Introduction

The textile and garment industries, especially garment play a crucial element in the country export drive. And the export success in the industry will be the forerunner to the emergence of a broad-based export-oriented development strategy. In both garment and textile industries have achieved notable achievement to date. The export sale increases from nearly 100 million USD in 1989 to about 2000 million in the year of 2000, accounted for approximately 20% merchandise commodities, nearly 41% manufactured exports. And textile and garment raking the second since 1995 after oil export.

Garment export to quota EU market takes about 40% Vietnam textile and garment exports. Although the textile and garment agreement signed on 15^th Dec, 1992 and taken effect on 1^st Jan 1993, export revenue increased sharply. This figure implies that Vietnam garment producers have a given successful in penetrating in difficult market. However, clothing export to EU market also relies on some items. The Asian financial crisis led Vietnam compete sharply with regional nations in EU market as their devaluation. When China became a member of WTO and the quota regime on textile and garment is dismantled, the competitive pressure will be stronger. Those are the challenge and obstacles of Vietnam garment industry in period 2001-2005.

To overcome the difficulties and continue penetrating into foreign market, Vietnam garment and related industries should have reforms such investment strategy, oriented development, marketing effort, trademark creation that all together stimulate export.

The thesis focuses some issues: Assessment the export activity of garment industry and export to EU market in period 1993-2000 such the condition for market penetration, the main categories exported, current garment production, the Asian rivals in EU market. The last part is to evaluate the export potential of Vietnam garment industry to EU market period 2001-2005 that is based on the previous assessment . And  the objective  of the thesis is to answer the central question:

Has Vietnam garment industry got export potential to EU market?

- How about the garment export capacity and garment export quota level of China and regional competitors in EU market are in compared with Vietnam?

What are achievements and obstacles of Vietnam garment export activity in EU market? Are there any changes with main exporting clothing categories over years?

The chapter would answer some questions:

- Why do countries carry out export activities, and why do developing countries often export garment products in the first phase of industrialization process?

- What are the gains that garment export would bring to the economies?

- What are the factors affect garment production and garment export?

- How do macroeconomic policies affect garment export activities?

2.1. Mechanism of trade and position of export in the economy

2.1.1. Mechanism of trade and export activities

Trade has been understood that all transactions of goods, and services and even capital between parties. If parties reside in different countries, the trade is international.

There are some well-known theories to explain trade among nations.

2.1.1.1. Trade and arbitrage between countries

The theory states that trade occurs as result of price differences (arbitrage) among nations of a given commodity. Parties engage to trade to get price gap benefit. In the absence of transaction and trading cost, arbitrage will occur till the prices of a commodity traded converge.

The theory only shows the price differences of a commodity leading trade occur, but it does not explain why the price differences happen.

2.1.1.2. The theory of comparative advantage and Ricado’s model

The law of comparative advantage: even if one nation is less efficient than (has an absolute disadvantage with respect to) the other nation in the production both commodities, there is still a basic for mutually beneficial trade. The first nation should specialize in the production of and export the commodity in which its absolute disadvantage is smaller- that is the commodity having comparative advantage, and import the commodity in which its absolute disadvantage is greater- the commodity has comparative disadvantage.

However, the theory states that the value or the price of a commodity depends on amount of labor for production of a commodity. This means that: (1) either labor is the only factor of production or labor is used the same proportion in the production of all commodities and (2) labor is homogeneous. Since neither both assumptions is true. And G. Haberler in 1936 explained that relative price ratio based on the opportunity cost. Inspite of the limitation, the comparative advantage has importance to explain a partial trade flow.

2.1.1.3. Heckscher- Ohlin theory

The typical idea in Heckscher-Ohlin trade theory is that endowments and abundant resources of a country will decide comparative advantage in producing. The theorem as: A nation will export the commodity whose production requires the intensive use of the nation’s relatively abundant and cheap factor and import the commodity whose production requires the intensive use of the nation’s relatively scarce and expensive factor.

In reality, the industrial nations have relative abundant amount of capital, and advance technology, but they face a relative scarce unskilled labor, the wage paid highly. These countries have comparative in producing intensive capital goods. The less developed and developing countries with large unskilled labor, and lack of capital will have comparative in producing labor intensive goods.

