The EU and Vietnam have reached an agreement on a free trade deal that will remove nearly all tariffs on commerce between the two economies and contribute to further market access, albeit with long transition periods for certain products.

Although most economic experts believe that the deal concluded and set to come into force in 2018 is a good agreement, they also note that there are many issues that find the pact out of tune with today’s business reality.

Most notably the terms call for long transition phase outs of tariffs for sensitive products of up to seven years for certain Vietnamese goods.
Furthermore, the strict rules-of-origin scheme for textiles will most likely not allow any of the parties to immediately benefit unless the more sophisticated businesses in the segments give effect to a fresh marketing strategy.

This is because most raw and intermediary materials used in production in Vietnam are imported from countries such as China that do not have trade agreements with the EU and therefore disqualify exports for more favourable treatment.

To receive the positive treatment of the trade pact such raw and intermediary products would for all practical purposes need to be imported from only the EU economy, that of the Republic of Korea or produced in Vietnam.

Absent an innovative marketing strategy the experts with near unanimity agree, and say it will take many years until Vietnam exporters develop an adequate in-country supply chain to capitalize on the benefits of the deal.

It should also be clearly understood that in most cases, Vietnam clothing and textile domestic sector companies do not export to the EU but instead sell their product cash on delivery in Vietnam to customers from the EU.

This is a point that is not well understood by much of the fake news in Vietnam who fail to understand that more than 70% of the domestic sector businesses are not considered exporters and do not pay border taxes.

The entire discussion of the free trade deal with the EU does not apply to these businesses and therefore to the overwhelming majority of those in the clothing and textiles segments.

Unless these clothiers change their marketing strategy and method of doing business the entire discussion of the free trade pact is academic and has no practical relevance whatsoever to their situation.

They are not exporters and they do not pay border taxes.

The experts underscore the point that they do not see these businesses changing their strategy any time in the foreseeable future, emphasizing again that the actual free trade agreement will undoubtedly have little to no immediate impact on their sales to EU customers.

Outward processing

However, they say that an outward processing strategy between the larger more sophisticated Vietnamese clothiers and EU businesses should be closely explored because it does offer some immediate benefits.

Outward processing pursuant to the agreement encourages EU companies to process in Vietnam by providing relief from import duties on the compensating value of goods shipped back to the EU after processing.

Under this regime, goods temporarily exported from the EU (or the ROK) qualify. Although, if products of EU origin are insufficient, derogation can be granted from these rules, but for no more than 14% of the total value of the goods for which prior authorization is requested.

Allowing for outward processing might sound complicated at first, but the rules are not nearly as complex as the rules of origin themselves, say the experts and they should not be ignored or underestimated by Vietnamese businesses.

This is because, assuming general compliance with the outward processing rules, the border taxes are almost always less than they otherwise would have been using other strategies in situations such as that of Vietnam where there is a deficient supply chain.

The German government took advantage of outward processing and built its entire modern production facilities upon it. It is also a scheme that has been widely used in India, Malaysia, Singapore, the Philippines and the Republic of Korea with tremendous success.

Source: Customs News
 

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