam comes from overseas,” he said, citing local resistance to building manufacturing plants for textile supplies on the back of environmental pollution concerns, and low domestic cotton production.

In addition, much of the textile industry remains reliant on raw material imports from non-CPTPP member countries such as China. This means that companies may not be able to fully enjoy tax incentives of the CPTPP, given that textile products must be made from CPTPP-originating materials.

The key here is to roll out massive transformations in the supply chains.

“This is a huge problem that would require time and resources to fix. The solution to this problem would result in a transformation in the supply chains that are attached to the textile industry in Vietnam and their major investors,” observed Raymon.

Still, firms like TNG Investment and Trading Joint Stock Company, the biggest exporter of apparel products in the northern province of Thai Nguyen, are prepared to make changes so they can capitalize on the CPTPP. They have switched to importing raw materials from CPTPP countries and built a factory to produce its own feedstock.

By tackling the current challenges head-on, Vietnam’s textile industry will then be able to move up the value chain and, in turn, fully reap the rewards of free trade deals.

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As the world grapples with the effects of the escalating trade war between the United States and China, one nation is benefiting from it: Vietnam.

The Southeast Asian country, famously known as the “Land of the Ascending Dragon”, is reaping the benefits of the trade diversion as the world’s two largest economies look elsewhere in search of alternative sources for imports.

A market report by Japanese banking group Nomura suggests that Vietnam is by far the largest beneficiary of the redirection, with a 7.9 percent boost expected for its gross domestic product (GDP).

An increase in U.S. imports, however, is not the primary reason Vietnam is slated to become a manufacturing powerhouse.

Pushed by rising labor costs in China, global retail giants have shifted textile and apparel production activities down south in recent years, while ongoing trade tensions have given a stronger impetus for manufacturers to act quickly.

To date, Vietnam has attracted over 6,000 textile manufacturing companies that employ some 2.5 million people combined.

And the numbers are set to rise. The Vietnam Textile and Apparel Association expects textile manufacturing to grow about 10 percent this year to hit US$40 billion (€35.74 billion) by end 2019 — which would propel the nation into the ranks of the top three exporters of textiles and garments worldwide.

Vietnam’s promise

Vietnam’s renaissance in manufacturing while other countries are seeing a slowdown goes beyond China and its role as a push factor.

Foreign companies are turning to Vietnam to leverage its low labor costs and proximity to key markets, which makes it an ideal hub for textile manufacturing.

The CPTPP is expected to help Vietnam build up a stronger supply chain for the textile industry.
The CPTPP is expected to help Vietnam build up a stronger supply chain for the textile industry.

“The geographic location is important. Vietnam is highly connected to China on the northern side, which makes the supply of raw materials quite easy for manufacturing, and through the South China Sea and Pacific, it’s also connected to North America,” said Shoeib Reza Choudhury, Country Manager & General Director, DHL Express Vietnam.

But perhaps the biggest carrot for manufacturers comes in Vietnam’s promise of free, open trade — a big draw given the increasingly uncertain global economic order.

Ho Chi Minh City Investment and Trade Promotion Centre (ITPC) director Pham Thiet Hoa believes that Vietnam’s garment and textile sector is set to expand its market share globally as it taps on free trade agreements (FTAs) to become “a manufacturer of the world’s established brands”.

He noted that more international buyers were, in fact, sourcing products from Vietnam because supply chains for locally made products had improved and the country had participated in more FTAs, including the highly anticipated Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

In January 2019, the agreement came into full force, removing duties on 95 to 98 percent of tariff lines, including footwear and textile exports.

“The CPTPP helps to reduce import tariffs on textile and garment products to several markets. It will also help to attract investment into Vietnam, which will help the country build up a stronger supply chain for the textile and garment industry,” explained Raymon Krishnan, Director of Corporate Advisory at Asian Trade Center.

“Compared to other big textile exporters such as China and India, this is a huge advantage that Vietnam enjoys.”