Heckscher-Ohlin trade theory explains a large amount of trade flow. Based on the theory each nation should pursue trade strategy that it obtains endowments in each period.

2.1.1.4. Economies of scale

Some firms can benefit from large scale in production as cost reduction. Instead of producing a series of products or sizes, they concentrate on some few variety of products to supply  for international market as mass production makes cost reduce.

2.1.1.5. Trade based on differentiation

The amount of international trade between products of the same industry or product group based on the differentiation (on function, or service) among them that produced in different nations takes a large proportion. The development of differentiated products of an industry is as the result of different taste, preference among territories. And there has a need, or demand to fulfil the requirements such tastes and preferences.

2.1.1.6. Technology gap and product cycle

Industrial nations have strong R&D activities, obtain new technology and often create new products. The products are firstly consumed at and standardized in the innovating countries with high selling price and then exported to other countries that have lower technological level (there has a difference technological levels among nations that is called technology gap).

When products are in the mature stage, the technology for producing products can be transfered from advanced nations to developing countries. These countries combined the new technology they have just got with exploitation the existing advantageous- abundant labor, and they can produce the same products with lower cost compared to innovating nations. The products with lower price are exported against to advanced nations which are trying to innovate other technology and newer products for market the technology as they perceived that import the products from developing countries is more benefitable than production themselves because of high wage for labor.

In the theories above the Heckscher- Ohlin theory is the most suitable with explaining the trade among developing and advanced countries, including Vietnam’s trade in terms of exploiting national advantages.

2.1.2. The position of export in the economy

The role of export activities can be interpreted into three ways as follow:

-         Firstly, according to the traditional trade theory, stimulating export activities based on comparative costs will increase the direct gains from trade, thus it promotes economic development.

-          Secondly, exports have a crucial role in making foreign exchange for importing capital commodities, materials, and other inputs for production.

-          Thirdly, in the condition of free trade and export expansion in the open economy, the new outside technology that may be penetrated into domestic production freely grades up the skill level of domestic worker, facilitating spread of new skill and technology.

Garment industry appears as a labor- intensive industry whose technical requirements are not high. Thus, the industry has capabilities of creating jobs for workers relative easily, solving employment for the economy.

Another feature should be emphasized is that garment production can be organized on small and medium scale, creating sub-contract networks. Such production scale facilitates job creation and mobilization of funds among resident. Combination of different production scales large, medium and small can be made relative easily.

With main characteristics above, garment industry has a big role in the development of the developing nations, especially in the early development process.

2.2. The process of trade liberalization on textile and garment products

The multiple-fiber agreement (MFA) signed in 1961 to regulate trade on textile and garment by quota and other trade barriers. This took effect in 1974. Agreement on textile and clothing (ATC) in 1994 replaced MFA, and applied for WTO members. According to ATC, trade liberalization on textile and garment will be in 4 periods since 1.1.1995:

1.1.1995 integrating not less than 16% amount of imported commodities in 1990 based on the commodity list of agreement.

1.1.1998 integrating not less than additional 17% following amount of imported commodities.

1.1.2002 integrating not less than additional 18% following amount of imported commodities.

1.1.2005 all the rest commodities have to integrate; the limitations of MFA will be dismantled

ATC has positive effects on world trade. And the developing countries have more chance to penetrate into world market, expand their export activities.

2.3. Factors affecting garment production and export activities

-         The supporting and related industries supply input or affect to garment production process.

-         Demand factor

-         Factor conditionse: general and specialized factors

-         Rivalry in the market

-         The government policies

-         The chances

2.4. Assessment of the export potential of an industry

Based on the current condition to forecast the future export capability such: current export, the advantage of the industry, foreign demand of the industry’s products, purchasing power of the market, consumption for the goods/GDP, the growth of import yearly… And the export potential of an industry can be classified into two groups: the internal factors such the development of the industry, the business environment and macro policy. The external factors such foreign demand, and international competitive pressure.

