However, leading experts say the GSP scheme, in fact, only provides modest benefits to Vietnam, and its incentives are definite.
Opportunity vs challenge
Under the scheme, GSP is applied to most of Vietnam’s export products, including footwear, hats and umbrellas which have already been listed under the ‘graduation’ mechanism for competitive products.
Tran Ngoc Quan, deputy head of the European Market Department under the Ministry of Industry and Trade, postulates the GSP scheme will no longer be valid when a free trade agreement (FTA) between Vietnam and the EU is signed and comes into effect.
Although graduation thresholds increase from 15% to 17% on products, excluding garments, many of Vietnamese exports are likely to reach these threshold levels and will not enjoy EU preferences.
If the new GSP is applied, the market share of Vietnamese coffee, tea and spices in the EU will increase to 21.68% from the current 12.11%, meaning these products will cross over the graduation threshold and will not receive preferences.
Similarly, Vietnamese seafood and footwear are no exception, as these two groups of products are expected to make up 19% and 34% of the EU’s market share respectively.
Claudio Dordi from the EU Investment and Trade Policy Support Project says EU tariff incentives create a competitive advantage for Vietnamese garment businesses, especially when their major rival, China, is paying Most-Favoured-Nation (MFN) taxes which are 3% higher than GSP levels on average
Customers, therefore, will place orders with Vietnam, in lieu of China to benefit from lower tariffs, he says.
However, Dordi warns the GSP brings a definite competitive advantage as the validity of the GSP is not permanent.
Than Duc Viet, a Garment 10 Corporation representative, says the most difficulty in gaining GSP advantages is to meet Rules of Origin of materials to get certificate of origin (C/O) form A.
Currently, the company cannot apply for incentives for its FOB products as most of its materials are imported from China at the customer request.
Internal strength needed
Vietnam, an export-driven economy mainly based on outsourcing contracts, has no choice but to meet Rules of Origin to enjoy trade and tariff incentives. With its added value of less than 40%, Dordi suggests the garment sector play by these rules to make the most of preferences.
Former Trade Minister Truong Dinh Tuyen posits GSP does not exert sufficient pressure on economic restructuring, thus affecting a trade balance. Exports may rise thanks to GSP, but imports may also increase due to low competitiveness in labour productivity, quality and production costs.
As Vietnam is integrating more deeply into the world economy and has signed many free trade agreements, tariffs will be slashed gradually, normally over a period of 10 years, and as a result GSP will no longer be important to businesses.
This means GSP creates an external source of competitive advantage and domestic businesses should not rely on this source, Tuyen says. Instead, he advises businesses to grasp GSP rules to avoid obstacles, even losses when exporting products to these markets.
To this end, the former Trade Minister says business should make full use of GSP incentives by improving product quality, diversifying their exports, and reducing costs and prices to sharpen the competitive edge of Vietnamese products.
In addition, a greater effort is needed to accelerate economic restructuring and growth model shifting, he concludes.