FOREIGN TRADE UNIVERSITY

HO CHI MINH CITY CAMPUS

---------***--------

MID-TERM REPORT

Major: International Business

INFLUENCE OF EVFTA ON VIETNAM’S FOOTWEAR

EXPORT ACTIVITIES

Student ID
Hồ Việt Anh 1801015003
Nhan Tử Quyền 1601015395
Đặng Tuấn Anh 1801015002
Nguyễn Bích Ngọc 1701015536
Mai Thị Xuân An 1801015001
Supervisor 1: Lecturer Le Thi Thanh Ngan
Supervisor 2: Lecturer Le Hong Van

Ho Chi Minh City, October 31, 2020

TABLE OF CONTENT

S
INTRODUCTION............................................................................................................1

CHAPTER 1: BACKGROUND AND LITERATURE REVIEW.................................2

1.1 Free Trade Agreement...............................................................................................2

1.1.1 Definition............................................................................................................2

1.1.2 Classification.......................................................................................................3

1.2 The main contents of the EVFTA Agreement...........................................................5

1.2.1 Trade in goods.....................................................................................................5

1.2.2 Trade in services and investment.........................................................................5

1.2.3 E-commerce........................................................................................................7

1.2.4 Trade and sustainable development........................................................................7

1.3 FTAs that Vietnam signed.........................................................................................7

1.4 Literature Review......................................................................................................9

1.4.1 The effect of reducing tariff barrier and non-tariff barrier...................................9

1.4.2 Evaluation of economic impacts of EVFTA......................................................10

1.4.3 Effect of others FTA on Vietnam’s export........................................................13

1.5 Methodology...........................................................................................................14

CHAPTER 2: EVALUATING THE EXPORTATION OF FOOTWEAR FROM

VIETNAM TO EUROPE...............................................................................................16

2.1 Overview of Vietnam’s footwear industry...............................................................16

2.1.1 Development of footwear industry....................................................................16

2.1.2 Overview of footwear exports from Vietnam to EU..........................................17

2.2 Evaluating the exportation of footwear from Vietnam to Europe............................18

 2.2.1 RCA evaluation.................................................................................................18

2.2.2 IIT evaluation....................................................................................................22

CONCLUSION...............................................................................................................24

REFERENCES...............................................................................................................27

TABLE OF FIGURES
Figure 1 Export value of footwear to EU, 2010-2019.......................................................18
Figure 2 RCA of different footwear products...................................................................20
Figure 3 RCA of HS64.....................................................................................................20
Figure 4 IIT of HS64........................................................................................................22
Figure 5 IIT of different footwear products......................................................................22
 1

INTRODUCTION

Since August 1, 2020, the EVFTA Agreement has officially come into force after it has
been ratified by the National Assembly of the two Parties. It can be said that EVFTA is
one of the new generation Free Trade Agreements that Vietnam has acceded to, with
many deep and wide commitments, covering both traditional and non-traditional content.
According to economic experts, EVFTA is expected to bring many favorable
opportunities to the economy and society of our country. As soon as the Agreement
comes into effect, the EU will eliminate import duties on about 85.6% of tariff lines,
equivalent to 70.3% of Vietnam's exports to the EU. After 7 years from the date of entry
into force of the Agreement, the EU will abolish import duties on 99.2% of tariff lines,
equivalent to 99.7% of Vietnam's export turnover. For the remaining 0.3% of export
turnover, the EU commits to give Vietnam a tariff rate quota with import tax in the quota
of 0%. With the above commitments, EVFTA brings benefits to both sides when the
number of tariff lines committed to eliminate tariffs is very high. Data from the Vietnam
Leather - Footwear - Handbag Association (Lefaso) also shows that Vietnam is currently
in the top four largest footwear producing countries in the world, after China, India and
Brazil and is 3rd largest exporter in the world in value terms, after China and Italy.
Vietnam's footwear products have been exported to over 50 countries and regions. In
which, the EU has always been one of the largest export markets for Vietnam's footwear
products. According to EU statistics, since 1996, Vietnam has ranked 3rd among the most
footwear exporting countries to the EU. Recently, Vietnam has risen to the position of
the second largest exporter after China. Of the 18.32 billion USD of footwear exports in
2019, exports to the EU alone reached 5 billion USD. Therefore, the analysis of Vietnam -
EU trade to assess the impact of EVFTA on the export of footwear products is of great
importance to Vietnam.
 2

CHAPTER 1: BACKGROUND AND LITERATURE REVIEW

1.1 Free Trade Agreement

1.1.1 Definition

Among the various forms of regional economic integration, FTA is the most common.
FTA is understood as a discriminatory preferential agreement aimed at eliminating trade
barriers between FTA signatories but continuing to maintain tariffs with non-FTA
countries. However, there are differences between the views on the extent and scope of
the FTA incentives. According to Krueger (1995), an FTA is a preferential agreement, in
which the tariffs between member countries are 0%. As for Plummer et al. (2010), the
FTA is aimed at reducing tariffs among member countries but does not emphasize that
tariffs should be 0%. Hill (2008) expanded the scope of FTA preferences not only to
eliminate tariffs but also quantitative restrictions and administrative procedural barriers.
Salvatore (2013) introduces the general concept in which FTA is the agreement under
which all trade barriers will be removed among the members. Thus, according to the
common and traditional understanding, FTA is an agreement between two or more
members aimed at reducing most of the tariff and non-tariff barriers on trade between
member countries, and each member still apply different barriers and trade policies for
countries that are not party to the agreement.

