EU-Vietnam FTA: India’s labour-intensive export sectors to feel the heat, China may gain

EU-Vietnam FTA: India’s labour-intensive export sectors to feel the heat, China may gain

Beijing to ramp up investments in SE Asian country, to overcome barriers to its direct trade with EU

Pandemic-hit Indian exporters, especially in labour-intensive sectors, are expecting their fortune to plummet further, as key competitor Vietnam has clinched a free trade agreement (FTA) with the EU.

The pact will raise competition between the Asian rivals for the lucrative EU market in a range of products such as garments, footwear, marine products, plastics, rubber, leather and coffee (See the chart). Importantly, Vietnam will get duty-free access to the EU for 71% of its goods from day one and 99% after seven years but Indian supplies will continue to attract up to 9.6% duty (the maximum, among the products from labour-intensive sectors, is on garments).

Moreover, trade analysts expect a further jump in investments by China and others in Vietnam to take advantage of its duty-free access to the EU, at the cost of India. As such, according to a Nomura report last year, as many as 26 of 56 companies that relocated out of China between April 2018 and August 2019, set up shop in Vietnam.

While India shipped out such products worth $12.2 billion to the EU in 2019, Vietnam exported $13.5 billion — a substantial portion of their total goods exports of $55.7 billion and $41.5 billion, respectively, to the bloc. Of course, with the UK out of the EU now, the bloc’s share in supplies for both the countries will drop.

The EU, India’s second-largest export destination, accounted for about 17% of the country’s total outbound shipment. However, in a labour-intensive segment like garments, its share (including the UK’s) was typically about 30%.

This will further harden the challenge for India to even hold on to its market share in various labour-intensive export segment, let alone grab the space being gradually vacated by China in some of them, analysts have already warned.

Of course, India’s product basket for the EU is much more diversified than Vietnam’s, which will somewhat soften the blow for New Delhi. However, trade agreements usually enables nations to widen their product portfolio and given Vietnam’s stellar performance in exports of telecoms and garments in the past decade, India can’t afford to be complacent in any manner.

Another breather for India is that the EU remains a low-tariff destination, with zero or minimal import duties on several key products, including mobile phones, iron and steel, furniture and cashew, which will blunt the advantage for Vietnam.

Also, according to the FTA pact, EU duties on apparel have dismantling periods stretching from five to seven years for the more sensitive items and zero to three years for less sensitive goods. The duties on footwear also gets the similar “staging period”. This will offer some time for Indian exporters to get their act together.

India’s goods exports dropped marginally year-on-year in the calendar year 2019 to $324 billion, while those to the EU fell at a sharper pace of 3%.

Meanwhile, after 16 rounds of talks between 2007 and 2013, negotiations for an India-EU FTA have been stuck due to differences over the bloc’s demand for a sharp cut in tariffs on auto parts and wine by New Delhi, among others. Both the sides, however, were trying to revive the trade talks earlier this year when the Covid-19 hit, forcing authorities to shift focus to tackling the pandemic.

Gautam Nair, managing director at Matrix Clothing, one of the country’s largest apparel exporters, recently told FE: “The clear tariff differential in the EU market will add to our already-stark disadvatages in other areas (logistics costs, etc) and further erode our competitiveness vis-à-vis Vietnam,” said.

Raja M Shanmugham, president of the Tirupur Exporters’ Association, called for no quick-fixes but a long-term vision. “Promoting garment clusters, initiating structural reforms and tailoring policy interventions accordingly will be a way forward,” he said recently. Tirupur is the country’s largest garment exports hub, having recorded outbound shipments of around Rs 25,000 crore in FY20.

Ajay Sahai, director general and CEO of the Federation of Indian Export Organisations (FIEO), cautioned against much tougher competition from Vietnam in labour-intensive sectors, flagging our history of losing market share to Hanoi.

Flagging the threat to its export-competitiveness, the Debroy panel had earlier said India’s logistics costs alone accounted for as much as 15-16% of the consignment value. Also, as pointed out in an earlier report by HSBC, India’s domestic bottlenecks explain 50% of the recent slowdown in overall exports (remaining the biggest threat to its outbound shipments), followed by world growth (33%) and the exchange rate (just 17%).

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