All sewn? Vietnamese garment makers face problems under lucrative EU trade deal

HO CHI MINH CITY (Reuters) – For Tran Nhu Tung, the recently signed free trade agreement between Vietnam and the European Union presents both a huge opportunity and a logistical headache.

Workers work on a garment assembly line of Thanh Cong Textile, Garment, Investment and Trading Company in Ho Chi Minh City, Vietnam July 9, 2019. Picture taken July 9, 2019. REUTERS/ Yen Duong

Vice President of Thanh Cong Textile Garment Investment Trading (TCM) in Ho Chi Minh City expects rapid expansion ahead of the influx of orders that the EU-Vietnam Free Trade Agreement (EVFTA) promises to bring .

“EVFTA is the game-changer that will pave the way for Vietnamese garments to dominate the European market,” Tung said amid the clang of thousands of sewing machines at the metal-roofed factory on the outskirts of the mall in the Vietnam.

Analysts say apparel, accounting for around 10% of Vietnam’s exports and currently subject to EU tariffs of around 9%, will be by far the biggest beneficiary of the EVFTA finalized last month.

The EU is already Vietnam’s second-largest apparel market after the United States, accounting for 15 percent of the country’s total apparel exports last year, according to data from Vietnam Customs.

Tung expects orders for his factory, which produces corporate uniforms and sportswear, to increase by at least 15% once the EVFTA, which will reduce duties to zero on nearly the half of all clothing products, will be ratified by the European Parliament.

Vietnam, backed by more than a dozen free trade agreements, has become a key link in the global manufacturing supply chain.

Last December, Prime Minister Nguyen Xuan Phuc told a business forum in Hanoi that Vietnam had become “one of the great factories of the world”.

This ability, however, is being tested by growing demand – both from EVFTA and from the global trade disruption caused by the US-China trade war, which has led to the displacement of manufacturing from China to Vietnam and other neighboring countries.

Staff shortages have already started to show up in Vietnam’s garment industry, where the vast majority of manufacturers focus on the labor-intensive sewing and cutting process, making this Southeast Asian country a popular outsourcing destination for foreign fashion companies.

Low wages and long working hours make it difficult to meet growing labor demand from new factories, which has grown 7% since 2018, according to Ho Chi Minh-based recruitment firm Navigos Search. City.

“This industry still lacks human resources, especially high-level employees who have specialized skills,” Mai Nguyen, chief executive of Navigos, told Reuters.

For TCM’s Tung, who is set to open a new dye plant to fill orders, it means embarking on the difficult task of finding a chemical engineer who can lead his next operation.

“It is easy to find people to operate dyeing or weaving machines. They are workers and we can train them,” Tung said. “But finding experienced chemical engineers with in-depth knowledge of chemistry and dyeing is rare.”

“I can count them on one hand,” Tung added.

SEW WHAT?

The EVFTA presents another challenge for the Vietnamese garment industry: strict rules on the country of origin of materials – or the “double processing” of goods.

For manufacturers like Tung, this means that the textile and the finished product itself must be Vietnamese or come from a country with which the EU already has a free trade agreement in order to be free of customs duties. .

This is partly due to strong lobbying by European manufacturers who are already battling cheap imports from China.

At a hearing in 2013, European garment manufacturers expressed concern that an FTA with Hanoi could pave the way for cheap Chinese textiles to enter the European market after being made into garments in Vietnam.

Italian textile manufacturers and the European Confederation of Clothing and Textiles (Euratex) acted during negotiations to prevent Chinese products that have undergone a finishing process in Vietnam from entering the EU duty-free.

They also fought to delay the removal of duties for some time after the agreement was signed to prevent a sudden influx of Vietnamese products into the European market.

“In conclusion, given the starting conditions, we were able to contain the damage,” Sistema Moda Italia, the federation of Italian textile and fashion manufacturers, said in a statement.

Currently, nearly 70 percent of the raw materials used in Vietnamese garment manufacturing come from overseas, especially China, according to official data. Garment makers in Vietnam say few can afford the expensive process of producing their own raw materials.

“We do not intend to invest in dyeing… It is capital-intensive work and requires highly skilled workers to operate,” the owner of a company told Reuters. small factory of about 800 employees based in Ho Chi Minh.

“Importing is cheaper, easier and faster for small businesses like us,” said the factory owner, who requested anonymity.

The factory, tucked away in an industrial area about 20 km (12 miles) from the city centre, mainly produces women’s clothing and says Germany is its biggest export market.

“The issue of ‘point of origin’ is important to us. We plan to import materials from South Korea, which has already established free trade relations with the EU, rather than from China,” the owner said.

“The higher costs mean less profit for us, but this is the best alternative we can think of at the moment.”

Reporting by Phuong Nguyen.; Additional reporting by Khanh Vu in Hanoi, Claudia Cristoferi in Milan and Sonya Dowsett in Madrid.; Editing by James Pearson and Lincoln Feast.

Michael O. Stutler