Using the swot model to analyze the potentialimpact of the eu vietnam free trade agreement (evfta)on vietnam’s leather and footwear exports and makerecommendations to the vietnamese government

Currently, raw materials andaccessories account for 68-75% of the structure of footwear products, but the localizationrate of products of Vietnamese enterprises is only 40-45%, mainly co

NATIONAL ECONOMICS UNIVERSITY

SCHOOL OF ADVANCED EDUCATIONAL PROGRAM

Nguyễn Thủy AnhNguyễn Trần Tú LinhDương Lâm Tuệ

Lê Thanh ThảoTrần Trà My

Hanoi, 2023

II The current situation of Vietnam's leather and footwear exports to the EU market 7

1 European Union–Vietnam Free Trade Agreement (EVFTA) 7

3 Vietnam's leather and footwear exports to the EU market (nhớ so sánh trc và sau

III SWOT analysis - A case study of Thuong Dinh Shoes 7

Source: Vietnam Leather, Footwear and Handbag Association (LEFASO)

In the total leather and footwear export turnover of Vietnam in the first 11 months of

2022, the South America region grew the most with 50.5%, followed by North America(39.1%), Europe (47.5%), %), Asia (28.4%), Oceania (39.4%) Regarding the exportmarket, the US still leads with 10,722.3 million USD (37.3%), China is still the secondmarket with 1,659.6 million USD (8.6%), Belgium is the standing market 3rd place,reaching 1,613.0 million USD (51.0%)

2 Facilities and equipment

With the slow development of the domestic tanning industry, raw materials always have

to be ordered from other countries around the world Currently, raw materials andaccessories account for 68-75% of the structure of footwear products, but the localizationrate of products of Vietnamese enterprises is only 40-45%, mainly consisting of twosecondary products The weak point is the sole of the shoe and the sewing thread Only30-40% of enterprises in the leather and footwear industry are self-sufficient in rawmaterials, the remaining 60-70% are mainly outsourced The most important rawmaterials for footwear production are leather, and artificial leather is still being imported.Every year, Vietnam has to import from 1.1-1.5 billion USD of leather for exportproduction In addition, domestic enterprises can only supply fabrics for producinglow-grade canvas shoes, while high-grade fabrics must be imported

Although leather and footwear are one of the industries with the highest export turnover

in Vietnam, the majority of exports are mostly in the hands of foreign direct investment(FDI) enterprises The competition of domestic enterprises is still lower than that of FDIenterprises in the export segment Although these enterprises account for a smallproportion in number (just over 20%), they contribute nearly 80% of the export turnover

of the whole industry (accounting for 79%)

According to LEFASO statistics, there are currently 213 members dealing in leather andfootwear products in the country : 124 non-state enterprises, 50 joint-stock companies, 23companies with 100% foreign capital, and 9 companies joint-venture companies, 3state-owned enterprises, and 3 state-owned one-member limited liability companies Theparticipation of non-state enterprises and companies with 100% foreign capital has reallyhelped transform our country's footwear industry

4 Trade agreements

- Vietnam now has more than 14 free trade agreements (FTAs) in force, either as anASEAN member or bilaterally.

- Through its ASEAN membership, the country is a member of the bloc's economicfree trade zone, as well as a signatory to the Comprehensive and ProgressiveAgreement for Trans-Pacific Partnership (CPTPP), a massive trade agreementbetween all ASEAN members and Australia, Canada, Peru, New Zealand, Mexico,Chile, and Japan Furthermore, on August 1, the European Union Vietnam Freecommerce Agreement (EVFTA) went into effect, which is expected to expandcommerce between Vietnam and the EU

II The current situation of Vietnam's leather and footwear exports to the EUmarket

1 European Union–Vietnam Free Trade Agreement (EVFTA)

1.1 Overview of EVFTA

The Free Trade Agreement (FTA) between Vietnam and the European Union (EVFTA)was signed in the spirit of comprehensive cooperation and a balance of interests betweenVietnam and the European Union (EU) This is one of the new-generation FTAs that isexpected to bring strategic benefits to Vietnam through the development oftrade-investment relations with one of Vietnam's largest and most important partners.The EVFTA has been negotiated since 2012, ending technical negotiations in 2015 Theagreement was officially signed by the two sides on June 30, 2019 Then, it was approved

by the National Assembly of Vietnam on June 8, 2020, and come into effect on August 1,2020

