New difficulties for textile, garment exports to Canada

The fabric-forward rule of origin challenges Vietnamese textile and garment enterprises

Rule-of-origin challenges

According to Tran Thu Quynh, Vietnam Trade Counselor in Canada, Vietnam exported about US$1 billion worth of textile and garment products to Canada in 2022. The exports grew 10 percent in the first several months of 2023 and are expected to further increase in the remaining months of this year, she said.

The General Department of Vietnam Customs’ data showed that Vietnam exported textiles and garments worth more than US$236 million to Canada in the first quarter of 2023.

However, while Canada is extending its General Preferential Tariff (GPT) and Least Developed Country Tariff (LDCT) until the end of 2034, Vietnam is graduating from the program due to its economic growth in recent years.

Without the GSP, many Vietnamese products will likely fail to satisfy Canadian input material standards, posing a major challenge for Vietnam vis-à-vis its rivals, Bangladesh and Cambodia, which will continue to enjoy Canada’s extended GSP.

Tariff elimination

While the upcoming GSP expiry is expected to challenge Vietnamese textile and garment exports to Canada, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) will provide them with attractive incentives and opportunities. Specifically, according to the CPTPP’s commitments, Canada has eliminated a majority of import duties for Vietnamese textile and garment products as soon as the trade deal came into force in 2019 and will remove all the tariff lines this year.

Vietnam exported textiles and garments worth more than US$236 million to Canada in the first quarter of 2023

Vietnamese textiles and garments have carved a modest niche in Canada, incommensurate with their potential, but the CPTPP is drawing increasing attention of Canadian textile and garment importers.

Pham Quang Anh, Director of Dony Garment Company, heard about the CPTPP when it took effect in 2019, but then paid little attention. However, Anh recently began studying the CPTPP following suggestions by many Canadian customers. “I found it very strange at first, because this line of customers was almost never there before. But after researching, I discovered that they came because of the special incentives of the CPTPP,” he said.

However, the CPTPP’s fabric-forward rule of origin, requiring all yarn and fabric used to make a textile or apparel product to be formed in the 11 countries that are signatories to the free trade deal, will challenge Vietnamese textile and garment enterprises. To meet the CPTPP’s rules of origin, textile enterprises like Anh’s may have to change their input sources and thus lose competitive prices compared to other manufacturers, especially China, which is not a CPTPP member.

Anh said that price is the biggest concern of business enterprises. “Businesses need free trade agreements (FTAs) for large contracts. But with these contracts, even a difference of one dong compared to the competitor’s price is crucial,” he said.

At a CPTPP seminar, Pirkko Penttila, Canada’s regional coordinator for CPTPP issues, said that the Association of Southeast Asian Nations (ASEAN) is now the main focus of the country’s Indo-Pacific strategy. “Canada already has FTAs ​​with some CPTPP members, such as Mexico, Chile and Peru. But in the CPTPP there are also some game-changing factors, such as Vietnam,” Penttila said.

According to Penttila, the CPTPP is more than an agreement that provides preferential market access for countries in the Asia-Pacific region. “The CPTPP covers all sectors and aspects of trade to remove all barriers to trade, helping to create a fair, transparent and consistent environment among internal markets,” she said.

Penttila affirmed that Canada attaches great importance to its relationship with Vietnam, its largest trading partner in Southeast Asia. Promoting trade relations between Vietnam and Canada is even more special in the context of this year’s 50th anniversary of diplomatic relations, she added.