European Union – Vietnam Free Trade Agreement

On June 9, 2020, the Vietnam’s National Assembly ratified the European Union – Vietnam Free Trade Agreement (EVFTA). We explore this topic in detail with Mr. Vu Ba Phu, Director general of the Vietnam Trade Promotion Agency – the governmental organization of Vietnam responsible for national regulation of trade and investment promotion for development of industry and trade.

Why Vietnam negotiated an agreement with the EU?

EVFTA will bring great and immediate benefits to Vietnam’s economy through stronger growth and greater trade. According to the World Bank, the full implementation of the EVFTA could increase Vietnam’s GDP by 2.4 percent, boost exports by 12 percent, and lift an additional 0.1 million to 0.8 million people out of poverty by 2030. It will also potentially help close the gender wage gap by 0.15 percentage points, particularly for households in the bottom 40 percent of income distribution.

The EU is Vietnam’s second largest export market. Vietnam has increased exports to the EU at an annual rate of 15% since the negotiations for an EU-Vietnam free trade agreement (FTA) began in 2012.

EVFTA will help promote competition, cooperation and capacity building, especially the development of services, including finance. Many provisions of EVFTA will also promote institutional reform, promote transparency and gradually form modern institutions in Vietnam, especially in the fields of environment, government procurement, and intellectual property, investment, rules of origin and non-tariff measures (NTMs).

Vietnam is the second economy in ASEAN successfully engaged with EU in the FTA and investment protection agreement (IPA), also the first developing economy in the globe singed the FTA and IPA with a developed economic zone. This will help to improve the image as well as competitiveness of Vietnam on the international market.

Will the bilateral trade boost?

As estimation, Vietnam is expected to gain significantly from bilateral trade liberalisation with the EU. Compared with the business as usual baseline, the expected gains are USD 3.2 billion in 2020, USD 6.7 billion in 2025 and USD 7.2 billion in 2025 (World Bank’s forecast).

Bilateral trade between Vietnam and the EU tends to strengthen Vietnam’s global value chains (GVCs). Common export products of Vietnam include agricultural products such as fish, coffee, and production such as garments, machinery, electronics, etc.

Vietnam – EU bilateral trade is on an upward trend due to lower tariffs on goods. By 2030, when most of the tax cuts made, EU exports to Vietnam are estimated to be 37% higher, Vietnam’s exports to the EU are estimated to be 44% higher. As estimation, the most significant increases are textiles, apparel and footwear, with rice and fish products making a significant contribution both relatively and absolutely.

At the bilateral level, imports from the EU increased significantly. Vietnam has relatively large tariffs on some products, but these products have been reduced gradually. The most significant increase in imports occurred for high technology machineries and equipment, luxury goods, pork and poultry, beef, forestry, dairy products, other processed foods, and leather. In addition, there is a significant increase in services, including finance and insurance.

What are the implications of the EU-Vietnam FTA on bilateral trade?

We consider the followings as specific implication for business:

  1. It needs to focus on rule of origin for textiles/garment sector while increasing value added products with a focus on quality control on imports;
  2. Anticipating the modifications brought about the EVFTA agreements such as workers, environment, intellectual property rights (IPRs), etc.;
  3. Tariff reductions are not enough. Vietnam should capture higher value added as improving quality/safety of national products, distributing to EU with environmental and social friendly productions;
  4. EU is not the only target market; it is necessary to check other relevant markets for Vietnam.

For cooperation, the FTA will need to strengthen closer link between the EU and Vietnam in monitoring the implementation of commitments. The institutional framework which will emerge from the agreement will strengthen bilateral cooperation in several fields, such as protection of IPRs, investment promotion, mutual recognition of standards and possibly qualifications, NTMs, etc.

For the application of the agreement, it is necessary to ensure that the agreement will be applied in a timely, correct, transparent and non-distortionary manner.

FTA brings a lot of potential benefits, especially the contribution to economic growth. Industry in Vietnam will be the dominant sector. The textile and footwear industries are expected to benefit significantly from the FTA. The EU is one of the main and target markets of Vietnam and Vietnam enjoys a large trade in goods surplus with the EU.

