VOV.VN – A free trade agreement between the EU and Vietnam is scheduled to come into force in 2018 resulting in businesses from both economies enjoying more favourable conditions for both imports and exports.

rules of origin undermine the eu-vietnam free trade pact hinh 0

Trade in goods

Pursuant to the agreement, the Vietnam government will fully dismantle nearly all tariffs on imports from EU businesses except for a few tariff lines that are subject to duty-free tariff rate quotas.

Upon entry into force of the trade pact, roughly 65% of the value of EU imports (49% of tariff lines) will enter Vietnam duty free with substantially all the remaining 35% liberalized after 10 years.

The EU in turn will liberalize from day one 71% of the value of Vietnamese imports (84% tariff lines); and 99% will enter duty-free after seven years.

The agreement will support expanded unimpeded market access for commercial goods for businesses from both economies in each other’s markets.

Furthermore, the agreement foresees compliance with principles and rules across a large array of fields such as: rules of origin, technical barriers to trade, sanitary and phyto-sanitary measures, and customs and trade facilitation.

In addition, it provides a framework for liberalizing E-commerce and the establishment of a modern investment protection mechanism including an original investment tribunal system.

Other cross-cutting issues brought by the agreement are: government procurement, trade remedies, competition policy, commitments on state-owned enterprises, protection of intellectual property rights and geographical indications, trade and sustainable development, and cooperation and capacity building.

The agreements potential effects can touch upon all sectors – and the agreement specifically mentions among others – automotive, agribusiness, chemicals, pharmaceuticals, wine and spirits, fisheries, machinery, and textiles.

Rules of Origin

The rules of origin of the agreement indicate how to treat goods from sources that are not a party to the agreement.

This is one of the more troublesome aspects for the Vietnam clothing, textiles and footwear segments because of the lack of a well-developed in country supply chain— which results in most raw materials and intermediary goods being sourced from foreign countries.

The preferential rules of origin define when a product can be considered as sufficiently transformed in Vietnam to grant it a tariff preference as agreed to in the free trade agreement.

Only products originating in Vietnam can benefit from the references granted under the agreement. The following conditions must be met for goods exported from Vietnam to benefit from preferential treatment at the EU border.

Goods must: Originate in Vietnam, be accompanied by a certificate of origin, and fulfil certain additional requirements.

The protocol provides for bilateral cumulation. This means, for example, that EU textile producers may supply Vietnamese garment producers with fabrics originating in the EU.

The agreement also provides for other types of cumulation in two well targeted situations: Vietnam may benefit from extended cumulation with the Republic of Korea in relation to fabrics used for producing garments after complying with certain administrative requirements.

Vietnam will also benefit from cumulation with ASEAN countries with which the EU has a free trade agreement in force for two fishery products: squid and octopus.

A review clause foresees the possibility of agreeing to extended cumulation for more products and/or more countries with which both parties have a free trade agreement in the future.

Most of the basic agricultural products exported from Vietnam must be wholly obtained in the Southeast Asian country or in the EU.

The product specific rules for other products mostly require a change of tariff classification from processing in Vietnam or alternatively a limitation in value of non-originating materials between 50% and 70%.

Some products benefit from rules expressed in specific manufacturing operations. The product specific rules for textiles and garments require double transformation (from fibre to fabric or from yarn to garment).

Printed fabrics benefit from the so called ‘printing rule’. Vehicles must comply with the value limit of 45% of non-originating materials and vehicle parts with the value limit of 50% of non-originating materials.

Although this all sounds complicated, in simpler terms it means that segments such as clothing, textiles and footwear that import raw materials and intermediary goods exceeding 50% of the value of the export to the EU most likely will receive no benefit of reduced tariffs from the agreement.

That is, unless these inputs are sourced from either EU member countries or the Republic of Korea. 




VCN- At the Vietnam Textile and Garment Conference on rules of origin in the EU-Vietnam Free Trade Agreement (EVFTA) co-organized by the Vietnam Textile and Apparel Association (Vitas) and EU-MUTRAP on 20th April 2017 in HCM City, experts said that the compliance with rules of origin was the biggest obstacle for exporters to enjoy tax incentives in this market.

rules of origin the biggest barrier of textile exports to the eu
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.

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.

By Nguyen Hue/ Hoang Anh