However, the trend of increasingly deep integration between countries leads to the
emergence and rapid development of new generation FTAs, requiring a new
understanding of FTA. Accordingly, the new generation of FTAs not only stops at the
liberalization of trade in goods through tariff and non-tariff reduction, but also can expand
to other areas such as services, investment, Government procurement, competition policy,
labor, the environment etc. With such characteristics, the new generation FTA not only
has the characteristics of a traditional FTA, but can also have the characteristics of the
forms. higher integration. Therefore, when analyzing the impacts of a new generation
FTA, it is necessary to consider the form, scope and level of integration commitments of
the members of the FTA.
 3

1.1.2 Classification

FTAs are divided into many different categories based on criteria such as number of
members, level of development as well as scope and content of commitments. The
classification of FTA is of great importance because it affects the motive, manner and
content of the commitments, the implementation of the commitments as well as the
impact of FTAs on member economies. A member of the FTAs can be a country or
independent tariff area (European Union, Hong Kong - China, ...).

Based on the number of FTA members, the FTA can be either a bilateral FTA, a regional
FTA or a multilateral FTA. A bilateral FTA is an FTA between two partners. For
example, the FTA between Vietnam and Chile (VCFTA) or the FTA between Vietnam
and the EU (EVFTA). In case the two partners are two countries, the negotiation and
agreement process will be easier and faster than others FTA. However, if at least one of
the two partners is a regional economic link, as in the EVFTA case, the negotiation,
signing and approval process may be longer and more complicated. A regional FTA is
one that involves three or more member countries and is often geographically close to
each other. Examples include the ASEAN Free Trade Agreement (AFTA) between 10
countries in Southeast Asia, the North-American Free Trade Agreement (NAFTA)
between the US, Canada and Mexico. Multilateral FTA is an FTA signed between many
different countries. The countries may not be in the same geographic proximity to each
other. Examples are the Comprehensive and Progressive Agreement for Trans-Pacific
Partnership (CPTPP) between 11 member countries in Asia, Australia and North
America. Negotiation and agreement between bilateral FTAs is often easier and faster,
and therefore the cost of negotiation is often lower than regional and multilateral FTAs.
Due to the small number of members, the commitments in the bilateral FTA also better
meet the needs of each member.

Based on the level of development of member economies, an FTA can be a North-North

FTA, a North-South FTA or a South-South FTA, of which the North is the developed
country and the South is the developing country. A North-South FTA is an FTA between
developed countries and developing countries. This FTA often focuses on exploiting
 4

different comparative advantages among FTA partners, promoting vertical foreign direct
investment. At the same time, developing countries also benefit from market access,
institutional improvement, and economic restructuring when signing the Agreement with
the developed economies. On the other hand, the North-North FTA and the South-South
FTA are the FTAs between countries with similar levels of development. North-North
FTAs between developed countries tend to have a high degree of integration, covering
broader issues such as trade-investment liberalization and related to institutional
harmonization. In a North-North FTA, members can benefit from economies of scale.
Meanwhile, the South-South FTA between developing countries is mainly aimed at low-
level integration to liberalize the movement of goods, services and resources for
production. Developing countries often have similar resources and relatively small
economies of scale, thus limiting the benefits that can be derived from exploiting the
difference in comparative advantage as well as economies of scale. However, South-
South FTAs create a broader market for participating countries, enhance their position in
negotiations, and establish a more attractive region for partners outside of the FTA.

Based on the scope and contents of commitments, the FTA can be either a traditional FTA
or a new generation FTA. Traditional FTAs usually include only commitments to
liberalize trade in goods, eliminating tariffs on about 70-80% of tariff lines. A few
traditional FTAs have additional commitments to liberalize trade in services, with a
broader extent than those in the WTO and general principles of investment, intellectual
property, and competition. However, commitments on these issues are usually general,
with low level of constraints. For example, the FTAs that Vietnam signed before 2014
include six FTAs within the framework of ASEAN and two bilateral FTAs with Japan
(VJEPA) and with Chile (VCFTA) are both traditional FTAs, in which the the main
commitment is the elimination of tariffs on imports and exports among member
economies.

Meanwhile, the new generation FTAs expand the scope of liberalization commitments in
many areas such as trade in goods, services, investment, and also include issues related
directly or indirectly to trade such as intellectual property, public procurement, labor,
 5

environment. In particular, the level of open-door commitment in new-generation FTAs is

very high, often eliminating tariffs on about 95-100% of tariff lines, strongly opening up
many service sectors and setting high standards for rules. The new-generation FTAs that
Vietnam has signed include the Comprehensive and Progressive Agreement for Trans-
Pacific Partnership (CPTPP), effective from December 30, 2018, and the Vietnam-EU
Free Trade Agreement (EVFTA) was signed on June 30, 2019. With a broader scope of
commitments and a deeper level of commitments, the benefits from a new generation of
FTAs are often greater than that of traditional FTAs. The extended commitments in the
new generation of FTAs also help member countries, especially developing countries, to
improve institutions, policies and capacity of the economy.

1.2 The main contents of the EVFTA Agreement

1.2.1 Trade in goods

For Vietnamese exports, as soon as the EVFTA comes into effect, the EU will eliminate
import duties on about 85.6% of tariff lines, equivalent to 70.3% of Vietnam's export
turnover to the EU. After 7 years from the date of entry into force of the Agreement, the
EU will abolish import duties on 99.2% of tariff lines, equivalent to 99.7% of Vietnam's
export turnover. For the remaining 0.3% of export turnover, the EU commits to give
Vietnam a tariff rate quota with import tax in the quota of 0%.

For EU exports, Vietnam committed to eliminate tariffs as soon as the Agreement came
into effect with 48.5% of tariff lines (accounting for 64.5% of import turnover). Then,
after 7 years, 91.8% of tariff lines equivalent to 97.1% of export turnover from the EU
was abolished by Vietnam. After 10 years, the tariff elimination is about 98.3% of tariff
lines (accounting for 99.8% of import turnover). For about 1.7% of the remaining EU
tariff lines, Vietnam applies the tariff elimination schedule of more than 10 years or
applies tariff quotas according to WTO commitments.
 6

1.2.2 Trade in services and investment

In EVFTA, the commitments of Vietnam and the EU on trade in investment services aim
to create an open and favorable investment environment for the operation of enterprises of
both sides. Vietnam's commitments go beyond WTO commitments. The EU's
commitments are higher than the WTO commitments and equivalent to the highest level
of EU commitments in the recent EU FTAs.