1.2 Relevant commitments in the EVFTA Agreement for footwear products1.2.1 Tariff commitments:

The roadmap to eliminate tariffs for footwear products under EVFTA is implemented in 4stages:

- A: The base tax (Most Favored Nation - MFN) is eliminated as soon as the agreementcomes into force;

- B3: The base tax is eliminated after 4 regular reductions, once a year, starting from theyear the Agreement enters into force;

- B5: The base tax is eliminated after 6 regular reductions, once a year, starting from theAgreement year;

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- B7: The base tax is eliminated after 8 regular reductions, once a year, starting from theyear the Agreement enters into force;

Accordingly, the EU commits to grant preferential import tax for Vietnamese footwearproducts as follows:

- Group to eliminate import tax as soon as the agreement comes into effect: 37% offootwear tax lines (including rubber/plastic waterproof shoes, slippers and slippers,leather and footwear materials ) However, these are footwear products that are rarelyprocessed or exported to the EU, so Vietnam will benefit little from this group

- The remaining amount will be eliminated import tax according to the roadmap B3, B5,B7 (most of the footwear that Vietnam has export strengths in this group)

HS64 Describe EU MFN tax The roadmap to

following codes

6404

Fabric shoes,leather soles,plastic, rubber 16,9 - 17% A-B3

6406 FootwearAccessories 3% ATable: The EU's tariff reduction roadmap for Vietnamese footwear imports

1.2.2 Commitment to rules of origin

For footwear products, the rules of origin that apply to a part of non-originating materialsare as follows:

- For all articles of Chapter 64 (shoes, sandals, boots, similar articles, parts thereof)except product code 6406: Use materials from any Heading for manufacture, other thanuppers fitted with insoles or other sole components of Heading 6406

- For products under code 6406 (parts of shoes): Produced from all kinds of materials inany HS code except the HS code of the product itself

1.2.3 Commitment to certificate of origin

EVFTA stipulates two different types of origin certification procedures, including:

● Procedures for issuance of certificate of origin: The competent authority of theexporting country issues a Certificate of Origin based on the documents presented

Specifically, the EVFTA's exporter self-certification mechanism allows exporters toself-certify origin on invoices, delivery notes or any commercial documents, instead ofhaving to apply for an export certificate origin from the agency

According to the EVFTA and EU regulations, within a period of 2 years from theeffective date of the EVFTA (August 1, 2020), enterprises exporting goods to the EU canstill choose to apply preferential tax under EVFTA or preferential tax under GSP,provided that any type of preference is applied, it must comply with the QTXX of thattype and the corresponding certification of origin procedure Specifically:

● If exporting goods want to enjoy the preferential tax rate of EVFTA, Vietnameseexporters must apply for C/O form EUR.1 at the units of the Ministry of Industryand Trade;

● If you want to export goods to enjoy GSP preferential tax, Vietnamese exportersmust certify their origin under the GSP mechanism, which is currentlytransitioning to self-certification of origin by registering REX codes

1.2.4 Other relevant commitments:

● Commitment to Technical Barriers to Trade (TBT)

● General commitment to Intellectual Property (IP)

● Shared commitment to sustainable development

2 Non-tariff barriers

Non-tariff measures-NTMs are measures that are not tariffs, but have an economic impact

on trade in goods between countries Around the world, non-tariff measures are replacingtariff measures as significant barriers to trade in goods, especially export flows fromdeveloping countries to developed countries' markets develop In the market ofdeveloped countries, the EU is seen as the world's large-scale import market with highstandard requirements

The frequency of use of non-tariff measures (NTMs) on imported goods is among thehighest in the world with the ratio of Sanitary and Phytosanitary Measures (SPS) andTechnical Barrier Measures in commercial (TBT) is very popular The commodity groupswith the highest frequency of applying SPS and TBT when imported into the EU arevegetables, processed foods, textiles, leather goods, chemicals, footwear, plastic products,etc Vietnam's main export products

Currently, the EU is tending to increase the application of non-tariff measures, traderemedies and new protectionist barriers The trend of strengthening supply chains within

the EU also creates significant competitive pressure on trade and investment forVietnamese businesses.

