Assessing the EU-Vietnam Free Trade Agreement

By Ana Maria Pedraza Serrano | June 10 2020, 8:51 PM SGT 

Europe has been emphatic on the importance of the ASEAN region for its trade policy and approached this will through bilateral discussions on Free Trade Agreements with the region’s major economies such as Singapore, Malaysia, Vietnam, Thailand, the Philippines, and Indonesia. It is expected that after the bilateral phase is over, a region-to-region agreement will stand out.

Vietnam has been the second ASEAN country to ensure an FTA with the European Union, and this is supported by a history of strong ties and trade. Since the establishment of formal diplomatic relations between the European Union and Vietnam in 1996, the relationship has continuously strengthened. In terms of trade, Vietnam has established Europe as its primary destination for major exports and its second-largest export market. Considering this and supported by the EU imports of 42.5 billion USD and exports of 13.8 billion USD, (representing nearly 13.5% of Vietnam’s global export in 2018), Vietnam is in good shape to profit from free trade with the Euro Region, aiming to boost these indicators.

The final steps that will allow the agreement to come into force have been taken, as the EU-Vietnam Free Trade Agreement (EVFTA) and EU-Vietnam Investment Protection Agreement (EVIPA) were ratified by 95% of Vietnam’s National Assembly on June 8 after the European Parliament did on February 12.

Yet, many regret that the entry in force of this agreement coincides with current consumption indexes, trade bans and the economic downturn inflicted by the spread of COVID-19. The last Global Economic Prospects report, released on June 8 by the World Bank, expects that the outstanding GDP growth of Vietnam, which had been 6.8% for 2017, 7.1% for 2019 and 7.0% for 2019e, will differ in percentage points between January and June projections on a -3.7%. On the other side, the Euro Zone is expected to contract 4.7% in 2020. Is then the timing suitable for the EU-Vietnam Free Trade Agreement?

As much as the conditions might seem unappealing, the agreement can be an important tool towards post-pandemic economic recovery. The same report encourages countries to seek conditions and reforms that allow capital and labor to adjust quickly, and the agreement sets tools for speeding the resolution of disputes, reducing regulatory barriers, and creating an attractive investment climate supporting this.

In the first place, contractions are mainly associated with current account pressures aggravated by export decline and supply-chain disruptions that have affected local and international demand for products in both latitudes. Benefits provided by the EVFTA include

1. Elimination of 71% of tariffs from day one, achieving a 99% elimination progressively in the next ten years.
2. Trade facilitation mechanisms include reducing non-tariff barriers by simplifying customs, information sharing, standardization of data and documentation required by customs and other agencies, and adjustment of production processes to comply with conformity assessment procedures and standards.
3. Access to the public procurement market for European companies.

These conditions help minimize the impact of the mentioned pressures on exports and will contribute to the resumption of the EU-Vietnam trade relationship in a speedier way.

Besides, the EVFTA improves sustainability and social indicators for Vietnam compromising human rights, product protection, and sustainability. Being one of the most innovative agreements, it provides benefits that aim for sustainable economic growth through preferential access to markets. Some of these conditions will open the doors of other markets to Vietnam. On the one hand, it includes the protection of Intellectual Property Rights through enforcement mechanisms to protect trademarks, designs, patents, data, plant varieties, and geographical indications.  On the other hand, the agreement emphasizes on human and labor rights, easing concerns on Vietnam’s records on human and labor rights. To ensure this, Vietnam has ratified the ILO Convention and adopted a revised Labour Code. Access to new markets will boost international trade and uprise its competitiveness.

Resulting from this, the World Bank indicated in May that the FTA would improve Vietnam’s gross domestic product and exports by 2.4% and 12%, respectively. European countries will profit from an economy of more than 90 million consumers with a dynamic workforce and a growing middle class, limiting the harm of the pandemic while opening new doors to maintain an active private sector. The agreement will also provide broader access to foreign exchange, which will be crucial for debt payment and stimulating the country’s middle-class growth.

European Investors in Vietnam, who have been especially harmed as financing conditions for investors have tightened, will also profit from this. The EVIPA and the EVFTA provide preferential market access for investments in strategic services sectors and protect investments in computer services, postal services, higher education, financial services, maritime transport services, and telecommunications. Through formal state-to-state dispute resolution mechanisms, law enforcement, institutional and legal links to the EU-Vietnam Partnership and Cooperation Agreement,  investors’ will ease uncertainties, promoting technology and innovation transfer.

The agreement’s potential to overcome the post-pandemic economic situation will highly depend on both parties’ private sector capacity to identify the benefits within each sector, adapt fastly to the supply-chain adjustments, and fulfill requirements and standards imposed by authorities. The time is suitable, and more than ever, an opportunity for Vietnam. Proper management of the pandemic and profiting from the possibilities of accessing the Euro market widely will place Vietnam progressively on the first places of ASEAN economies.

Sources:

• https://www.vietnam-briefing.com/news/vietnam-eu-trade-evfta-ratified-vietnam-national-assembly.html/
• https://www.bangkokpost.com/business/1931296/vietnam-ratifies-free-trade-deal-with-eu
• https://www.consilium.europa.eu/en/press/press-releases/2020/03/30/eu-vietnam-council-gives-final-green-light-to-free-trade-agreement/
• https://trade.ec.europa.eu/doclib/docs/2018/october/tradoc_157444.pdf
• https://trade.ec.europa.eu/doclib/docs/2016/june/tradoc_154622.pdf
• https://www.eias.org/news/eu-vietnam-free-trade-and-investment-protection-agreements-fairness-transparency-and-sustainability/
• World Bank Global Economic Prospects, June 2020.

Image credits: Zing