EU trade deal threatens Vietnam's uncompetitive firms

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Vietnamese seafood imported to the European Union is levied with 10.8 percent import duty

While Vietnam hopes to boost exports and attract more foreign investment by signing a free trade agreement it is now negotiating with the European Union, the flip side is that the removal of tax and non-tax barriers could hurt its businesses, which are barely prepared for the fierce competition international integration would bring.

"Vietnamese firms may lose even at home since many EU industrial and service products have competitive advantages," Nguyen Van Nam, former director of the Trade Research Institute, said.

The deal will eliminate tariffs on 90 percent of Vietnamese goods, and cut by 10-20 percentage points the average import tax on the remaining 10 percent, which is at 4.1 percent now.

Vietnamese exporters pay high duties on certain popular items - 11.7 percent on garments, 10.8 percent on seafood, and 12.4 percent on footwear.

The lower tariffs would make EU products cheaper in Vietnam, forcing many domestic firms to reduce or even stop production, he warned.

Industries which could be most seriously hurt include meat and animal-feed manufacture, he said.

"While negotiating FTAs with foreign partners, Vietnam should have prepared for the competition. But it has never done so."

Vietnam and the EU held the fifth round of talks on the FTA early this month, discussing reform of the former's economy for healthier competition, focusing on building a level playing field for state and private firms, intellectual property protection, regulations on origins of products, and sustainable development.

The FTA is expected to be finalized by the end of 2014 after the EU parliamentary election in the middle of the year.

Nam said local firms failed to capitalize on the opportunities that arose from
WTO accession and the bilateral trade agreement with the US, but were in fact adversely affected.

Vietnam's annual average GDP growth in five years before WTO membership in 2007 was 7.2 percent, much higher than the 6.2 percent in the next five years, he said.

"If Vietnamese firms do not improve their management and technologies and restructure production in the next one or two years, many of them, under the pressure of cheap imports from the EU, will face bankruptcy."

Nguyen Van Tuan, deputy general secretary of the Vietnam Apparel and
Textile Association, said local firms would be unable to make use of the tax reductions by the EU due to its stringent conditions with regard to certificates of origins for materials.

Vietnam's garment industry mainly imports feedstock from China, Taiwan, and South Korea, so local producers would not be able meet the EU's stipulation that exported garments should use materials of local origin, he said.

Vietnamese firms would not much
benefit from the tariff cuts since most of them export products made under outsourcing contracts with foreign partners, he said.

"Few Vietnamese firms can complete the business cycle from designing and producing products to exporting them."

The same situation exists in the footwear industry since 70 percent of its exports are done under outsourcing contracts, a spokesperson for the Leather and Footwear Association said.

Vietnamese footwear firms could also face fierce competition in the EU from more sophisticated producers like Singapore, Malaysia, and Thailand with whom the EU is having FTA negotiations.

Vietnam's main exports to the EU are farm produce, textiles and garments, footwear, and wood products.

Hope

According to a recent study by the EU's Multilateral Trade-related Assistance Program (Mutrap), the FTA will increase exports of major Vietnamese products to the EU by 10-20 percent.

Nguyen Ton Quyen, general secretary of the Vietnam Timber and Forest Product Association (Vifores), said the FTA would help boost exports.

Vietnamese wood products are exempt from tariffs under the Generalized System of Preferences, and this would remain unchanged, he said. On the other hand, the FTA would help attract more foreign investors coming with more advanced technologies, capital, and expertise to the country, which would help the sector increase its production capacity and exports, he said.

Wood producers can also import machines and equipment at lower cost, helping improve their competitiveness, he added.

The EU Union became Vietnam's biggest export market last year after shipments increased by more than a fifth to US$20.3 billion, or 17.7 percent of the country's entire exports, according to the General Statistics Office.

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