Making the most of benefits from the Vietnam-EU Free Trade Agreement (EVFTA) is largely dependent on the country’s production capacity of fabric over the next two years, according to SSI Securities.

The Vietnamese National Assembly is expected to ratify the EVFTA in May followed by the trade pact coming into force sometime in July.  

Currently, most of Vietnamese garment items enjoy a preferential tax rate of 9% under the Generalized System of Preferences (GSP). However, they are not subject to tax cuts as soon as the EVFTA takes effect, as the trade pact has applied a fundamental tax rate of 12% in line with the Most Favored Nation (MFN) tariffs.

Moreover, the EVFTA stipulates that fabrics used to make products must originate from either Vietnam, the EU, or the Republic of Korea, another nation that has signed a FTA with the EU, in addition to the making process not being outsourced.

With local firms importing more than 60% of fabric from China and Taiwan (China), the utilisation of the trade pact is set to be largely dependent on the country’s production capability of fabric over the next two years.

Among the country’s listed apparel companies, TNG currently holds the largest market share in the EU market, accounting for 53% of revenue, followed by the GMC with 40% of revenue.

Indeed, GMC is heavily reliant on fabric imported from China, meaning that it does not come up to standards with regard to the rule of origin as set by the EVFTA, while TNG can enjoy more opportunities to export to the EU market due to the company using a certain amount of domestic fabric.

Despite China swiftly recovering between 80% and 90% of production, the number of apparel and garment orders is projected to drop between 30% and 50% during the course of April and May.

Furthermore, total textile and garment exports during the four-month period suffered a decline of 6.6% to US$10.64 billion, while total imports fell by 8.8% to US$6.39 billion.

To compensate for the falling demand of apparel products, local companies have made moves to produce antimicrobial cloth masks in order to meet both domestic demand and have a surplus for the purpose of export.