The preferential advantage of FTA for both Vietnam and EU will be diluted in the near future. Vietnam has the key advantage of being the first country in ASEAN to sign FTA with the EU. Over time, however, this advantage will be lost as the EU expands its concessions to Thailand, the Philippines, Indonesia and perhaps other countries in the region.

What are the main advantages of EVFTA?

EVFTA may bring immediate and long-term benefits to Vietnam from economic and institutional restructuring. The direct impact of EVFTA on GDP growth and exports and imports is of greater significance than any other FTA that Vietnam has negotiated. Important changes in the current economic structure and institutions due to the implementation of EVFTA are expected to help bring Vietnam on the right track to creating a more competitive and innovative economy.

EVFTA can boost strongly and accelerate domestic market. EVFTA reflects the content of modern trade agreements: promoting competition, cooperation, and capacity building. Many provisions of EVFTA will also stimulate institutional reforms to strengthen and standardize rules, promote transparency, and support the creation of modern institutions in Vietnam.

EVFTA contributes to creating a more competitive and innovative economy. In the long run, it is not just export growth that matters, especially the level of technology they show. Larger inflows of foreign investment may be directed to upstream supply chains and supporting industries for industries such as textiles, apparel and leather, to capture EVFTA opportunities. This process will stimulate domestic private enterprises to participate in the expanded domestic supply chain and integrate into the GVCs, which will eventually promote further value-added exports.

What are the challenges of EVFTA for Vietnam?

Making commitments on global integration, especially according to EVFTA, is to implement a comprehensive domestic reform program. This is considered a challenging process. Some of the key challenges are as follows:

  • Compliance with rules of origin and sanitary and phytosanitary measures (SPS) is one of the most difficult enforcement issues. Vietnam participates in simple assembly of GVCs and its exports depend heavily on imported raw materials, especially from non-EU members. This is the main barrier preventing Vietnamese businesses from making the most of the tax reduction. Rules of origin are reflected in strict provisions on both domestic minimum origin and non-EU originating materials in order to enjoy EU preferential tariffs. Exports will be required to meet the requirements of high-quality standards and plant hygiene and quarantine. This is quite challenging for an economy like Vietnam, where agriculture plays an important role.
  • EVFTA can promote foreign direct investments (FDIs). However, a major challenge for Vietnam is the efficient handling of compliance requirements with investment protection provisions.
  • Local producers and service providers (distributions, banking, financial, insurance etc.) shall be facing with high competition from EU’s products, as well as services.

What is the impact of EVFTA on the Vietnamese small and medium enterprises?

After seven years from the date of entry into force of the Agreement, nearly 100 percent of Vietnam’s exports to the EU would be eliminated import tax. This will be an extremely favorable condition, a new breakthrough, opening up huge opportunities for businesses, especially small and medium enterprises (SMEs), creating very competitive advantages. As said above, Vietnam being very first country in the ASEAN region to sign EVFTA is an important advantage, helping goods of Vietnamese enterprises go deeper into the EU market, through the exemption and reduction of import duties.

Vietnamese SMEs can fully adapt whether the EU standards and trade costs are among the highest in the world. This also means that EVFTA’s commitments can fully spread to SMEs, contributing to economic and social stability, avoiding the conflict of interests as happened in many countries.

The EU is a model to protect geographical indications (GIs), and this is a model suitable for SMEs in Vietnam. The sustainable development commitments that Vietnam has made in EVFTA will also mean that Vietnamese enterprises will no longer have to apply for technical certificates as it has happened with previous trade agreements.

Along with the implementation of EVFTA, the EU applied an early harvest (REX) mechanism that allowed businesses to self-certify origin. This is what businesses need to seize to turn into their benefits.

What is the impact of EVFTA on the Vietnam’s farming communities?

From an importing country, up to now, Vietnamese agricultural products have been exported to over 180 countries and territories, with the second largest export turnover in Southeast Asia and the 15th in the world. Some agricultural products have affirmed their position and competitiveness in the world market

The EU is currently one of the two most important partners of Vietnam in terms of trade and investment and is one of the main markets for Vietnam’s agricultural products (in particular, seafood and coffee that are Vietnam’s main products).

