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Vietnam Free Trade Agreement (EVFTA) heralds new chapter for Vietnam -EU relations

28/01/2019

The European Union − Vietnam Free Trade Agreement (EVFTA), which is heading to the European Council and Parliament for the final approval necessary for it to come into force, brings unprecedented advantages and benefits for Vietnam and the EU.

The European Commission is now submitting to the Council the proposals for signature and conclusion of the agreement, ahead of the European Parliament elections in May. Once authorised, the agreement will be signed and presented to the European Parliament for consent before being concluded by the Council and entering into force.

British Prime Minister’s Trade Envoy to Vietnam, Laos and Cambodia, the Rt Hon Edward Vaizey MP, and economist Alessandra Bonfiglioli, from the School of Economics and Finance of Queen Mary University of London (QMUL)* give their views on the many opportunities the EVFTA is expected to bring to both parties.

The European Commision has described the EU-Vietnam FTA (EVFTA) as the most ambitious free trade deal ever concluded with a developing country. Why Vietnam ?

Vaizey:

•    Vietnam is an incredibly vibrant country with a very high level of business and technical expertise.

•    For the UK alone, the ASEAN-4 are our second largest export destination, after the United States.

•    Vietnam has one of the fastest growing economies in the region, with 6.8% growth in GDP in 2017 and 7.3% in Q1 2018 - the highest in the last 10 years. [7.08% in 2018]

Bonfiglioli:

Vietnam is one of the 10 members of the Association of Southeast Asian Nations (ASEAN) and has become the EU’s second-most important trading partner in the region after Singapore. In turn, the ASEAN represents the EU’s third-largest trading partner outside Europe (after the US and China). Hence, getting better access to the ASEAN market for its exporters has become a priority for the EU.

Negotiations for a region-to-region trade and investment agreement between the EU and ASEAN were launched in 2007. These talks were then paused by mutual agreement in 2009 to give way to a bilateral format of negotiations. These bilateral trade and investment agreements were conceived as building blocks towards a future region-to-region agreement.

Being Vietnam the second main trading partner within the ASEAN, the EU has targeted it to achieve a free trade and investment agreement.

On the other hand, Vietnam’s firms rely heavily on export to the EU (mainly for telephone sets, electronic products, footwear, textiles and clothing, coffee, rice, seafood, and furniture), and the country is a massive recipient of Foreign Direct Investment from the EU (a flow of €1.6 billion in 2017, for a total stock of €19.2 billion). This suggests that the interest in a free trade agreement was mutual.

As for Vietnam’s comparative advantage, this is no longer in just textiles, cloths and agriculture (i.e., sectors that are intensive low-skill labor, as typical of developing countries), but it now extends to goods with higher technological and skill content like telephone sets and electronic products (this is because Vietnamese workers are more educated and still earn much lower wages that EU workers). The EVFTA opens up better opportunities for EU multinationals to do direct investment, through mergers&acquisition or greenfield projects, in these sectors and other such as food products and beverages, tyres and tubes, and ceramics and construction materials. This makes the trade agreement even more desirable for both parties.

On the potential impacts of EVFTA on EU economy:

Vaizey:

•    The biggest impact will be the elimination of customs duties on goods traded between the EU and Vietnam.

•    65% of import duties from the EU to Vietnam will be eliminated immediately, with the remainder being removed over the next 10 years.

•    For Vietnam, the implementation of the principles of the International Labour Foundation and the Paris Agreement are also an important step.

Bonfiglioli:

The EU will definitely benefit from better market access in the Vietnamese market, and to a larger extent than Vietnamese firms in their access to the EU. The reason is that, while the EVFTA  will reduce tariffs on goods by 99% bilaterally, as a matter of fact, many Vietnamese products have been already enjoying trade preferences offered unilaterally by the EU under the General Scheme of Preferences (GSP). The sectors benefitting the most in the EU will be those producing machineries, vehicles and pharmaceuticals.

Moreover, the agreement grants the protection of Geographical Indications, such as those of Champagne, Parmigiano Reggiano and Feta cheeses, and many more (there are 169 such traditional European food and drinks products). Considering that the spectacular growth performance of Vietnam is bound to increase the demand for these products, the EU agricultural sector is expected to seize relevant benefits.

The EVFTA will grant European companies better access to the Vietnamese public procurement markets than companies from any other country. This means that they will be able to bid for public contracts, for instance in infrastructures, which are worth billions of Euros.

Envisaging the UK-Vietnam FTA when UK leaves the EU:

Vaizey:

•    The UK Government is committed to maintaining continuity in its existing trade and investment relations when we leave the EU, including continuity of existing EU FTAs such as the EVFTA. 

•    It is important that continuity is safeguarded so as not to leave British businesses at a disadvantage. 

•    The government supports swift progress towards implementation of the EVFTA to further this aim, to ensure that continuity of trade relations with Vietnam can be achieved.

Bonfiglioli:

If the UK eventually leaves the customs union, it will also completely exit from the EVFTA (in a customs union, all members face the same tariffs vis-à-vis other countries). This means that the UK would miss relevant gains relative to the EU, especially in the automobile and the pharmaceutical sectors, which account for most of UK exports of manufactured goods, and are among the most benefitted by the EVFTA. If the UK were to negotiate a UK-Vietnam FTA, I would expect it to quite closely resemble the EVTA, at least as regards tariffs, FDI and procurement market access.

On the impacts of trade protectionism on the EVFTA:

Bonfiglioli:

On the one hand, protectionism reduces trade between the country adopting it and its trading partners, but on the other hand it may create more trade opportunities between the latter and other countries. This is why the EVFTA may bring an opportunity to those EU and Vietnamese firms that suffered a drop in their exports (mainly) to the United States. Since the U.S. market is about the same size as the EU, and way larger than the Vietnamese one, however, the EVFTA will shield Vietnamese firms from protectionism to a much larger extent that their EU counterparts: while the former will be able to largely replace the loses on the US market with the gains on the EU market, the latter will be able to sell relatively small volumes to Vietnam.

* Alessandra Bonfiglioli is a Reader (Associate Professor) in Economics at the School of Economics and Finance of Queen Mary University of London (QMUL). She is also a Research Fellow of the Centre for Economic Policy Research (CEPR, London) and an Associate Editor of the Journal of the European Economic Association. Her fields of specialization are international trade and economic growth. She has taught Undergraduate and Postgraduate modules in International Trade for more than ten years, both at QMUL and in Spanish institutions (Pompeu Fabra University, ranked 1st in Spain, and the Barcelona Graduate School of Economics).

Source: Vietnam News