Nguyen Thi Thu Trang, Director of the WTO and Integration Center at the Vietnam Chamber of Commerce and Industry, added that the CPTPP will also help Vietnam access new markets it has not yet signed bilateral trade agreements with.

The CPTPP is expected to boost Vietnam’s export turnover by 4 percent — with CPTPP member countries becoming its second largest export market after the US — and lift the economy by 1.3 percent.

Foreign companies are turning to Vietnam to leverage its low labor costs and proximity to key markets, which makes it an ideal hub for textile manufacturing.
Foreign companies are turning to Vietnam to leverage its low labor costs and proximity to key markets, which makes it an ideal hub for textile manufacturing.

Other trade agreements like the EU-Vietnam Free Trade Agreement (EVFTA) are also playing a pivotal role in attracting investment and driving textile sales in Vietnam.

The EVFTA, which will remove tariffs on more than 99 percent of Vietnamese exports to the European Union (EU) and vice versa, is expected to bring in more orders from established international apparel brands when ratified in 2019 or 2022.

Smoothing out the knots

Globally, the textile market is projected to reach US$1.23 trillion by 2025.

The rising demand means textile manufacturers are inevitably facing several challenges. In Vietnam, one pressing problem has been the industry’s heavy reliance on imported raw materials.

Raymon pointed out that Vietnam imports 99 percent of cotton and 70 percent of the fiber used in textile production.

“In general, 80 percent of material supply for textile and garment production in Vietnam comes from overseas,” he said, citing local resistance to building manufacturing plants for textile supplies on the back of environmental pollution concerns, and low domestic cotton production.

In addition, much of the textile industry remains reliant on raw material imports from non-CPTPP member countries such as China. This means that companies may not be able to fully enjoy tax incentives of the CPTPP, given that textile products must be made from CPTPP-originating materials.

The key here is to roll out massive transformations in the supply chains.

“This is a huge problem that would require time and resources to fix. The solution to this problem would result in a transformation in the supply chains that are attached to the textile industry in Vietnam and their major investors,” observed Raymon.

Still, firms like TNG Investment and Trading Joint Stock Company, the biggest exporter of apparel products in the northern province of Thai Nguyen, are prepared to make changes so they can capitalize on the CPTPP. They have switched to importing raw materials from CPTPP countries and built a factory to produce its own feedstock.

By tackling the current challenges head-on, Vietnam’s textile industry will then be able to move up the value chain and, in turn, fully reap the rewards of free trade deals.

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The EU has also made provisions in the deal regarding intellectual property protection and sustainable development. For example, it commits Vietnam to implement specific International Labor Organization core standards and United Nations conventions — including those aimed at fighting climate change and protecting biodiversity.

A brighter future

Despite such challenges, the agreement comes at an opportune time for Vietnam’s post–Covid-19 recovery. As the country’s Ministry of Planning and Investment has pointed out, the EVFTA’s benefits will allow Vietnam to expand its export markets once economic activities resume.

Looking further ahead, the World Bank estimates that full implementation of the EVFTA could boost exports by 12 percent, increase Vietnam’s gross domestic product by 2.4 percent and lift 100,000 to 800,000 people out of poverty by 2030.

Maximizing the trade deal’s opportunities could also put Vietnam in a more powerful position on the global trade map, helping to reduce its dependence on China.

Thanks to the country’s favorable geographical location, it could serve as a gateway to ASEAN [the Association of Southeast Asian Nations] for EU and Australian trade and investment activities,” said Dr Long. “At the same time, it could become a processing center for ASEAN businesses looking to export to the EU.”

The agreement will also help to promote relations between the EU and ASEAN more broadly, potentially paving the way for the negotiation of an FTA between the two blocs in the future.

 

For customs and tariff issues relating to the EVFTA, speak with a customs brokerage expert from DHL Global Forwarding Vietnam today.

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