3 Current situation of Vietnam's footwear exports to the EU market before andafter the implementation of EVFTA

The types of footwear exported to the EU are very diverse, of which the most are HScodes 640411 (accounting for nearly 30%) and 640399 (accounting for 20.7%)

Source: Department of European and American Markets

In addition, the EU is the main export market for Vietnam's HS code 640312 (Snowshoes, snowshoes with rubber, plastic, leather or synthetic leather and leather uppers) ofVietnam, accounting for up to 88% of the country's total export turnover of this item.According to data from the General Department of Customs, exports of sports shoes,tennis shoes, basketball shoes, gym shoes, training shoes and the like, with rubber orplastic outsoles and uppers made of materials textile (HS 640411) to the EU in the firstyear of EVFTA implementation reached 1.47 billion USD, up 14.2% compared to thesame period in the previous period Export of footwear with HS codes: 640419, 640299,

640391, 640291 to the EU market since the EVFTA took effect has also grown positively,especially in the first 7 months of 2022.

In contrast, the export of shoes with rubber, plastic or synthetic leather outsoles andleather uppers (HS 640399) to the EU after 2 years from the date of entry into force of theEVFTA decreased by 6.5% compared to the same period last year

3.1 Export turnover of footwear products

Source: Calculation from statistics of the General Department of CustomsChart: Footwear export turnover of Vietnam in the period 2010-2022

(Unit: Billion USD)The EU market is the second major footwear export market of Vietnam (after the US).Footwear exports of all kinds to this market continuously increased with an averagegrowth rate of 6.1%/year in the period 2014 - 2020

Vietnam's leather shoe industry has developed very quickly and is considered one of thedriving forces of the Vietnamese economy With about 240 operating businesses,Vietnam’s leather and footwear industry is a key export industry, attracting about 500,000employees

Statistics show that our country's footwear export turnover has increased almostcontinuously over the years, only decreasing in 2020 due to the impact of the Covid-19pandemic but in 2021 has increased again Footwear export turnover reached over 5billion USD in 2010, over 10 billion USD in 2014, over 17.7 billion USD in 2021,accounting for about 5.3% of total turnover export of the country

Nowadays, our country has been vaccinated against Covid-19 at a high level (in the top

of the world), so export activities in general and footwear exports in particular haveadded support to export growth The leather and footwear industry expects to reach theexport milestone of 20 billion USD in 2022, up 12.7% compared to 2021

Currently, Vietnam is ranked second in the world in terms of leather and footwearexports, just behind China Specifically, each year Vietnam exports more than 1 billionpairs of shoes of all kinds to hundreds of countries around the world By the end of 2021,there were about 2,200 footwear manufacturing enterprises, which are mainly locatedaround Ho Chi Minh City

Notably, Vietnam has become the largest exporter of canvas shoes (in terms of value),outstripping China This is the first time since the publication of the World FootwearYearbook that China has not led the export of a footwear item The next countries in thelist include Indonesia, Germany and Turkey

In 2014, Vietnam's footwear entering the EU

officially enjoyed the universal tariff

preference - GSP (the tax rate was reduced to

3-4% for all items) Taking advantage of the

above advantages, footwear exports to the

EU have grown strongly by 20% However,

GSP is a limited-time incentive program with

certain conditions

● As soon as EVFTA is applied, 37%

of the footwear industry tax lineswill enjoy import tax to 0% Itemswith a tax rate of 0% as soon as theEVFTA comes into effect, focusing

on sports shoes, canvas shoes,rubber/plastic shoes, slippers andslippers, raw materials for thefootwear industry

● The remaining amount willgradually decrease to 0% according

to the roadmap from 3-7 yearsdepending on each specific product(most of the footwear that Vietnamhas export strength in belongs tothis group) Accordingly,businesses can consider continuing

to use GSP until 2022 to choosemore favorable tax incentives

Thanks to the advantages of tariffs and the trend of diversifying supply in the world, inthe medium and long term, Vietnam will have many opportunities from the wave ofoutsourcing production, typical in the field of textile, leather and footwear However, inthe long term, if there is no solution going deep into the value chain (ODM, OEM),Vietnam's cost advantages will gradually disappear and face competitive pressure frommajor regional rivals.

