Viet Nam: The End Of Trading Under The European Unions’ Generalised Scheme Of Preferences For Viet Nam

Overview

2022 marks the second year of implementation for the European Union – Viet Nam Free Trade Agreement (EVFTA) and also the end of application of the European Union’s Generalised Scheme of Preferences (GSP) for Viet Nam. According to the GSP regulation,[1] a beneficiary country loses the benefit of the GSP two years after that an agreement is applied between the country and the EU (or another date as indicated by the EU). Following the entry into force of the EVFTA on 1 August 2020, imports from Viet Nam continued to enjoy the benefit under the Standard GSP scheme until 31 December 2022. As from 1 January 2023, the benefits under Standard GSP ceased for Viet Nam in accordance with Regulation (EU) 2021/114.[2] While the EVFTA has been widely considered as a major achievement to support the trade relationship between Viet Nam and the EU, the removal of the GSP preferences may initially cause certain confusion and can impact trade in the short-term.

Viet Nam’s trade with the EU

Viet Nam’s exports to the EU have increased remarkably over the last 20 years. Exports in 2020 hit a dip due the COVID-19 outbreak but quickly bounced back to the same level as in 2019 – reaching around USD 45 billion in 2021. Before the EVFTA took effect, Viet Nam traded with the EU under two schemes: the EU Standard GSP for developing countries, and the most-favoured nation (MFN) schemes. Notably, over the period, around 60% of Viet Nam’s exports entered the EU markets via the MFN (at zero duty) channel. For the GSP, Viet Nam’s utilisation[3] rate was around 60% before the EVFTA, relatively lower than that of other Standard GSP beneficiaries. For example, the GSP utilisation rate of India in the same period was around 80%, and Indonesia’s was 70%, according to UNCTAD data. This low utilisation rates can be the result of a number of reasons, including the lack of domestic capacity to meet the required level of processing for specific products, or the lack of understanding of how to meet such rules. For textile and apparel products, the challenges come from the double transformation requirements.

Following the entry into force of the EVFTA, the utilisation rate of the Agreement for exports from Viet Nam to the EU has increased from 17% in 2020 to more than 33% (USD 10.7 billion) in 2021 (see Figure 1). GSP still accounted for around 30% of Viet Nam’s exports to the EU in 2021. Following the end of the GSP for Viet Nam, those 30% of exports should enter the EU market through the EVFTA given the preferential margin Viet Nam was able to secure under the EVFTA compared to the MFN rates.

Figure 1. Exports and utilisation rate of EU Standard GSP by Viet Nam for all products, 2002-2021

Source: UNCTAD (2022). Database on GSP utilisation

Changes in tariffs

So, what will it mean for Viet Nam’s exports to the EU market after 01 January 2023?  According to the commitments under the Agreement, 71% of its imports from Viet Nam should enter the EU market duty-free from day one and 99% will enter duty-free after seven years (in 2027).[4] Notably, EU’s tariffs under around 50 HS chapters has been removed for products from Vietnam under the EVFTA, compared to the MFN regime, including for products such as live animal, certain textile products, as well as machinery.

Before the end of EU GSP preference for Viet Nam, the GSP and the EVFTA can be used in parallel, and traders may decide which arrangement they prefer to use. From 1 January 2023 until 31 July 2027, if the EVFTA duties applied to goods originating in Viet Nam is higher than the EU GSP the day before the date of entry into force of the Agreement (1 August 2020), the GSP rates can be applied.[5] In other words, the applicable GSP rate is fixed at the rate of the day before entry into force of the EVFTA (i.e., before 31 July 2020), and any subsequent changes to the GSP rates will not apply to imports from Viet Nam.

A quick comparison at the national tariff line level of the applicable 2021 rates show that most of the tariff lines under the EVFTA have already been lower than the GSP rates (in terms of ad valorem equivalent) (see Figure 2), except for a few lines which are subject to tariff-rate quota (such as sweet corn, tuna and other fish, cocoa, and chocolate products). This means, Viet Nam’s exports can enter the EU market duty free within the specified quotas provided in the EVFTA schedule.

