Rules of origin: The biggest barrier of textile exports to the EU

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Textile production at Saigon Garment Company No.3.

Regarding textile exports to the EU in recent years, Ms. Dang Phuong Dung, the Deputy Head of the Vitas Advisory Board and EU-MUTRAP expert said that although the EU was the largest textile import market in the world, it was only the second largest textile export market of Vietnam (after the US). The growth rate of the textile and garment export turnover to the EU as well as the proportion of imported textile and garment into the EU have been still very small, which shows the weak competitiveness of Vietnamese garment products. The negotiation and signing of EVFTA are to create more favourable conditions for domestic businesses to improve their competitiveness in this market.

According to Ms. Dang Phuong Dung, the export of textile and garment products to the EU in the past time faced difficulties due to strict criteria of the EU market with small orders, not as large as the US. In addition, the importers tend to buy package products instead of processing goods, so most Vietnamese businesses which are not competitive find is difficult to access.

EVFTA will create more favourable conditions for domestic enterprises to expand their market thanks to preferential tax policies. However, according to Ms. Dang Phuong Dung, rules of origin were the biggest obstacles for textile and garment to enter the EU market from when EVFTA took effect because Vietnam mainly imports goods from China. In recent years, Vietnam has signed many FTAs with ASEAN, Korea and Japan on the rules of origin on the fabrics, but the ability to use rules of origin of Vietnam is very limited.

EVFTA, however, applies accumulation rules, which allows Vietnamese exporters to use textile from a third country that has signed an FTA with Vietnam and the EU (South Korea as an example). This is a good opportunity for Vietnam because in the future, the ASEAN countries will increase sign FTA with the EU, and Vietnam can expand the source of materials to enjoy tax incentives.

Ms. Vu Thi Phuong, the Deputy Secretary General of the Vietnam Textile and Garment Association, said that in the first two months of 2017, textile and garment export turnover to the EU market reached $US 480 million, an increase of nearly 7% compared to the same period of 2016. This is considered to be a positive sign for textile and garment exports to this market. Although the proportion of textile and garment exports to the EU is still low (only accounting for 1.9% of total EU textile and garment imports by 2015), textile and apparel imports into the EU are subject to a high tax rate of 8-12. %, But with EVFTA, the EU will be a potential market for export garment and textile. Since this agreement takes effect, many products will be reduced to 0% and after 7 years, all exports to the EU market will be reduced to 0%.

According to Mr. Stefan Moser, the EU-MUTRAP expert, in order to meet the requirements of EVFTA rules of origin, exports to the EU must meet the requirements of fabric produced in Vietnam or the EU, or from one-third country which has had FTAs with Vietnam and EU. However, the rate of utilization of bilateral rules of origin (EU imports of fabric for production and re-export to the EU) is very low because the price of EU fabrics is very expensive with a high transportation cost.

According to Mr. Stefan Moser, insufficiently processing activities such as preservation, unpacking, assembly of packages and polishing do not meet the requirements of rules of origin, so in the case where enterprises still declare and export to the EU, they may be detected and fined by the European Regulatory Authority.

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According to experts, the opportunity from EVFTA is very high, but domestic enterprises must meet the requirements of rules of origin to take advantage of the opportunity. Meanwhile, according to Ms. Vu Thi Phuong, the practical use of tax incentives from the signed FTA has been quite low. Currently, there are only 35% of Vietnam's export products make full use of the opportunities provided by FTAs, while 65% are still subject to high tariffs. In order to support enterprises, the Vietnam Textile and Garment Association has actively propagated and provided information on the market for enterprises to prepare. "The regulations of the FTAs are increasingly tight and enterprises must carefully prepare to take advantage of opportunities from integration", Ms. Phuong emphasized.