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Textile and Garment Industry Aims to Improve the Rate of Using C/O Form EUR.1

Textile and Garment Industry Aims to Improve the Rate of Using C/O Form EUR.1

The combined efforts of businesses and state management agencies are expected to create strong steps to solve the problem of rules of origin in FTAs and increase the rate of C/O usage.

After nearly three years of implementing the EVFTA, Vietnam’s trade picture with the EU has grown optimistically. Among the “billion-dollar” items to the EU in 2022, textile and garment exports ranked fifth with 4.46 billion USD, but ranked second in growth with an increase of 34.7%, more than twice the general increase in exports to the EU.

Notably, Vietnam’s export turnover to the EU using the certificate of origin (C/O) form EUR.1 reached about 7.8 billion USD in 2021, increasing to 12.1 billion USD in 2022, an increase of 1.5 times. Some product groups have a very good rate of preferential use of C/O form EUR.1, such as rice (100%), footwear (98.02%), seafood (76.9%), and plastic and plastic products (70.63%).

Interestingly, textiles and garments are not among the product groups with a high rate of using C/O form EUR.1. This shows that tariff incentives are probably only part of the problem of textile and garment exports. To grow exports in a market with large purchasing power like the EU, there are many other issues that need attention.

In addition to high inflation in the EU causing aggregate demand for goods to show signs of decline, the devaluation trend of the Euro over the past year and the EU’s rapidly changing trade policy have also required export businesses to comply with high standards of technique, labor, and environmental protection. This has had a significant impact on the operations of textile export enterprises.

The devaluation of the Euro is a negative signal for Vietnam’s exports to the EU. The decline in the Euro means that imported goods into the EU become more expensive, thereby worsening inflation and reducing demand for imported goods from markets, including Vietnam. For businesses that trade in euros, the devaluation of the euro has a certain impact on profits, because the same amount of euros earned but the amount converted into local currency is less.

In addition to this general impact, textile and garment exports to the EVFTA market are also under their own pressure due to the energy crisis in Europe due to geopolitical conflicts, which has pushed inflation to high levels and caused the Euro to lose record value. The consequence of the devaluation of the Euro makes imported goods into the EU more expensive, reducing demand for imported goods from markets, including Vietnam. On the other hand, Vietnamese textile and garment enterprises exporting to the EU and trading in Euros will have their profits affected, because the same amount of Euros earned but the amount converted into VND is less than before.

In early April, the European Commission (EC) proposed applying a number of new ecological regulations to “green” textiles and garments consumed in Europe. New EC regulations require textiles entering the European market to have a long life, be reusable, and be repairable. To achieve this standard, manufacturers must use recycled fibers that do not contain toxic substances and are environmentally friendly.

Not only that, Northern European countries, including Iceland, Norway, Sweden, Denmark, and Finland, also have stricter requirements for natural and synthetic fibers. Textile fibers must be organic, recycled, or of biological origin. Cotton used in clothing cannot be genetically modified (GMO) and must be 100% organic or recycled.

These regulations certainly have a significant impact on Vietnamese suppliers, forcing the textile and garment industry to accelerate the pace of green transformation. However, according to VITAS’s assessment, the development of green supply chains is not popular, mainly in pioneering enterprises. In order for the entire industry to participate in “greening” and effectively exploit the EVFTA Agreement, VITAS sets a goal in 2023 to reduce energy consumption by 15% and water consumption by 20%. By 2030, transform and “green” Vietnam’s textile and garment industry, and build 30 international brands.

Although Vietnam’s textile and garment export turnover using C/O form EUR.1 in 2022 increased compared to 2021, this number still only accounts for a small proportion, only nearly 30% of the total textile and garment export quota to the EU market. Thus, the rate of using C/O form EUR.1 of Vietnamese textiles and garments exported to the EU for the purpose of taking advantage of preferential tariffs has not reached the expected level.

There are two main reasons why exported goods cannot use the EUR.1 certificate of origin (C/O) to enjoy preferential tariffs are:

  1. The goods already have a very low base import tax rate of 0% or none.
  2. The goods do not meet the rules of origin.

In the EU’s import tariff schedule, the number of textile and garment products with a base tax rate of 0% is very small. Most EU textile and garment tax rates range from 3% to 12%.

Rules of origin are extremely important for textiles and garments exported to the EVFTA market. The EU has committed to eliminating tariffs on 77.3% of textile and garment exports from Vietnam over 5 years, and the remaining 22.7% of tariffs will be eliminated over 7 years. The EU is Vietnam’s third largest textile and garment import market, and there is still significant room for growth, as Vietnam’s market share is currently less than 2% (USD 4.46 billion/USD 250 billion).

The current challenge for businesses exporting textiles to the EU market is the rules of origin. According to data from the General Statistics Office, domestic fabric production only reaches 2 billion meters/year, meeting 25-30% of demand. Less than 5% of fabric is imported from the EU, while most fabric imported into Vietnam comes from markets outside the EVFTA Agreement. Specifically, in 2022, Vietnam imported USD 14.09 billion worth of garment fabric, of which 52% was imported from China.

The combined efforts of businesses and state management agencies are needed to create strong steps to solve the problem of rules of origin and increase the rate of C/O usage.

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