Figure 2. EVFTA Tariff Preferential Margin compared to MFN, by HS chapter

Source: IEC, based on ITC MacMap data

Changes in Rules of Origin

In the case of no substantial preferential tariff margin among the available trading schemes (e.g., EVFTA, GSP, and MFN), the ability to meet the rules of origin (RoO) requirements will determine which tariff scheme that Viet Nam’s exports can enter the EU market.

There are few changes in substantive rules for major exports from Viet Nam to the EU. One prominent feature of the EU preferential RoO is the change from single transformation requirements for textile articles as applicable to least developed beneficiary countries in contrast to the double transformation requirements for other developing and FTA partner countries. The GSP RoO for developing countries and the EVFTA RoO applied to textile and apparel products show the similar requirements for double transformation. For example, for a product under Chapter 62 to obtain originating status, the required working or processing is ‘weaving accompanied by making- up (including cutting); or making-up preceded by printing accompanied by at least two preparatory or finishing operations […], provided that the value of the unprinted fabric used does not exceed 47,5 % of the ex-works price of the product’. The tolerance thresholds for product under chapters 50 to 63 (textile and apparel) under the EVFTA are the same to those of the GSP rules that Vietnamese exporters have been familiar over the year (Table 1).

The EVFTA, however, provides a narrower scope for cumulation[6] as well as lower tolerance[7] thresholds for products originating from Viet Nam. Typically, the cumulation rules can be categorised as bilateral cumulation, [8] regional cumulation, [9] and extended cumulation. [10] While the EVFTA allows for all three types, the scopes of cumulation have been significantly reduced compared to the GSP. For example, bilateral cumulation rule under the EVFTA does not allow the inclusion of

Norway, Switzerland, and Turkey. Regional cumulation with the ASEAN countries under the EVFTA is now limited to only two types of products in seafood: processed cuttlefish and squid, and octopus. Extended cumulation is also restricted to the inclusion of fabric input for manufacturing apparel under Chapter 61 and 62. On 23 December 2020, Viet Nam and the Republic of Korea notified to the EU the undertaking required under the extended cumulation rules in Article 3(10)(b); therefore, fabrics originating in the Republic of Korea can now be cumulated in apparel articles from Viet Nam exported to the EU. Other than with the Republic of Korea, Viet Nam has not requested cumulation with other FTA partners of both parties.

Table 1. Comparison of Cumulation Rules under EU GSP and EVFTA

GSP EVFTA
Bilateral Cumulation Cumulation with the EU Member States, Norway, Switzerland, and Turkey Cumulation with EU Member States
Regional Cumulation Cumulation within ASEAN GSP beneficiaries

Cross-regional cumulation with South ASEAN GSP beneficiaries upon a request-and-granting process

Cumulation with cuttlefish, squid, and octopus from an an ASEAN country that has a preferential trade agreement with the EU for making of products HS 1605.54 (Prepared or preserved cuttlefish and squid) and HS 1605.55 (Prepared or preserved octopus)
Extended cumulation Cumulation with an EU FTA partner country upon a request-and-granting process. Agricultural products (HS Chapters 1 to 24) are excluded from extended cumulation. Cumulation with fabric from the Republic of Korea/other FTA partners of both the EU and Viet Nam for making products under HS Chapter 61 (Articles of apparel and clothing accessories, knitted or crocheted) and Chapter 62 (Articles of apparel and clothing accessories, not knitted or crocheted)
Tolerance – Chapters 2 and 4 to 24 of the Harmonized System, other than processed fishery products of Chapter 16: 15% of the weight of the product

– Chapters 50 to 63

· For Products Made of a Mixture of Textile Materials: basic textile materials used representing 10 % or less of the total weight of all the basic textile materials used

· For certain products under Chapter 61 to 63: non-originating textile materials classified in a heading other than that of the product and that their value does not exceed 8 % of the ex-works price of the product.

– Other products: 15% of the weight of the product

– Chapters 2 and 4 to 24 of the HS, other than processed fishery products referred to in Chapter 16: 10% of the weight of the product or ex-works price

– Chapters 50 to 63 of the HS:

· For Products Made of a Mixture of Textile Materials: basic textile materials used representing 10 % or less of the total weight of all the basic textile materials used

· For certain products under Chapter 61 to 63: non-originating textile materials classified in a heading other than that of the product and that their value does not exceed 8% of the ex-works price of the product.