EVFTA will create favorable conditions to attract FDI into Vietnam to invest inmanufacturing footwear products, especially international outsourcing activities (Foreignenterprises can import raw materials from the EU and then export finished products to the

EU at a low cost.)

III SWOT analysis - A case study of Thuong Dinh Shoes

1 Overview of Thuong Dinh Shoes

1.1 Establishment

Thuong Dinh Shoes is one of Vietnam's decades-old brands, established in 1957 Theproduction of Thuong Dinh Shoes has a long history in Vietnam The shoes are made byskilled artisans who use traditional techniques and materials Thuong Dinh Shoes is nowexported to many countries around the world, where they are appreciated for its uniquestyle, comfort, and cultural significance

1.2 Types of products

Thuong Dinh Shoes are made of lightweight materials such as fabric or canvas and has aflat sole with a pointed toe They are designed to be comfortable and practical, with asimple yet elegant style There are various types of Thuong Dinh Shoes, including slip-onand lace-up shoes, with different colors and patterns They are also available in differentsizes and styles to suit different preferences and occasions

1.3 Exports to the EU market

In particular, Thuong Dinh Shoes have become increasingly popular in the EuropeanUnion (EU), where they are appreciated for their unique style and cultural significance.Vietnamese shoe manufacturers have been able to take advantage of the EU-Vietnam

Free Trade Agreement (EVFTA) to expand their exports to EU countries, as theagreement eliminates tariffs on Vietnamese footwear exports to the EU.

The main export market of the company is the EU (accounting for about 80% of the totalexport value), besides markets such as the Americas (mainly Mexico, Canada, Brazil),Australia, Eastern Europe and some countries in Asia such as Japan, Taiwan, Korea…

2 SWOT analysis

2.1 Strengths

a Low labor costs

Vietnam has a large and relatively inexpensive labor force, which makes it morecompetitive in terms of production costs Vietnam has a relatively low cost of living,which means that wages and benefits for workers are generally lower than in many othercountries The government has implemented policies to encourage foreign investment inthe industry, which has led to the development of a strong and efficient supply chain

=> Most of Thuong Dinh Shoes' products are manufactured and processed, so the laborforce plays a huge role in the production process Competitive pricing is a major strengthfor Thuong Dinh Shoes because its labor costs are lower than those of many competitors

in the EU Vietnam has a lower cost of living and labor rates compared to most EUcountries, which means that the production cost of shoes is lower

=> The minimum wage of Vietnamese people will be applied from July 1, 2022,according to the table below This salary is only about half that of Thailand, less than 1/3

of Malaysia, and only 1/20 of Singapore This is considered an advantage to productioncosts because the company can optimize product costs compared to competitors.Region Minimum monthly salary

Table 1: Regional minimum wage table 2022 (applicable from July 1, 2022)

b High-quality products

Vietnam is a country with highly skilled labor Therefore, Vietnamese leather andfootwear products are known for their quality and durability, which are highly valued inthe EU market One of the reasons for Vietnam's skilled workforce is its long history ofproducing leather and footwear products The industry has developed a strong supplychain with access to high-quality raw materials, and the government has implementedpolicies to promote investment in the sector and support worker training anddevelopment

=> Thuong Dinh Shoes uses high-quality materials to produce its shoes, includingdurable rubber soles This could help them to differentiate themselves from othercompanies offering lower-quality products.The products of Thuong Dinh Shoes arerecognized as high-quality Vietnamese goods and meet the standards: ISO 9001:2000 -ISO 14001:2004

Thuong Dinh Shoes has a large workforce with about 2,310 employees, of which directlabor is about 1955 and indirect labor is about 355 people In addition to skilled laborers(accounting for 85% of the total number of employees in the company) is a team ofhighly qualified managers, meeting the company's production and business requirements

c Industry expertise

Vietnam has a well-established and experienced leather and footwear industry, with adeep understanding of EU market requirements, including compliance withenvironmental and social standards Shoe manufacturing companies have adoptedinternational environmental standards such as ISO 14001 and ensure the use ofsustainably sourced materials In addition, the use of green technologies to reduceemissions, wastewater, and solid waste is also a strong point for industry development

