Opportunities for Sustainable Exports from New-generation FTAs

10:42:05 AM | 8/22/2022

With its 24th largest export value among 240 economies, Vietnam is regarded as one of the world's export powerhouses. Even during the COVID-19 pandemic, its exports still grew at a double-digit pace to stand among the best performers.

FTAs work effectively

Vietnam is a wide-open economy as it has trade relations with 230 countries and territories, including free trade agreements (FTAs) with 60 economies. These FTAs have enabled Vietnamese businesses to expand and access global markets, connect with and participate more deeply in global value chains and production networks. Its major export markets include the United States, Canada, China, the EU, China, ASEAN, Japan and South Korea.

According to the Ministry of Industry and Trade, Vietnam's export turnover to CPTPP countries recorded remarkable growth. As of July 2022, exports to Canada reached US$5.3 billion, up 20.8% year on year; exports to Mexico soared 44.5% to US$4.6 billion; and exports to Peru leaped 84.4% to US$560 million.

Boosted by the EVFTA Agreement, exports to the EU rose 14.2% to US$40.1 billion in 2021. With the UKVFTA Agreement, shipments to the United Kingdom (UK) jumped 16.4% to US$5.8 billion in 2021.

Currently, as the COVID-19 pandemic has been controlled, export prospects to markets with new-generation FTAs with Vietnam will continue to grow. EVFTA, CPTPP and RCEP agreements will continue to increase tariff preferences, provide incentives for investment flows to increase production capacity and make exporters more professional in the world market.

Besides, many countries are launching economic stimulus packages and stimulating consumer demand to increase the demand for imported goods. Therefore, in the coming time, Vietnam's exports to FTA markets are forecast to further grow, thus ensuring jobs for workers and enabling Vietnam to join more deeply in global supply chains.

The leather and footwear export value climbed 13% year on year to over US$14 billion in the first seven months of this year. Growth was steady in key markets such as North America (24%) and the EU (17.5%). Main markets, especially those with FTAs, maintained a very good export rate, for example CPTPP market (up 10%) and the EU (18%). In particular, the leather and footwear industry increased the localization rate from 40-45% to 55% and domestically supplied 70-80% of inputs for sports shoes.

For the textile and garment industry, according to a WTO report, in 2020, Vietnam surpassed Bangladesh to become the second largest garment exporter in the world after China. In 2021, the textile and garment industry exported US$40 billion and Vietnam National Textile and Garment Group (Vinatex) also achieved an all-time profit high of nearly VND1,500 billion in its 26-year history. In the first six months of 2022, good market demand boosted its profit to VND981 billion, 3% higher than its plan. The group's export value exceeded VND10,000 billion, up nearly 40% year on year.

Challenges for exporters

According to economic expert Le Quoc Phuong, in the opposite direction, FTAs also create great competitive pressures on businesses in both domestic and international markets while their potential and competitiveness are limited.

Vietnam's exports are not sustainable. Although the export value is high, the added value is lower than in some ASEAN countries such as Thailand, Singapore, and Indonesia. Although the commodity structure has changed dramatically, key exports remain processed and assembled industrials and raw materials. This shows that exports are still very dependent on FDI firms. "Enterprises have not fully tapped their competitive technological advantages, labor qualifications and management to create competitive exports with high scientific and technological content," he added.

A representative of the Vietnam Leather, Footwear and Handbag Association (Lefaso) said that the biggest challenge in sustainable development when entering into new-generation FTAs is forcing businesses to comply with environmental and labor requirements and regulations. These are very strict requirements. When fulfilling FTA commitments, tariff barriers will be lifted but nontariff barriers will be erected.

For example, Germany will introduce new laws on due diligence of supply chains or the EU will impose a tax on CO2 emissions per unit of product. The leather, footwear, textile and apparel industries are still facing difficulties in input investment and production. Leather costs billions of U.S. dollars on imports every year due to strict environmental regulations. Garment materials must also comply with new regulations on dyeing and weaving techniques. This is also a limitation for these two industries to increase the localization ratio in the near future.

A representative of the Vietnam Textile and Apparel Association (Vitas) said that the European Commission approved a strategy for sustainable development and circular textiles of the EU. Accordingly, manufacturers are responsible for their products along the value chain even when they become waste.

Trade barriers in FTAs are quite diverse. Agricultural products must meet food safety requirements. The textile and garment industry must comply with rules of origin and products must be recyclable and reusable. Other requirements relating to labor standards, environmental standards and intellectual property will lead to higher costs.

