The lack of fabric production in the country means businesses are unable to meet origin requirements to enjoy tax incentives, SSI Securities Corporation said.

To do so, they need to use domestically produced fabrics or imports from countries that have free trade deals with the E.U., it added.

But Vietnam depends on China for 60-70 percent of its textile feedstock, and fabrics imported from South Korea account for only 15 percent of the total requirement.

The E.U.-Vietnam Free Trade Agreement, which took effect on August 1, has strict rules of origin for goods exported to the bloc.

Under its provisions, 77.3 percent of Vietnam's textile exports to it will enjoy zero percent tax within the first five years while the rest follow a seven-year roadmap.

The EVFTA is the E.U.’s second trade deal with an ASEAN member country after one with Singapore, and one of the few with a developing country.

It will see Vietnam eliminate 99 percent of its import duties over 10 years and the E.U. doing the same over seven.

Before the deal was signed, Vietnam's garment and footwear exports to Europe were given preferential treatment under the Generalized System of Preferences (GSP) program, with a 9.6 percent tariff on the former.

For the first two years enterprises can choose to continue to be taxed under the GSP program or EVFTA. From the third year, if a company does not meet the rules of origin as stipulated in the deal, the tariff rate will increase to 12 percent.

The Vietnam National Textile and Garment Group (Vinatex) said the tax incentives under EVFTA are not attractive enough for businesses to switch from Chinese to Vietnamese fabrics since the former are 10-40 percent cheaper and delivered faster due to the scale of production.

China's textile and dyeing industry has a capacity of 80 billion meters of fabric a year while Vietnam’s is 2.5 billion meters against a demand of eight billion meters.

But SSI believed that in the long run Vietnam needs to develop its own industry and ensure sufficient scale to compete on cost with China.

There are around 6,800 textile and garment businesses in the country and their exports were worth $32.85 billion last year.