In social terms, businesses ensure safe jobs, create a fair working environment andprovide benefits to employees International standards like ISO 26000 can helpbusinesses comply with social and business ethics regulations Regarding origin,Vietnam has joined many free trade agreements and agreements on regulations of originsuch as AANZFTA, VKFTA, and CPTPP,… Therefore, companies have somewhatgrasped the regulations on rules of origin to meet the requirements of the internationalmarket

=> Thuong Dinh Shoes has been operating in Vietnam for over 20 years and hasestablished strong manufacturing capabilities This could allow them to produce shoesquickly and efficiently to meet demand in the EU market Thuong Dinh Shoes is

committed to sustainability and uses eco-friendly materials and production practiceswherever possible This could help them appeal to environmentally conscious consumers

in the EU market who prioritize sustainable products

2.2 Weaknesses

a High production costs

- Vietnamese leather and footwear manufacturers may struggle to meet EUstandards due to high production costs, which could limit their ability to takeadvantage of the agreement

- Regarding the ability to apply technology, more than 75% of Vietnamese leatherand footwear enterprises are small and medium enterprises, with little investmentcapital for technology and automation In addition, Vietnam is facing competition

in labor costs from many other countries such as Cambodia, Bangladesh, andEthiopia

- High input costs (electricity, water, raw materials, transportation ), and high laborcosts due to the pressure to increase the minimum wage every year

=> Input costs have increased by 5-10%, especially the cost of buying raw materials.When the Covid-19 epidemic broke out in China, the supply of raw materials had to bechanged, and the cost increased Now the supply from the Chinese market has recovered,but the cost has not decreased due to the rapid increase in shipping costs Another factorcontributing to high input costs is the use of traditional techniques and tools in theproduction process Many of the steps involved in making Thuong Dinh Shoes requirehandwork, which is more time-consuming and labor-intensive than machine production.This requires skilled artisans to perform the work, which adds to the labor costs

b Dependence on imported materials

- Vietnam's leather and footwear industry is still heavily reliant on imported rawmaterials, which limits the value addition and competitiveness of its productscompared to those of other countries that have integrated supply chains and canproduce high-quality materials domestically Currently, 60% of the industry's rawmaterials are still imported from China

- The domestic leather and footwear industry is facing great difficulties due to thelow rate of domestic supply of raw materials Currently, raw materials andaccessories account for 68-75% of the cost structure of footwear products.Vietnamese enterprises' products currently only reach 40-45%, mainly two minoritems: shoe soles and sewing threads

=> Usually, the materials are imported mainly to serve the production of sports shoeswith special fabrics Most of the input materials for the production of sports shoes areimported from abroad, especially in China The company still has to continue to importthese materials because domestic production does not meet the quality requirements ofthe product.

=> In 2019-2021, due to the impact of the Covid-19 pandemic, China closed all bordergates, causing our country to lack raw materials for production, causing productionactivities to stall

c Lack of brand recognition in the EU market

Vietnamese leather and footwear brands are not well known in the EU market, which canlimit their ability to attract and retain customers

There may be cultural differences between Vietnam and the EU that affect howVietnamese products are perceived and marketed For example, certain aspects ofVietnamese culture or packaging design may not resonate with EU consumers, which canimpact brand recognition

=> One of the main weaknesses of Thuong Dinh Shoes is that they are not a well-knownbrand in the EU market This lack of brand recognition could make it difficult for them togain traction and compete with other established footwear brands In order to overcomethis weakness, Thuong Dinh Shoes would need to invest in marketing and brandingefforts targeted specifically at the EU market They would need to carefully allocate theirresources to focus on the most effective marketing channels for reaching their targetaudience Thuong Dinh Shoes is a long-standing company in the shoe industry, but theproducts are old, outdated, and have not been improved The products have not beenupdated in terms of fashion, variety, and design It requires the company to updatemodern fashion trends to match the tastes of modern consumers

d Production inefficiently

Leather and footwear manufacturing companies in Vietnam are mainly in the form of lowlabor costs, so they have not been able to optimize production efficiency Vietnameseleather and footwear enterprises have little capital, so they are not able to expand theirscale and invest in automation equipment Dependent material sources also impact laborproductivity if the global supply chain is disrupted

=> Like many domestic footwear export companies, Thuong Dinh Footwear Companymainly outsources to foreign countries instead of investing in technology and machinery,because of low labor costs, outsourcing is suitable for export, suitable for the company'soperations and the company's international business conditions are still limited So the