Enterprises need to aim for sustainable export, improve product quality control, prepare carefully, establish partnerships and focus on human resources

Mr. Le Hoang Tai, Deputy Director of the Vietnam Trade Promotion Agency, Ministry of Industry and Trade

From a business perspective, to effectively deploy and utilize trade promotion solutions for sustainable export of Vietnamese goods, companies first of all need to enhance their active approach to information, policy regulation, market research, partner appraisal or coordination with trade promotion agencies to work out and carry out action plans.

Second, it is necessary to focus on improving and controlling product quality, enhancing competitiveness to meet import market regulations on quality, food hygiene and safety, traceability and non-tariff barriers.

Third, they need to prepare export plans for each item and each target market, and actively link with other firms to support each other to meet requirements imposed by importers.

Fourth, special attention is paid to human resource training, not only in production but also in commerce. Human resources need to have foreign language skills, negotiation skills, and trade promotion skills to grasp modern consumer trends and update information technology to carry out effective trade promotion, and boost exports to international markets in a more professional and methodical manner. Because some businesses lack methods, skills and foreign languages when they take part in promotional events, they thus fail to achieve their desired effects from trade promotion.

Exports must be of higher quality, localization and technology

Dr. Le Quoc Phuong, Economist

To boost sustainable export development, the government needs to have incentive policies and ensure enforcement to add quality and value to exports and increase localization rate and advanced technology for exports. First, it is necessary to develop supporting industries to take advantage of FTA incentives. To do this, a huge cost is needed. In this regard, although we have made plans for a long time, we have not done much. There is a need to sharpen corporate competitiveness on par with FDI firms in many fields

In addition, the government needs to step up administrative reform and reduce time costs for businesses to focus on production and business, control exports and take trade protection measures.

They also need to make good use of government support measures; have suitable development strategies and actively integrate into the world. They need to advance reforms, reduce product costs, accelerate digital transformation, technological innovation and human resource development. These solutions need to be synchronized, not only by the government, but also by enterprises themselves, to achieve sustainable exports to meet FTA requirements.

Textile and garment companies need to comply with rules of origin and actively source raw materials

Mr. Vuong Duc Anh, Chief of Office of the Board of Directors of Vietnam National Textile and Garment Group

New-generation FTAs such as CPTTP and EVFTA all require that fabric must be produced in FTA areas. Controlling raw material sources will be a very important approach for companies, including textile and garment companies, to have sustainable development directions in the coming time.

Vietnam National Textile and Garment Group (Vinatex) also made a development strategy to 2025, with a vision to 2030, aiming to become a one-stop supplier of solutions for businesses in global supply chains: Supplying all materials from yarns and from fabrics to end knitwear products. Targeted products are green, and consistent with requirements from large retailers. Vinatex will also develop products for niche markets such as eco-friendly flame-retardant fabrics. If the target is achieved, the added value can be up to 80%.

We hope to have a textile-garment and leather-footwear development strategy to 2025 and to 2030 to advance export sustainability.

Companies need to diversify markets and invest in input and personnel development

Ms. Phan Thi Thanh Xuan - Vice President and General Secretary of the Vietnam Leather, Footwear and Handbag Association (Lefaso)

To solve and respond to challenges, we have some recommendations: Firstly, manufacturers should not focus on a few markets but need to diversify markets from supply sources to export markets. With marketing activities to be deployed, we hope to support businesses to access more markets and import commodities from other markets when we face some difficulties caused by world volatility.

Second, we necessarily have a strategy for human resource development. As we can see, the leather and footwear industry can only make product lines of world-average quality. Therefore, if we want to have high added value, we must make higher-quality products whose value will be higher. And, to do so, the qualifications and skills of human resources must be improved while leather and footwear workers are largely unskilled. Before this reality, we need solutions to address this reality and have effective vocational training strategies. In particular, it is necessary to apply certification regulations and requirements for leather and footwear workers.

Third, to develop raw materials, we also need to focus on making materials and accessories towards sustainability such as a clean and green environment to keep up with the world's trends while ensuring stability for the manufacturing industry and increasing the opportunity to access supply chains in a sustainable way. Textile-garment and leather-footwear development strategies, which are being drafted, are expected to be approved soon to provide specific instructions for businesses of the two industries to work out appropriate production and business development plans in the coming time.

Huong Ly (Vietnam Business Forum)