Areas in which Vietnam committed to be favorable to EU investors include a number of

specialized services, financial services, telecommunications services, transportation
services, distribution services. The two sides also made commitments on national
treatment in the field of investment, and discussed the content of dispute settlement
between investors and the state.

In the banking service sector, the two sides committed that, within 5 years from the date
of entry into force of the Agreement, Vietnam committed to consider favorably allowing
EU credit institutions to increase their holding. from foreign countries to 49% of charter
capital in 02 joint stock commercial banks of Vietnam. However, this commitment does
not apply to the 04 joint stock commercial banks in which the state is holding the majority
of shares, namely BIDV, Vietinbank, Vietcombank and Agribank.

In the field of insurance services, Vietnam commits to permit cross-border reinsurance

assignments, commitments to voluntary health insurance services under Vietnamese law.
Particularly for the request to allow the establishment of a reinsurance company branch,
Vietnam only allows it after a transition period.

In terms of telecommunications services, Vietnam accepts the same level of commitment

in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).
In particular, for value-added telecommunication services without network infrastructure,
Vietnam allows the EU to set up 100% foreign-owned enterprises after a transition period.

In the distribution services sector, Vietnam agrees to remove the requirement of an

economic needs test after five years from the date of entry into force of the Agreement,
however Vietnam reserves the right to implement distribution system planning on the
 7

basis of Department does not discriminate. Vietnam also agrees not to discriminate in the
production, import and distribution of alcohol, to allow EU businesses to reserve their
operating conditions under the current licenses and only need one license to implement
the activities in import, distribution, wholesale and retail.

1.2.3 E-commerce

In order to develop E-commerce between Vietnam and the EU, the two sides commit to
not impose import tax on electronic transactions. The two sides also commit to cooperate
through maintaining a dialogue on regulatory issues raised in e-commerce, including:
Responsibilities of intermediary service providers in transmission or storage. information;
To deal with forms of electronic communication in commerce without the permission of
the recipient (such as email offers, advertising ...); Protect consumers when participating
in electronic transactions. The two sides will also cooperate to exchange information on
domestic laws and regulations and related enforcement issues.

1.2.4 Trade and sustainable development

Both sides affirmed their commitment to pursuing sustainable development, including

economic development, social development and environmental protection. On labor
issues, as members of the International Labor Organization (ILO), the two sides pledged
to respect, promote and implement the 1998 ILO Declaration on Fundamental Principles
and Rights in Labor. This includes promoting the ratification and effective
implementation of ILO Core Conventions.

In addition, the two sides also agreed to strengthen cooperation through information and
experience sharing mechanisms to promote the ratification and implementation of labor
and environmental conventions in some areas such as gas change. climate, biodiversity,
sustainable forest management and forest product trade ...

In addition to the above, the EVFTA Agreement also includes Chapters related to
cooperation and capacity building, legal - institutional, competition policy and subsidies.
These contents are consistent with the legal system of Vietnam, creating a legal
 8

framework for the two sides to strengthen cooperation and promote the development of
trade and investment between the two sides.

1.3 FTAs that Vietnam signed

A summary of Vietnam's Trade Agreements (FTAs) as of February 2020 was compiled
by the Center for WTO and Integration.

No FTA Current Status Partner

FTAs have come into effect

1 AFTA Effective since 1993 ASEAN

2 ACFTA Effective since 2003 ASEAN, China

3 AKFTA Effective from 2007 ASEAN, Korea

4 AJCEP Effective from 2008 ASEAN, Japan

5 VJEPA Effective from 2009 Vietnam, Japan

6 AIFTA Effective from 2010 ASEAN, India

7 AANZFTA Effective from 2010 ASEAN, Australia, New Zealand

8 VCFTA Effective from 2014 Vietnam, Chile

9 VKFTA Effective from 2015 Vietnam, Korea

10 VN - Effective from 2016 Vietnam, Russia, Belarus, Amenia,

EAEU Kazakhstan, Kyrgyzstan
FTA

11 CPTPP Effective from December 30, 2018, Vietnam, Canada, Mexico, Peru,
effective in Vietnam from January Chile, New Zealand, Australia,
(Formerly
14, 2019 Japan, Singapore, Brunei, Malaysia
TPP)
 9

12 AHKFTA Take effect in Hong Kong (China), ASEAN, Hong Kong (China)
Laos, Myanmar, Thailand,
Singapore and Vietnam from June
11, 2019

13 EVFTA Effective from August 1, 2020 Vietnam, EU (28 members)

1.4 Literature Review

1.4.1 The effect of reducing tariff barrier and non-tariff barrier

In 2016, Kazunobu Hayakawa et al. made a research on the affection of tariff and non-
tariff reduction. These are significantly positive trade‐enhancing effects owing to tariff
reduction. Tariff reduction substantially large in cases of trade among low ‐income
countries but weak in cases of trade among high‐income countries. The estimates indicate
that trade among low‐income countries is enhanced by 39% because of either tariff
reduction while the effects are much smaller in cases of trade between high and high,
between high and low, or between low and high.

In 2007, Doanh et al. established their studies on trade barriers in Vietnam and Thailand.
The results suggest that both Vietnam and Thailand have recently moved fast toward a
more open trading system. Over more than a decade, both countries have followed a
number of unilateral, bilateral and multilateral moves to free the trading sector, including
measures directed at tariffs, quantitative restrictions, exchange rate mechanisms, etc. As a
result, imports and exports have expanded rapidly in both countries. For Vietnam, the
AFTA experience and the trade policy roadmap provides for tariff reductions, quantitative
restriction removal, and other trade measures, aimed at laying the basis for WTO
accession in 2007, while eventual accession to that body will place Vietnam firmly in the
mainstream of the global trading system.