Chapter III: achievements of Vietnam garment export in EU market period 1993-2000

3.1. The bilateral trading agreement between Vietnam and European Union on textile and garment products

According to the agreement textile and garment between Vietnam and EU, Vietnam can export its 21,938 tone textile and garment products (including 106 categories in which 45 cats. are non-quota export) to EU market with the value of 450 million USD yearly. After comprehensive co-operation Vietnam-EU signed 17^th July 1997, the agreement on textile and garment had some modification on main articles such increase import quota of 23 hot cats from 20% to 25%, reduce number of cats controlled by quota… On 17^th November 1997, the agreement period 1998-2000 signed in Brussels has much favor for Vietnam, export turnover can increase by 40% in comparison with that in 1997.

3.2. EU market for textile and garment products

EU has fifteen members, GDP was 9000 billion USD in 1996, GDP per capita was 23,000 USD with 391.3 million resident. EU is a very crucial center for both import and export garment and textile products, and ranks the first in garment and textile import products. Table 3.1 will show the import activity in the market recently:

Table 3.1:EU’s import textile and garment

Unit: million USD                                                                           Source: Textile Asia- 12/1997

            The trading among EU nations takes a large part (53%). The second crucial source is Asian countries, for garment products the figure is 28% with main partners China, India, Turkey. And the processing imports also have increased recently.

3.3. Vietnam’s garment exports to EU market

3.3.1. Export turnover of textile and garment industries

Since trading bilateral agreement on textile and garment products signed on 15^th December 1992, textile and garment export turnover has increased sharply ranking the second after crude oil export. Table 3.2 shows the export of textile and garment result in period 1993-2000:

Table 3.2: Textile and garment export turnover period 1993-2000 (Mil.USD)

Export Revenue	1993	1994	1995	1996	1997	1998	1999	2000
Total revenue	350	537	845	1,150	1,349	1,450	1,500	1,942*
- Textile revenue	61.7	107.8	147.8	175.5	171	222*	285*	370*
- Garment revenue	288.3	429.2	697.2	974.5	1,178	1,228*	1,215*	1,572*

*: Estimated by Ministry of Trade               Source: Ministry of Trade and Hal Hill report 1998

            Export turnover increased from 350 million USD in 1993 to nearly two billion USD, the figure indicates that Vietnam has ability to produce and export textile and garment products, and his products can compete successfully in foreign market, although the regional financial crisis has negative effect on export.

            The table above also shows the limitation of textile in the total export revenue. We continue analyze deeply this issue in the next chapter.

            3.3.2. Markets for Vietnam textile and garment products period 1993-2000

            The thesis will focus on analyzing main and (or) high growth export rate markets such Japan, US, EU markets.

            3.3.2.1. Japan market

            Japan is the biggest non-quota market of Vietnam garment textile and garment exports. Export sales have increased rapidly since 1994. Vietnam was one of the ten leading exporters to Japan market in 1995. In 1996 Vietnam garment textile and garment exporters ranked the 8^th, and 7^th in 1997 among other exporters in Japan market. The revenue of most exporters in Japan market reduced in 1997, Vietnam exports increased both items and quantity.

Textile and garment exports to Japan market have high growth rate and relatively diversified categories. The following table will present the total export revenue of Vietnam producers to Japan market as well as main export categories.

Garment products takes over 80% of total export revenue. And categories are simple, the items required high quality and complicated design are not be able to export as domestic producers have no ability. Vietnam exporters inherit preferential tax based on Japan’s GSP system. This is a crucial reason leading textile and garment export to Japan increased sharply in the last period.

However, Vietnam producers also face to some difficulties such quality standard, competition with other rival in the market. In 1998 export revenue of Japan market decreased sharply as the result of regional financial crisis.

Table 3.3: Export revenue and some main categories’ revenue of Vietnam textile and garment producers in Japan market

Source: Statistic of Japan ministry of finance

Over period 1995- 2000 Japan market accounted for 38- 40% of Vietnam’s total export revenue of textile and clothing industries. This figure shows the importance of the market for Vietnam textile and garment exporting activities, especially for garment sector- taking large and crucial part in total revenue.

            3.3.2.2. US market

US market is evaluated as a potential market for Vietnam export textile and clothing industries. Although Vietnam does not inherit preferential tax (GSP) and MFN after US lifted the embargo toward Vietnam, textile and garment producers have penetrated into this market. Export turnover to US is not as high as to Japan or to EU market, but the rate of growth is highest. Average growth rate in period 1994- 2000 is 114.23%, which is much higher than that of textile and garment industries 35.76%.  The export turnovers to US during 1994- 2000 are in figure 3.1.

