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EU Vietnam FTA: rice carve-outs and ‘double transformation’ rule of origin in sight

Ongoing European Union (EU)-Vietnam free trade negotiations are reaching a critical point. Although negotiations have advanced well so far, the most difficult part of the talks still lies ahead of Brussels and Hanoi, a hearing at the EU parliament revealed. Some idea of the likely carve-outs from trade liberalisation in this politically sensitive deal for both parties starts emerging.

EU Vietnam talks have eleven rounds of negotiations behind them. Both sides hope to conclude their talks this year. The EU Commission is eager to conclude an ambitious free trade deal with the 90-million strong South East Asian economy, for market access reasons, but also for strategic reasons. Vietnam’s economy has been growing at above 5 percent and exports by 25 per cent per year in the last half-decade.

Brussels sees the talks as a step into Asian markets at a time where China and the United States (US) are securing preferential market access in the world’s economically most dynamic region – some fear to the detriment of European business. For Vietnam, deals with the US and the EU are a means to boost its economy, make soon-to-expire trade preferences permanent, and hedge against China’s rising economic and political weight in its neighbourhood.

The EU has concluded an agreement with Singapore, a small but rich economy, in 2012, and is negotiating with Vietnam. ”With these agreements we want to set the framework for what we want to achieve in the ASEAN [Association of South East Asian Nations] region. More building blocs, more bilateral agreements, culminating in a region-to-region agreement”, Mauro Petriccione, the EU Commission’s negotiator, explained to MEPs.

The EU official brushed aside concerns that Vietnam was not sufficiently committed to the talks, because it is negotiating a separate complex deal with the US – the Transpacific Partnership, TPP – which requires time and resources.

“Our Vietnamese friends seem to be determined to conclude both agreements as soon as possible and reap the benefits from both. They have – and I know as a matter of fact - a capacity problem, the Vietnamese negotiating team is very badly stretched, but, I have to say, we have to salute the impressive performance they’re doing in keeping up both negotiations. We have not felt any slowdown in the negotiation because of their participation in TPP.”

So far, seven chapters out of fifteen have been concluded, Petriccione said.

Petriccione praised Vietnam’s “very high level of ambition’” in liberalisation of import tariffs. “In the very first tariff offer the parties committed to liberalise 85 percent of their tariffs. So we’ve been negotiating on the remaining 15 percent. While it is not likely that we will reach full tariff liberalisation on both sides, I think it is very likely that we will get very close to it, which would be a first in our relations with a developing country”.

On services trade liberalisation, “achieving a meaningful top-up” on previous liberalisation achieved in the WTO by Vietnam “is not easy”, Petriccione said.

The EU is pursuing a highly ambitious market access agenda in public procurement. “This part of the negotiation is particularly difficult”, the EU trade diplomat said, especially as the EU is seeking Vietnamese commitments at regional and city level.

The EU – similar to the US in TPP – is seeking to have Vietnam agree to disciplining its state-owned enterprises (SOEs). While the EU is not asking for privatisations, it is asking that SOEs that compete with other market players play by commercial rules of the game. “The negotiation is predictably complex”, so Petriccione.

Accommodating Vietnamese rice exports

Vietnam for its part wants to secure better market access for its booming machinery (e.g. printers), textile and footwear as well as agricultural exports. Hanoi in return is ready to accommodate EU demands on market access and regulations, such as competition policy and intellectual property rights, including EU-style geographical indicators, and corporate social responsbility (CSR) principles. Hanoi is wary of Brussels’s demands that Vietnam abide by its preferred norms on labour and environmental rights, but is willing to go some way in accomodating these.

“While encouraging high levels of protection it is important that each party has the right to establish its own level of domestic environmental and labour protection. Especially for labour standards and agreements, Vietnam has already engaged the EU and continues to promote the principles and fundamental rights at work in accordance with its obligations deriving from its membership of the [1998] ILO [International Labour Organization] Declaration on Fundamental Principles and Rights at Work”, Vietnam’s Head of Mission to the European Union, Ambassador Vuong Thua Phong, told MEPs.

MEPs present at the hearing, notably those representing Spain and Italy, voiced concerns over the impact of trade liberalisation with Vietnam on their agricultural sector – notably on rice producers - and on the textiles and ceramics sector.

“Rice: an obvious sensitive problem”, Petricione responded. The EU currently applies import quotas on rice, and tariffs are set at between €64 to €75 per ton.

The EU’s negotiator explained: “We are not very likely to liberalise tariffs on rice. At the same time, there are tried and tested techniques to ensure meaningful market access – tariff-rate quotas for instance – while maintaining a limit to how much free trade there is in that product and therefore being able to predict the impact on the domestic market and know what is possible and what is not possible to accept”.

Yet a deal needs to be struck. “Vietnam is a very important exporter of rice. We will have to find a balance between the fact that it is clearly a sensitive product for Europe and the fact that without meaningful access to the European market for a product like rice, one would have to wonder what is the interest of Vietnam in actually concluding the agreement”, Petriccione said.

The EU’s textile indstry has apparently obtained from EU negotiators that they obtain Vietnam’s acceptance of the principle of ‘double transformation’ in the future free trade deal’s rules-of-origin (ROO) in return for full-fledged tariff removal.

‘Double transformation’ is a requirement by which which fabrics need to be woven or woven or knitted domestically to qualify for duty-free treatment under a preferential trade scheme. In the Vietnam case, this is a means to avoid the that too many inputs from China are integrated into Vietnamese textile exports, Petriccione explained. The double transformation requirement no longer applies to the EU’s unilateral preferences towards least-developed countries in its General System of Preferences. The fact that it is reintegrated in the Vietnam deal shows that the EU tries to favour EU textile investors and that it sees Vietnam and China as a serious competitors.

The ROOs in US trade deals – presumably in TPP too – require a yarn-forward rule, which obliges trading partners to buy yarn from the other party to qualify for duty free treatment. Vietnamese exporters are likely to face different requirements from its key export markets – Europe and North America.

Source: Borderlex

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