Made in Vietnam (Part 2: Sourcing and Pricing)

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“Invention, my dear friends, is 93% perspiration, 6% electricity, 4% evaporation, and 2% butterscotch ripple.”                                                                                          - Willy Wonka

In Part 1 last week, we discussed Vietnam’s vision for the global stage as a footwear manufacturing power, and the extent to which it is really ready for such a mantle. This week, we’ll explore Vietnam’s trade regulations and relationships generally, as well as some issues your company could face without some level of involvement in the production process.

Blue Horseshoe Loves Anacott Steel

Let’s get right to it . . . Vietnam favors trade generally as far as footwear is concerned. From a regulation standpoint, the Vietnam Trade Promotion Agency (VIETRADE) is a sub-agency of the Ministry of Industry and Trade and has set forth Rules and Regulations on Trade, including taxation, which explicitly state that “[e]xports are promoted in Vietnam” and that “taxes are only levied on certain commodities, mainly natural resources such as minerals and forest products.” Regulation 4.2.1(a). On September 1, 2016, the Law on Import and Export Duties went into effect, expanding the scope of favorable duty treatment to materials, supplies and components imported for the manufacturing of export products, including footwear.

In addition to this favorable regulatory scheme, Vietnam is a member of the ASEAN trade bloc, along with member countries Brunei, Indonesia, Malaysia, Philippines, Singapore, Thailand, Laos, Myanmar and Cambodia. Either directly or through ASEAN, Vietnam is currently a member of at least 16 free trade and/or economic partnership agreements, most notably with the EU, China, India, Russia, Japan, Korea, Australia and New Zealand, Hong Kong, Israel, and Chile.

Follow the Rules or Follow the Fools

These free trade agreements impose certain rules of origin and regional value content (RVC) restrictions which require that a certain percentage of the shoe’s free on board (FOB) or related value comes from materials which originate in the trade area. Some of these rules have stricter requirements than others.

For example, the ASEAN trade agreement with Australia and New Zealandrequires that at least 40% of the FOB value of shoe materials originate in one of the membership countries to that agreement, which includes Vietnam. However, the ASEAN-Indian trade agreement only requires 35% of materials to come from member countries. The Trans-Pacific Partnership (TPP), which the U.S. exited, would have required 45% of materials to come from one of the member nations.

Your company should take steps to ensure your Vietnam-based production facility is in compliance, especially if the facility is producing for export to multiple countries and differing RVC rules could apply. This is important given concerns expressed by Vietnam’s leather, footwear and handbag trade group (LEFASO) during the 2016 Vietnam Footwear Conference about the ability of Vietnamese factories to satisfy these varying requirements. Your company should have a working familiarity with the trade agreements which could be in play, and then develop strategies to ensure your factory is taking all steps to ensure that RVC requirements across the board are being satisfied.

I’m Gonna Pop Some Tags

In addition to these RVC requirements, your company’s desire to produce low-cost product in Vietnam could trigger anti-dumping regulations in other countries. Vietnam has been a member of the WTO since January 11, 2007, and is therefore automatically subject to the Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade of 1994 (the “Anti-Dumping Agreement”). Product “dumping” occurs when manufacturers export a product to another country at a price either below the price charged in its home market or below its cost of production. It is a predatory type of pricing which can be implemented to increase market share in a foreign market or to drive out competition.

For example, assume China exports footwear to Brazil for $50. However, China is selling the same shoes in its own country for $60, and manufacturers in Brazil also make similar shoes for $60, but are not able to compete with China’s $50 price. Brazil’s government could say that China is dumping its product in Brazil in order to drive out competing manufacturers, and then issue “anti-dumping” measures such as an increased duty of $10/pair imported from China. This measure would make the shoes from China and Brazil the same price ($60) and in turn protect local industry. Anti-dumping measures can also be non-tariff based, such as certain registry requirements, customs codes, or limiting the number of customs houses.

This example is not by accident, as Brazil has accused China of anti-dumping in the past and has levied anti-dumping measures accordingly. In particular, from March, 2016 onward, Brazil’s Ministry of Development, Industry and Foreign Trade advised that a surcharge of 10.22US$/pair would be applied to footwear imported from China. Vietnam is not currently subject to such duties. However, Brazil has imposed such measures in the past against Vietnamese imports and has recognized Vietnam as a non-market economy, leading to heightened suspicion and attention.

In addition to Brazil, Vietnam is subject to blanket anti-dumping measures levied by Mexico. These anti-dumping policies restrict the importation of footwear and are designed to combat unfair competition from exporting countries. In particular, Vietnam is now subject to a 25% — 30% tariff until January 31, 2019. There are also several non-tariff requirements in place, such as a decreased number of customs houses assigned to deal with footwear imports, and notice and audit requirements. Notwithstanding these measures, in February, 2016, Mexico and Vietnam established a joint committee on economic, trade and investment cooperation, and continue to build trade ties between them.

Summing up, in addition to making sure you are adhering to RVC requirements, your company should be strategic in FOB pricing and exporting practices, including researching pricing in export countries and understanding any anti-dumping measures in place which could affect your company. Of course, there are numerous other trade-related issues your company should also be considering, including on the corporate responsibility front. As will be discussed in the next installment, your responsibilities to society and the environment should be front and center as far as your Vietnam-based operations are concerned. As always, we're here to help.