Trade liberalization is definitely beneficial to both economies. In the coming years, both
Vietnam and Thailand will have to make further efforts to liberalize their trade policies
under their multilateral and bilateral commitments (for example, under AFTA and WTO
 10

commitments). For Vietnam, SOEs, banking, and administrative reforms should be

further accelerated to ensure macroeconomic stability, and to conform with WTO’s
national treatment principle. The policy and Downloaded from ias.sagepub.com at UCSF
LIBRARY & CKM on March 5, 2015 A Comparative Study of the Trade Barriers in
Vietnam and Thailand 262 business environment should be made more transparent and
transaction costs reduced by all means to enable freer trade. In short, both external and
internal reforms should be carried out with the right sequencing in order to maximize
benefits and minimize costs associated with Vietnam’s WTO accession and the outcomes
of multilateral negotiations in the Doha Development Round. For Thailand, further efforts
should be made in order to carry out its schedule implementing WTO and AFTA tariff
reduction commitments. Non-tariff barriers such as customs barriers, government
procurement, and other de facto non-tariff barriers should be eliminated. By doing so,
both Vietnam and Thailand will fully benefit from their freer trading regimes.

1.4.2 Evaluation of economic impacts of EVFTA

Ever since the negotiation of EVFTA there are studies that evaluate the foresee impacts of
this Agreement. The methodologies include: Computable general equilibrium (CGE),
Investigation and survey, Econometric Model, Partial equilibrium analysis (PE), SMART
Model and Trade Indicators; in which CGE is most commonly used to assess the overall
impact of EVFTA on different country economies.

One of the first fairly comprehensive studies on EVFTA was the one done by Phillip et al.
(2011). This study used the CGE model to assess the expected impact of tariff reductions
in three different scenarios on the Vietnamese economy in terms of budget, trade balance,
GDP, consumption, investment, savings and prices, etc. The results show that EVFTA has
a very positive impact on promoting trade between the two sides, specifically helping
Vietnam's exports to the EU grow by 4%/year, import from EU to Vietnam increased by
3.1% / year. The authors also analyze the impact of EVFTA on four industries including
cars, electronics, mechanics and banking; however, only qualitative analysis is made.
 11

Baker et al. (2014) also believe that the benefits that EVFTA bring to Vietnam are huge.
Using both the CGE model and the partial equilibrium model, the study has estimated the
impact of the FTA between Vietnam and the EU based on a long-term assessment
framework with a time frame of up to 2025. Research forecasts Vietnam Nam will grow
significantly thanks to capital inflows and improved labor productivity. It is estimated that
the FTA will help GDP increase higher than the trend level of about 7% -8% until 2025.
Regarding the sector impact, the results of the model show that Vietnam's industry gains
net benefits. largest from this FTA, especially the textile and footwear industries.

Two other recent studies also using CGE model all show that EVFTA promises to bring
many economic benefits to Vietnam. Research by MUTRAP (2017) shows that Vietnam's
GDP is estimated to increase by 3.2 billion USD by 2020, an increase of 6.7 billion USD
in 2025 and 7.2 billion USD by 2030. Vietnam's exports to the EU will reach
approximately USD 33 billion in 2020, USD 42 billion in 2025 and USD 47 billion in
2030. As calculated by the European Commission (2018), EVFTA will promote the
growth of Vietnam accounts for 15% of GDP in which Vietnam's exports to the EU
increased by more than a third. For the EU, this FTA is an important step towards broader
trade agreements with Southeast Asia.

In addition to the commonly used CGE model, there are a number of studies using survey
methods to forecast the impact of EVFTA on business decisions of enterprises.
EuroCham (2018) conducted interviews with 132 EU enterprises operating in Vietnam.
The results showed that EU businesses have a very positive and optimistic view of their
business prospects as well as the impact of EVFTA on their businesses in Vietnam in the
coming time. Specifically, more than 80% of European businesses have plans to expand
their business in the short and medium term. The proportion of firms planning to narrow
their business is low, suggesting that European firms still have a strong commitment to
development in Vietnam. Most enterprises believe that EVFTA will have an impact on
their business operations or investment plans in both the medium term (78%) and the long
term (85.6%). More than 80% of European enterprises interviewed believe that EVFTA
will help improve Vietnam's competitiveness compared to other countries such as China,
 12

Japan, South Korea and the United States. 72% of enterprises said that EVFTA will help
Vietnam become a center and a trading door for European companies to access the
ASEAN market. Positive and optimistic view of the impact of EVFTA makes European
businesses want EVFTA to take effect as soon as possible.

Focusing on assessing the impact of EVFTA on the bilateral trade sector, Vu Thanh
Huong (2017) analyzed the impacts based on the EVFTA potential impact diagnostic
framework developed by the author. Besides, the author also uses the gravity model and
the SMART model to quantitatively evaluate the impact of EVFTA on commodity trade
in general and in some specific industries (textiles, medicine). Research shows that
EVFTA strongly increases Vietnam-EU trade; Exports increased most in textiles,
footwear, machinery and live animal products, with the largest increase in vehicles,
transport equipment, chemicals, and processed foods. drinks, live animals. EVFTA also
helps Vietnam to more effectively use resources, exploit economies of scale, improve
competitiveness and efficiency of the economy, participate in the EU value chain,
contribute to transformation. pattern of economic growth and change in trade structure.
However, EVFTA will also lead to some negative impacts, such as distracting Vietnam
from multilateral negotiations and regional integration, causing circular exports, trade
bias, and additional cashew costs. to adjust the economy and increase competition
pressure with domestic enterprises.

