Vietnam’s garment industry needs drastic changes to profit from EU deal

Thursday, 2020-09-03 16:29:08
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NDO - Vietnamese garment makers have been struggling due to the coronavirus pandemic, which has disrupted the supply of materials while end products are failing to sell as many countries have put in place distancing measures and closed distribution lines.

It is projected that Vietnam’s total garment exports in 2020 will fall by 20% against the previous year to about US$31-32 billion. To overcome the difficulties, garment makers must implement urgent and flexible measures to adapt to the new situation and take full advantage of the opportunities brought about by new-generation free trade agreements, especially the one with the EU (EVFTA) which took effect on August 1.

With a population of 500 million, the EU’s total garment imports are estimated at US$250 billion a year, accounting for 34% of global demand, while Vietnam’s clothing exports to the union are only US$5.5 billion, or a market share of 2.2%. This means there is still a lot of room for Vietnamese garment producers to bolster exports and expand their markets. It is forecast that garment exports to the EU will grow rapidly by 67% over the next five years.

But capitalising on the EVFTA’s advantages is not easy because of the “yarn forward” rule while the infrastructure of Vietnam’s garment industry remains modest with a severe lack of material supply. Vietnam needs more than 9 billion metres of fabric annually, domestic suppliers can meet only one third of this and the rest must be imported.

As such, the Ministry of Industry of Trade should include fabric from Japan and the Republic of Korea, which also have trade agreements with the EU and account for 23% of Vietnam’s total imports.

In the long run, comprehensive measures are needed to fill the shortfalls facing the garment sector. Specifically it is necessary to build concentrated and large industrial parks in all the northern, central and southern regions, and introduce incentives to call for investment in the spinning, weaving and finishing stages.

The government needs to soon issue a garment development strategy for the 2020-2040 period, consider abolishing value added tax when domestic enterprises purchase materials locally and reduce their logistics costs. The government should also act to help enterprises connect with each other to form close linkages, thus bolstering their growth and keeping them competitive with foreign firms.

For their part, garment makers need to reform themselves towards becoming a sustainable part of the global garment supply chain if they want to quickly increase their market share in the member countries of the agreement.