Vietnamese garments to benefit from CPTPP if meeting origin rules

Considered as one of the greatest beneficiaries when the CPTPP comes into effect, Vietnam’s garment sector will be able to take advantage of tax preferences if it meets the trade pact’s rules of origin.

Vietnam's garment sector is expected to enjoy large benefits from the CPTPP.
Vietnam's garment sector is expected to enjoy large benefits from the CPTPP.

Do Xuan Hung, chief financial officer of Tinh Loi, whose garment products are all exported, did not conceal his expectations when the CPTPP comes into force. He said that the company had been watching the trade agreement negotiations closely and noted that, with significant tariff cuts, Vietnam’s garment sector will enjoy great opportunities to increase its exports to the markets of the CPTPP members.

For example, Canada, which has yet to sign a bilateral trade agreement with Vietnam, has pledged to eliminate tariffs on Vietnamese garments over several years. Specifically, 42.9% of garments exported to Canada will enjoy tariffs of 0% in the first year and tariffs on the remaining 57.1% will be removed in the fourth year.

According to the Ministry of Industry and Trade, when the CPTPP comes into effect, import duties on garments originating from Vietnam will be eliminated when exported to CPTPP economies. Such a market opening is highly significant because tariffs on garments are usually much higher than other industrial goods. This is a truly tremendous opportunity for Vietnam.

But Thang frankly admitted that many Vietnamese garment makers will find it hard to meet the rules of origin. That is because, in order to enjoy preferences, garment products must meet the yarn-forward rule, meaning they must be produced in CPTPP countries from yarn forward. Meanwhile most of Vietnamese garments are produced to foreign orders with imported materials.

At present it would be nearly impossible for Vietnam to meet the rules of origin for such products as knitted clothes, trousers and shirts. For other products such as winter coats, and sportswear, the ratio of contents from CPTPP countries is also low.

According to Trinh Thi Thu Hien at the MOIT’s Department of Export-Import, unlike other previous trade deals when the rules of origin for garments only applied to 1-2 production processes, under the CPTPP, the rules will apply to all production processes and finishing operations.

The rules of origin will ensure a balance between trade facilitation and trade fraud prevention. When meeting the rules of origin, goods will be granted certificates of origin, which are their passports, the most legal guarantee for their producers to enjoy tax preferences.

But Hien added that, although the CPTPP’s rules of origin are stricter than other trade agreements, the CPTPP also allows the import of materials not available in member countries of the pact.

Despite the challenges, Hung stated that this is a chance for domestic garment companies to develop their supply chains because many large companies specialising in garment materials have shifted their operations to Vietnam. Many Vietnamese companies are also pouring investments into producing materials. This is a good sign so that domestic enterprises will be able to secure materials that meet the CPTPP’s rules of origin.

TNG, for example, has doubled its cotton production capacity to meet its demand and supply for other garment makers in Vietnam. For the fabric stage, the company also purchases materials from local partners instead of importing them from non-CPTPP countries.

According to experts, Vietnam’s garment sector is facing a number of bottlenecks which have been in existence for years, namely a shortage of materials and imports from foreign countries. Therefore, the community of domestic garment makers need to have a vision of building a linkage chain in order to benefit from the CPTPP.

In addition, they should also pay attention to technological development, especially in material production, so that Vietnam’s garment sector can enjoy sustainable development and enhance its competitiveness.

Besides the efforts of enterprises, Hung also expressed his expectations that the government will provide training and guidance so that they can understand the requirements and benefits of the CPTPP and work out a road map to take advantage of opportunities from this trade agreement.