Vu Thanh Huong and Nguyen Thi Minh Phuong (2016) used Trade Indicators: Revealed
Comparative Advantage (RCA) and Export Specialization (ES) to evaluate the impacts of
EVFTA on different industries. Comparing Vietnam and EU's RCA in sectors can draw
some comments. Vietnam's industries have the greatest opportunity to boost exports to the
EU including textiles and garments, shoes, hats, plant products. In addition, mechanical
machinery and electrical and electronic equipment are the group with potential to increase
exports because RCA in recent years tends to increase rapidly. The sectors most likely to
face competition from the EU include processed foods, chemistry, pulp and paper,
transport vehicles and equipment, base metal products. Vietnamese industries have both
export opportunities but at the same time will face competition pressure from the EU are
 13

live animals; plastic and rubber. Sectors that could develop intra-industry trade in the
future include furniture, leather, products from stone, plastic, glass, and ceramic. The
remaining industries are less affected when the two sides open the market. The ES
analysis shows that taking into account both Vietnam's export capacity and the demand
for imports from the EU, Vietnam has the opportunity to specialize to boost exports to the
EU, the largest in terms of footwear, textiles, plants, animal, skin, wood - commodity
groups where Vietnam's exports meet the EU's. On the contrary, Vietnam will have to
compete strongly with the EU in the group of vehicles and transport equipment,
chemistry, optical equipment, clocks, paper and pulp, processed food and live animals,
animal products.

1.4.3 Effect of others FTA on Vietnam’s export

Nguyen Anh Thu (2012) mentioned that the average tariffs rate of Vietnam applied to
Japan will fall from a level of more than 14% to 7% in 2019. Similarly, the tariffs applied
for Vietnamese goods exported to Japan will fall from an average of 5.05% to 2.8% in
2019. Agricultural products exports to Japan will have great benefits from this Agreement
because Japan committed to reduce/eliminate tariffs for 83.8% of trading value of
Vietnamese agricultural products exported to Japan within 10 years. Moreover, 23 of the
30 top agricultural and aquatic products exported to Japan will subject to 0% tariffs right
after the Agreement came into effect or within 10 years period. Since agricultural and
aquatic products are the major exports of Vietnam to Japan (Appendix 2), impacts of
VJEPA on export volumes might be significant.

Sheng Lu (2018) stated that results of the CGE model estimation support H1 that
Vietnam’s annual apparel exports will be able to increase by $3,098 million and $2,750
million in Scenario 1 and Scenario 2 respectively compared with the base year level in
2015 (Table 1). Notably, most of the expanded exports will go to other CPTPP and
EVFTA members because of the trade creation effect of the two agreements. Second, the
apparel industry will account for a higher percentage of total employment in Vietnam
when the tariff elimination under the CPTPP and EVFTA applies only to the T&A sector
(Scenario 1). However, when the tariff elimination applies to all sectors (Scenario 2), the
 14

apparel industry will account for only 3.5% of total employment in Vietnam, down from
4.0% in the base year level (Table 2). Consistent with H2, the results confirm the
intensified competition between the apparel industry and other sectors in Vietnam for
labor forces after the implementation of the CPTPP and EVFTA. Additionally, it is
interesting to note that Vietnam’s apparel exports will grow less in Scenario 2 than in
Scenario 1 when other sectors also try to take advantage of the trade creation effect of the
CPTPP and EVFTA (H3 is supported).

1.5 Methodology

The following methods can be used to assess the potential impact of an FTA: (i) trade
indicators; (ii) Partial equilibrium analysis (PE); (iii) Computable general equilibrium
(CGE), (iv) econometric model through gravity model; and (v) tax revenue method. Each
method can be used to assess the different specific aspects of an FTA impact and has its
own advantages and disadvantages. To choose appropriate research methods, it is
necessary to base on research objectives and questions as well as existing data sources.
The aim is to assess the potential impact of EVFTA on the export potential of the
Vietnamese footwear industry by qualifying the advantages and risks that the footwear
industry will face when the agreement is effect.

The advantage of the trade index method is that the detailed import-export data between
the two sides to the commodity sector used to calculate trade indicators can be collected
quite easily, while the basic The potential challenges and opportunities from these
indicators are quite helpful. However, the downside of this approach is that it cannot give
exact figures about the impact of the FTA on trade and social welfare with member
countries, but only make judgments about its ability to bring benefits of the FTA.

The trade indicators used in the paper include: Revealed comparative advantage (RCA)
and Intra-industry trade index (IIT). These indicators are used not only to describe and
compare, but also to evaluate the current situation and trends of trade between Vietnam
and the EU, thereby helping to make initial assessment of the potential impact of EVFTA
to trade between the two sides.
 15

Revealed comparative advantage index (RCA) proposed by Balassa (1965) to identify the
items for which a country has a comparative advantage.

Where s is the country of interest, d and w are the set of all countries in the world, i is the
sector of interest, x is the commodity export flow and X is the total export flow. The
numerator is the share of good i in the exports of country s, while the denominator is the
share of good i in the exports of the world.

If the RCA is greater than 1, the country has a comparative advantage in the good and
vice versa, the RCA less than or equal to 1 represents the country with no comparative
advantage. The paper uses RCA to identify whether Vietnam's footwear industry will
have advantages or disadvantages when EVFTA is implemented.

Since intra-industry trade is both exporting and importing the same goods, it is necessary
to measure intra-industry trade based on the correct classification of goods so that goods
are in the same category. On that basis, Grubel and Lloyd (1975) proposed a method for
calculating intra-industry trade index based on trade transactions of commodity groups.
So far, this Grubel-Lloyd index has been widely used in studies of intra-industry trade.
Grubel-Lloyd's IIT is calculated using the following formula:

IITj is the intra-industry trade index for product j for a country; Xj is the country's export
turnover of product j; Mj is the country's import turnover of product j.
 16

The IIT index measures intra-industry trade as a percentage of a country's total trade in a
certain industry. The IIT index ranges from 0 to 1. The closer the IIT is to 1, the higher
intra-industry trade. The index ITT = 0 represents the inter-industry trade relationship
while the IIT = 1 index shows the trade relationship is purely intra-industry trade.
 17