New FTAs have all important provisions on market opening, creating favorable conditions for agriculture, forestry and fisheries. Enterprises related to the processing technology in the sectors of agricultural products, foodstuffs, fisheries etc. will be directly affected. About 50% of the tariff lines for fisheries will be eliminated as soon as the agreement comes into effect, the remaining 50% of tariff lines will be 0% after 3 to 7 years. Specifically, once EVFTA is in force, the group product of fresh, chilled and frozen cattle and buffaloes, fresh and frozen pork etc. will basically be reduced to 0%.

For fruits and vegetables, 530/556 tariff lines also dropped to 0% when EVFTA enters into force. Besides, 93% of coffee and pepper products will also be exempt from customs duties when EVFTA comes into effect. This is considered the most preferential treatment of the EVFTA.

EU also reduces the customs duties on rice products to 0% after 3 – 7 years of EVFTA implementation; vegetables and fruits have 520 of 556 tariff lines to 0%, processed vegetables and fruits also have 85.6% to 0%; cashews enjoy 0% tax; coffee, pepper 93% tax line to 0% as soon as EVFTA enters into force.

In addition to reducing tariffs on specific items, the EU also has a mechanism to protect Vietnam’s GIs such as Thanh Ha litchi, Luc Ngan litchi, Tan Cuong tea, Ninh Thuan grapes, Hoa Loc mangoes, and Northern tangerines. Can, Hai Hau rice. This is one of the favorable conditions for Vietnamese agricultural products to assert their brand in the world market.

What is the impact of EVFTA on investments between EU and Vietnam?

EVFTA will promote bilateral trade and investment. As mentioned, EVFTA will eliminate almost all customs duties between the EU and Vietnam and help modernize Vietnam’s taxation framework and enhance the trade and investment environment. Vietnam’s Ministry of Planning and Investment shows that EU companies have about 3,400 investment projects registered valued at more than USD 54.8 billion in June 2019. 

EVFTA creates opportunities for Vietnam to attract more investment in upstream activities, increase domestic added value and strengthen Vietnam’s position in the GVCs (textile and apparel). Three domains have the potential for moving into higher value-added products and these are textiles, agro-processing and automotive industries.

FDIs have contributed greatly to Vietnam’s economic development and its exports. EVFTA provides opportunities for GVCs integration. Vietnam’s geographical position facilitates EU companies to enter ASEAN and ASEAN + markets and promote EU investments. EVFTA helps open markets, increase trade, and help Vietnam become a more attractive investment destination for EU companies.

What is the impact of EVFTA on Vietnamese consumers?

Consumers are the first beneficiaries to benefit from the fact that cheaper products with higher quality will be found on the domestic market. This is due to the removal of import duties. Many “made in EU” items with high quality will be imported in Vietnam. For example, the commitment of customs duties’ reduction for cars will certainly create competitiveness for EU cars in the Vietnamese market and the EU luxury car segment will be export in Vietnam with reduced prices. More European dairy and confectionery products will also be found in Vietnamese supermarket as prices will drop significantly.

The FTA brings significant improvements in the IPRs field, with benefits for both IPR owners and consumers. Vietnam will also apply the recommendations of the World Intellectual Property Organization (WIPO) on the protection of well-known trademarks. IPRs will protect the intangible assets of products/companies and will be beneficial for consumers.

What are the roles of international institutions and organizations in helping Vietnam enterprises grasping on the potential advantages and overcoming the challenges related to stronger competition and EVFTA negative impacts?

In Vietnam, the SMEs represent 97% of the total number of Vietnamese enterprises. When the EVFTA and IPA enter into force, these SMEs will be heavily impacted and face big challenges, out of which, the competitiveness and adaptable capacity are the main issues.

Having this in mind, we consider that the international institutions and organizations dealing with trade, investment and finance such as IFC (WB), ADB, ITC, EU’s funds and EU Member State’s trade and investment funds are crucial in helping and providing technical assistance for capacity building and competitiveness improvement of Vietnam’s SMEs.

Thus, in the near future, the Vietnam Trade Promotion Agency (VIETRADE) hopes to work with relevant international organizations aiming to help Vietnamese SMEs to tackle their challenges and better integrate into the GVCs.

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