– Other products: 10 per cent of the ex-works price

Source: IEC’s compilation

As in under any preferential trading regimes, proof of origin is required to show the originating status of a product to benefit from the EVFTA. Self-certification has been adopted under Circular 11/2020/TT-BCT. For exports from Viet Nam to the EU, the maximum value for self-certification is 6.000 EUR. For consignment of value above 6.000 EUR, Viet Nam continues to adopt the traditional approach, whereby exporters must obtain a Certificate of Origin (C/O form EUR.1) from the competent authorities (currently Ministry of Industry and Trade). To ensure compliance with cumulation rules, the C/O issued for the materials imported to Viet Nam for cumulation purpose under the EVFTA shall bear the relevant entries. For cumulation with certain seafood from eligible ASEAN countries, the C/O must bear the entry “Application of Article 3 (2) of Protocol 1 to the Viet Nam-EU FTA“. For cumulation with fabric from the Republic of Korea, the C/O must bear the entry “Application of Article 3(7) of Protocol 1 to the Viet Nam-EU FTA“.

Conclusion

While the tariff rates under either the GSP or EVFTA can still be applied in parallel, the major changes are from the rules of origin. The Rules of Origin (RoO) under the GSP ceased their effect as of 31 December 2022, while the RoO under the EVFTA will apply for exports to the EU from Viet Nam. While the product specific rules for some of Viet Nam’s major exports (such as electronics, textiles, and footwear products) have not changed significantly from GSP, the general rules for cumulation and tolerance have become stricter. The impact of reducing scope for cumulation will differentiate across sectors. For example, the impact on textile and apparel can be insignificant given the low level of import of textile and apparel production inputs from GSP beneficiaries. However, the impact can be considerably higher for electronics as Viet Nam imports substantial volume of electrical machinery and equipment from other GSP beneficiaries like the Philippines.

Arguably, there might not be so much a challenge for the current production processes of Viet Nam to meet the RoO under the EVFTA, given the familiarity with the GSP rules, and the limited level of cumulation with countries which have now dropped out of possible cumulation. However, the new RoO might limit Viet Nam’s diversification strategy in leveraging the regional and global production networks for production and exports. Vietnamese traders need to carefully consider the new rules to prepare for trading on 1 Jan 2023 with the EU.

Authors:

Loan Le | Managing Director | +84 763 281 367 | le@tradeeconomics.com

Paul Baker | Chairman | +230 263 33 24 | baker@tradeeconomics.com

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about specific circumstances.

References: 

[1] Article 5(2)(b), Regulation (EU) 978/2012.

[2] Commission Delegated Regulation (EU) 2021/114 of 25 September 2020 amending Annexes II and III to Regulation (EU) No 978/2012 of the European Parliament and of the Council as regards Armenia and Viet Nam.

[3] GSP utilisation rate, or any preference utilisation rate, is defined as the degree to which imports that are eligible for a preferential tariff scheme enter the preference granting market under these rates. The utilisation rate may not correspond to the proportion of trade entered a market through a preferential scheme over total trade with that same market.

[4] Delegation of the European Union to Viet Nam (2016). Guide to the EU-Viet Nam Trade and Investment Agreements.

[5] Annex 2-A, Section A, point 3 of the EVFTA.

[6] Cumulation refers to the rule which allows an importer or exporter of a country under certain circumstances to consider non-originating materials imported from or processed in another country as originating in their own country for the purpose of claiming the product’s origin.

[7] Tolerance refers to a threshold of non-originating materials that is allowed to be used in the manufacture of a given product without affecting its originating status.

[8] Bilateral Cumulation refers to cumulation refer to cumulation among FTA parties.

[9] Regional Cumulation refers to cumulation within a regional economic grouping, for example among members of a regional trade agreement.

[10] Extended cumulation refers to cumulation between beneficiaries of different preferential arrangements, for example among GSP beneficiary countries and FTA member countries.

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