CHAPTER 2: EVALUATING THE EXPORTATION OF FOOTWEAR FROM

VIETNAM TO EUROPE

2.1 Overview of Vietnam’s footwear industry

2.1.1 Development of footwear industry

The Vietnamese leather and footwear industry has developed very rapidly and is
considered one of the main industries that boost Vietnam's economic growth. Footwear is
one of the three industries that bring in the largest export turnover today, after crude oil
and textiles, accounting for over 10% of total export turnover. With about 240 businesses
in operation, the leather and footwear industry is a front-runner export industry, attracting
more than 500,000 workers. Before the opening of the economy in the 1990s, the
Vietnamese leather and footwear industry mainly sewed the toe of the shoe to export to
the Soviet Union, but the quality was not high and the variety was small. At that time, the
leather and footwear industry of Vietnam faced a severe crisis due to the lack of
importers. Thanks to the reform policy of the Vietnamese Government, many joint
ventures with foreign partners were established and the footwear industry began to find a
foothold in the international market. Currently, Vietnam's leather shoe industry ranks 4th
among the eight largest exporting countries in the world, just behind China, Hong Kong
and Italy, but 90% of Vietnam's leather shoes products are processed goods. According to
statistics, over 70% of major exporting enterprises are joint ventures or 100% foreign
owned. Therefore, these businesses depend on them for engineering, technology and
product design.

Vietnam is a country with great potential for footwear production and export in Southeast
Asia, known internationally as a source of stable potential. Leather shoes are selected as
the key export sector in Vietnam's economy. The Vietnamese leather and footwear
industry is considered to be one of the main industries that boost Vietnam's economic
development.

Up to now, footwear products are occupying the leading position among Vietnam's
exports to the US and in the EU market. Vietnam is the third largest footwear exporter
 18

after India and China. The US is the largest footwear importer in the world, but so far the
footwear export to this market is still modest. Domestic footwear products are now
increasingly diversified in styles and quality. However, Vietnamese leather shoes also
have challenges, competition with footwear from abroad, especially Chinese and Thai
shoes, ... is increasingly fierce. In 2018, the leather and footwear industry has many
opportunities to benefit from the order shift from the Chinese market. Along with that, the
signing of a number of trade agreements also opens up development opportunities for the
footwear industry of Vietnam. Facing the situation of leather shoe production in Vietnam,
we see that these are good signals predicting the strong development of Vietnamese
leather shoes in the coming years, both domestic and overseas markets. In addition to
traditional export markets such as the US and EU, Vietnamese leather shoes are also
focusing on exploiting markets in the region such as China, Japan, ... Along with the
development of the leather industry, in our country today, there are more and more leather
shoe production and distribution enterprises. However, to be able to find a reputable
source of distribution, quality is always something shop owners care about.

2.1.2 Overview of footwear exports from Vietnam to EU

Generally, during the period 2010-2019, footwear exports of Vietnam to the EU countries
have witnessed an upward trend. The exports have increased by over two times, from
USD 2.3 million in 2010 to USD 5.4 million in 2019. However, the proportion of increase
is unstable during this period, 2012 and 2018 experienced a slowest increase with 3.7 and
2.3 percent respectively comparing to the previous year. Meanwhile the fastest increase
can be seen in 2011 and 2014, with the value of 16.4 and 21 percent respectively.

In the past years, Vietnamese footwear manufacturing companies have had to bear anti-
dumping tax rates of up to 10%. In 2011, Europe officially announced the termination of
anti-dumping duty on leather footwear imports of Vietnam and China after more than 3
years of taxation. Leather footwear products are no longer subject to anti-dumping tax
rate of 10% when exported to the European market, which is a big benefit for Vietnamese
footwear enterprises. However, in the past, Europe imposed tariffs on Vietnamese leather
shoes at 10% and China to 16.5%, while the 6.5% difference that Chinese leather shoes
 19

are subject to higher tax has partly contributed to Vietnamese leather shoes. easier to
compete in this market. Now, when both are not subject to anti-dumping tax,
inadvertently Vietnamese shoes will be at a disadvantage in competition with China

Figure 1 Export value of footwear to EU, 2010-2019

Vietnam's footwear export to the EU, 2010-2019

6000000 25
5463884
4925720 5037270
5000000 21.0
4491509 20
4261657
3887642
4000000 16.4
3214039 15

3000000 2751032 2851790 12.7

2363301
9.6 9.7 10
2000000 8.5

5.4 5
1000000 3.7
2.3
0 0.0 0
1 2 3 4 5 6 7 8 9 10

Value (USD) Proportion (%)

Source: International Trade Center

The new General System of Preference (GSP) of Europe in 2014 for developing countries
has created a good opportunity for Vietnam to export to this market. This mechanism will
not apply to a country where the total exports of goods to Europe belonging to a product
category exceed 17.5% of the total imports of similar goods from all EU GSP
beneficiaries within 3 years. Thus, Vietnam's market share of goods is expected to
increase when China and some countries are excluded from the GSP category, but not too
strong as we still have to compete with many competitors.

2.2 Evaluating the exportation of footwear from Vietnam to Europe

2.2.1 RCA evaluation

In general, Viet Nam’s RCA evaluations in HS64 are always higher than 2, which makes
Viet Nam has the advantage in footwear, comparing to other sectors exporting from
 20