Note: 1,2,3…7=1994,1995,…2000                                  Source: Vietnam customs report

Main exporting products to US markets are woven children gloves, children shirt, (count 85% export turnover), and knitted children shirt, man shirt, lady shirt, knitted gloves, cardigan… Although US has high demand on knitted products Vietnam can only fulfil a very limited requirement as tax rate is high over 30% per product on average. The biggest obstacle for Vietnam producers is that Vietnam has not yet inherited preferential tax (GSP) and most favor nation (MFN) from US. When these issues solved textile and garment producers have a very good opportunity to export to US, and export revenue is able to increase more rapidly.

3.3.2.3. European Union market

European Union (EU) market has been the biggest Vietnam quota market. After seven years the trading agreement on textile and garment products implemented, export turnover has increased over years from 250 million USD in 1993 to 650 million USD in 1998 and 705 million USD in 2000, the rate of growth is above 16% on average. Among fifteen nations formed EU market, garment and textile exports to Germany takes the largest part, and France ranks the second, the third is Holland. However, the proportion has a slight change over years:

Table 3.4: Vietnam garment and textile export revenue in some major countries in EU market period 1993- 1997

Unit: Million USD                                                  Source: Institution of trading research  

The export revenue of Vietnam garment and textile in table 3.5 shows textile products take a very small part in export revenue around 3-4% in export revenue. Garment products are main turnover of the industries in EU market, taking 96% sales. The export value of garment products in EU market will be presented in table 3.5. After trade agreement between Vietnam and EU had some modifications the sales has grown faster. In 1998, garment export revenue reached to 621.3 million USD, and 637.75 million USD in 1999 in comparison to 450 million USD in 1997 and 245 million USD in the first year of exporting garment and textile to EU market. The reduction in price of the main exported product leads total export revenue in 1999 cannot increase highly.

Table 3.5: Textile and garment export to EU market period 1993- 1999

Source: Institution of trading research

Vietnam export textile and garment industries also had inherited preferential tax rate 0% of EU’s generalized system of preferences (GSP). This is an important reason making Vietnam garment products have price competition with other rivals such China, ASEAN… and stimulate export over years.

EU market has opened for Vietnam textile and garment products only for seven years, but export activities have achieved very good results. High growth of export revenue over years is one indicator to assess the Vietnam clothing industry’s success. Taking over 90% revenue garment export plays a key role in the market penetration success of textile and garment industries. The development of textile and clothing export activities to EU market in period 2001- 2005 will still mainly base on the export ability of garment industry.

Three markets mentioned are main and promising markets. Vietnam textile and garment industries, especially garment industry have got notable achievements. And in this section the discussion will only be about the export turnover from Japan, US and EU markets. From exporting clothing products to EU market trade policies among countries, particularly trading treaties are very important in opening commercial transactions.

3.4. Contribution of Vietnam garment export to EU market to the economy

Enforcing employee asorbability and generating linkages of garment industry

Vietnam garment and textile industries absorbs about 1.6 million workers (according to VINATEX statistic in 2000). There are 187 state textile and garment firms in which there are 70 textile firms, 117 clothing firms. In 800 textile and garment Ltd companies, 600 are garment firms, 200 are textile cooperatives up to the year of 2000. Total production value of the industries in 2000 is 16,000 billion VND.

 Creating lot of work compounded with low capital requirement are two outstanding characteristics that are very useful for current situation as Vietnam is in lack of capital and high rate of unemployment (the rate of unemployment in 2000 is 6.7%). On the other hand, the development of related and supporting industries such textile or polyester spread or button as accelerating export in garment industry is a good way to create jobs for local laborers. In 2000, due to the development of export activities there has been 70 thousand laborers in planting cotton seed and processing raw cotton.

The number of quota export firms had increased in period 1993-1998. The limited companies and joint venture firms have impediment in export quota access. In general, up to 1998 for three types of firms the number of companies has quota all increased about thee times: from 99 to 302 for state firm, from 37 to 108 for limited company, and 12 and 47 for joint venture. These figures show that Vietnam producers have had improvement in production and in foreign market penetration.

Table 3.6: firm structure getting export quota to EU market period 1993-1998