Vietnam. The main sectors that makes up the most for HS code 64 are from two sectors
HS code 6403 (Footwear with outer soles of rubber, plastics, leather or composition
leather and uppers of leather (excluding orthopedic footwear, skating boots with ice or
roller skates attached, and toy footwear) and HS code 6404 (Footwear with outer soles of
rubber, plastics, leather or composition leather and uppers of textile materials (excluding
toy footwear). Meanwhile, in contrast, the lowest RCA remained at HS code 6401, 6405
and 6406 of the calculation. The textile footwear industry is one of the major parts of
manufacturing and trade in developing countries such as Vietnam. It can heavily affect
the increase in economic activities, employment, consumption and Foreign Direct
Investment (FDI). There are specific reasons why the nation keeps pushing this industry
productivity to maintain their 2nd place in the world top textile footwear exporters.
Firstly, the products itself can be considered as basic needs items, following closely, in
importance, other items such as food, shelter and clothing. Therefore, the demand for the
goods will increase when there are more potential consumers, especially in the era when
the population keeps rising rapidly. In order to response to this phenomenon,
manufacturers need to boost their production progress creating more transactions inside
and outside the economy. Increase in economic activities gives Vietnam more
opportunities to step up the country’s economy. By sustaining the strength of this industry
and economic growth, Vietnam has successfully attracted foreign investors pouring
capital into the country. This is the second factor that has made a significant contribution
for recent years’ footwear sector development. In 2018, almost 80% Vietnam’s footwear
export was covered by FDI. Thirdly, when community demand is high and businesses are
having tasks to complete, it will need more employees. In addition, because 70% of
Vietnamese textile footwear producers are local who are lacking financing resources to
upgrade their structures with modern technology necessary for larger productions, so they
have no other options to choose besides relying on available human resources. Higher
employment rate indicates that there will be higher aggregate demand in the future as
people have more disposable income to spend. Following that is consumption in every
category goes up including textile footwear sector. Now firms in the market would have
more orders to complete and the cycle will repeat. Furthermore, the US-China trade war
 21

in 2018 could have been a pity if Vietnam do not know how to take advantage of it as an
opportunity to move the new orders from China to Vietnam and attract more foreign
investors, especially to the nation’s textile footwear industry. Fortunately, the country
knew exactly when to catch the chance and made it as a boost for its economic
development.

Figure 2 RCA of different footwear products

Source: International Trade Center

Figure 3 RCA of HS64

Source: International Trade Center

 22

In general, it was clear that RCA of HS 64 in Vietnam declined gradually from 2010 to
2019, reaching its lowest point in 2017 at RCA 8.97. However, the rate always
maintained the level of at least 8 value in RCA to 12 value. Besides, Vietnam’s RCA has
dropped gradually from 2010 to 2019, thanks to being the country with footwear industry
is still competing well in terms of labor costs, per capita income, economic policies and
export markets. Footwear enterprises have employed 1 million workers, producing 800
million pairs of shoes each year. Vietnamese footwear industry has developed rapidly.
Year of 1992 was known as the first time Vietnam exported footwear products to foreign
markets, mostly to Eastern European countries. After more than 20 years of exporting, the
footwear industry has become one of the major exporting fields in Vietnam. Moreover,
the emergence of triangular relationships has seen the former suppliers, such as
Taiwanese, Korean manufacturers, become the agents managing the relationships with
new suppliers with lower wages in the region with lower wages, such as China, Vietnam,
and India... Vietnam’s emergence as a major shoe exporter to the EU and US were
possible because the Taiwanese, Korean manufacturers became the new intermediaries,
helping to establish production capabilities. Because of that, FDI into footwear
manufacture in Vietnam has increased mostly from these two countries. The share of FDI
enterprises in footwear exports, consequently, has highly increased in recent years. In
contrast, competitions with other developing countries in terms of labor costs and
manufacturers as well as switching to a more advanced development in terms of
technology, this has led to the results of the diminish in terms of RCA.
 23

2.2.2 IIT evaluation

Figure 4 IIT of HS64

Source: International Trade Center

Figure 5 IIT of different footwear products

International Trade Center

Besides, it is also clear that Viet Nam’s IIT value of all HS 64 sectors all remained at
approximately 0.1, this was the result from the fact that export from Viet Nam to World
 24

dramatically outweighed import to Viet Nam in HS 64 sectors. According to the latest

edition of the World Footwear Yearbook, in 2017 Vietnam produced 1.1 billion pairs of
shoes (a share of 4.7% in worldwide production), taking the third position as the largest
producing country. In 2017 Vietnam was the second largest exporter of footwear with a
7.1% share (1.0 billion pairs) behind China (9.7 billion pairs; 67.5%). Officials note that
the increase in leather exports is largely due to foreign investment from China to Vietnam,
as a result of the U.S. and China trade war, along with benefits for Vietnamese exports
coming from the free trade agreements it has signed. However, the sector has faced
challenges to meet the target. The lack of input materials for the sector has forced
Vietnam to make significant expenditures on material imports, hindering the development
of local supporting industries and the fulfillment of commitments on product traceability.
Moreover, labor productivity in the sector is low. A Vietnamese worker can make three to
four pairs of shoes per day, while a Chinese worker can produce seven to eight pairs. The
sector’s added value and foreign currency revenue remain low as well. Domestic firms
produce only one-fifth of the total footwear product volume, while the remainder is
manufactured by foreign-invested firms.
 25

CONCLUSION

On June 8, 2020, the National Assembly voted to approve the Vietnam - European Union
Free Trade Agreement (EVFTA). After the Resolution of the National Assembly on
ratification of the Agreement is issued, the two sides will agree on the date of entry into
force of the EVFTA, usually the first day of the second month after ratification by the
National Assembly. If this plan is followed, the EVFTA will take effect on August 1,
2020.

More than anyone, businesses are the ones most looking forward to this moment. In the
story of the benefits that EVFTA brings, along with textiles, footwear is one of the
industries that is mentioned a lot by the great significance of this Agreement for footwear
export growth. In 2019, the export turnover of footwear and handbags reached $ 22
billion. In particular, exports to the EU reached US $ 5.65 billion, becoming our second
largest footwear export market. As soon as the EVFTA takes effect, the tariff on
protective shoes and sports shoes will immediately drop to 0%, while leather footwear
will be reduced from the preferential import tariff. Most favored Nation - MFN is 12.5%
and 0% according to the 3 to 7 years roadmap. With these incentives, it is forecast that the
export growth rate of footwear industry will increase by 8-10% in the first 5 years,
helping the industry's export turnover increase by about 3% / year.

GSP tariff preferences and the incentives in the EVFTA

To enjoy preferential tax rates as committed in EVFTA, Vietnam's exported footwear

products must meet the requirements of origin, including the Regional Value content
(RVC). in the product material origin.

Specifically, the content of origin of imported materials and accessories in the product
does not exceed 50%, in which it is allowed to add up the rate of origin for materials
imported from countries that are or will have an FTA with the EU (such as Korea
National, Japanese). In fact, since 2014, Vietnam has been on the list of countries
enjoying universal tariff preferences (Generalized System of Preferences - GSP). The
rules of origin set forth by EVFTA are quite similar to GSP, except for a handful of items
 26

related to the fact that inputs and outputs of certain product codes need to be different at
the 4-digit and several-digit levels. The type has separate regulations on shoe soles and
uppers. Therefore, businesses that are able to export to the EU market under the GSP
tariff preferences can completely meet the requirements to enjoy the incentives in the
EVFTA. Even the EVFTA allowing the application of the cumulative origin rate rule will
create more favorable conditions for manufacturing enterprises, helping "Vietnam's
footwear industry to be added" wings ".

Footwear enterprises only benefit if they can self-control raw materials and to enjoy
low tax rates.

In the long term, the domestic supporting industry remains a major challenge that needs to
be addressed if the footwear industry wants to make a big breakthrough in EVFTA.

Statistics show that, at present, the footwear industry has been proactively more than 70%
of raw materials for the medium product lines and 50% of the materials for the average
product lines, including about 90% of paper packaging, 80% soles, over 80% of molds,
60% accessories, ... However, only 20% of Vietnamese enterprises produce footwear
materials. With such development potential, the supporting industry serving the footwear
industry in Vietnam still has many opportunities for businesses to exploit and develop. In
particular, the coming into force of EVFTA, will contribute to making Vietnam an
attractive destination for domestic and foreign investors. Many projects on raw materials
have been implemented in modern specialized industrial zones with advanced wastewater
treatment systems. Vietnamese businesses will have many opportunities to access and
master the technology of manufacturing leather, imitation footwear while still meeting
environmental standards.

Preferential tax rates when meeting the rules of origin

“In the short term, businesses must take advantage of the ratio of RVC content in
EVFTA, that is to know how to use raw materials from EVFTA member countries to
meet the requirements under regulations, if they want to enjoy tax. low interest rate. Also
according to the representative of Lefaso, the group of footwear products committed by
 27

the EU to immediately eliminate tax are the products that Vietnam does not process or
exports to the EU. Therefore, Vietnam will benefit less from this group of commitments.

Still need more time

Like many other export industries, the key to footwear exports to enjoy preferential tax
rates under EVFTA commitments is the origin of raw materials. Without solving the
material problem, the footwear industry will only grow in width, but it is difficult to
achieve depth. Only 30% of enterprises in the footwear industry can self-control raw
materials, that is, FDI enterprises own a supply chain, the rest of them mainly do
outsourcing.
 28

REFERENCES

Vietnamese

1. Baker, P., Vanzetti, D. Pham Thi Lan Huong (2014), “Đánh giá tác động dài hạn
Hiệp định thương mại tự do Việt Nam – EU”, Báo cáo nghiên cứu thuộc Dự án hỗ
trợ chính sách thương mại và đầu tư của châu Âu (MUTRAP).
2. Vu Thanh Huong, Nguyen Thi Minh Phuong (2016), “Đánh giá tác động theo
ngành của Hiệp định thương mại tự do Việt Nam – EU: Sử dụng các chỉ số thương
mại”, Tạp chí Khoa học Đại học Quốc gia Hà Nội: Kinh tế và Kinh doanh
3. Vu Thanh Huong (2017), Hiệp định thương mại tự do Việt Nam – EU: Tác động
đối với thương mại hàng hóa giữa hai bên và hàm ý cho Việt Nam.
4. MUTRAP (2017), “Tác động của Hiệp định thương mại tự do Việt Nam – EU đối
với nền kinh tế Việt Nam”, Báo cáo nghiên cứu thuộc Dự án hỗ trợ chính sách
thương mại và đầu tư của châu Âu (MUTRAP).

English

1. EuroCham (2018), EVFTA Report 2018 – The EU – Vietnam Free Trade

Agreement: Perspective from Vietnam,
https://www.eurochamvn.org/sites/default/files/uploads/180724_tax
%20update/The%20EVFTA%202018%20Report.pdf
2. European Commission (2018), The Economic impact of the EU – Vietnam Free
Trade Agreement, Publication Office of the European Union, Luxembourg.
3. Hill, C.W. (2008), Global Business Today (5th edition), University of Washington,
Washington.
4. Kazunobu Hayakawa, Tadashi Ito, Fukunari Kimura (2016), Trade Creation
Effects of Regional Trade Agreements: Tariff Reduction versus Non‐tariff Barrier
Removal. Available at: https://onlinelibrary.wiley.com/doi/full/10.1111/rode.12208
5. Krueger, A. (1995), Free Trade Agreements versus Customs Union, National
Bureau of Economic Research, Cambridge, Masachusetts.
 29

6. Nguyen Anh Thu (2012), Assessing the Impact of Vietnam’s Integration under
AFTA and VJEPA on Vietnam’s Trade Flows.
7. Nguyen Khanh Doanh, Yoon Heo (2007), A Comparative Study of the Trade
Barriers in Vietnam and Thailand. Available at : https://sci-
hub.do/10.1177/223386590701000113
8. Philip, M.J., Laurenza, E., Pasini, F.L., Dinh Van An, Nguyen Hoai Son, Pham
Tuan Anh, Minh, N.L. (2011), The Free Trade Agreement between Vietnam and
the European Union: Quantitative and Qualitative impact analysis, report in
MUTRAP project, Ha Noi.
9. Plummer, M.G., Cheong, D., Hamanaka, S. (2010), Methodology for Impact
Assessment of Free Trade Agreement, Asian Development Bank.
10. Salvatore, D. (2013), International Economics (11th edition), John Wiley and Sons,
Inc., U.S.
11. Sheng Lu (2018), Evaluation of the Potential Impact of CPTPP and EVFTA on
Vietnam’s Apparel Exports: Are We Over-optimistic about Vietnam’s Export
Potential?, University of Delaware, USA.