ASEAN Beat | Economy | Southeast Asia

Vietnam Ratifies EU Free Trade Agreement, What’s Next?

Hopes are high that the EVFTA will have a big impact.

Thoi Nguyen
Vietnam Ratifies EU Free Trade Agreement, What’s Next?
Credit: Pixabay

In February 2020, the EU Parliament ratified a free trade agreement (FTA) and an investment protection agreement (IPA) with Vietnam. Members of the European Parliament (MEPs) voted in favor of the agreements in Strasbourg.

On June 8, Vietnam’s National Assembly approved the agreements overwhelmingly, with 457 members of parliament voting for the FTA and 462 for the IPA. According to some Vietnamese newspapers, the agreements could possibly come into force in July. At the most basic level, the agreements will support jobs and growth between Vietnam and the EU. The agreements will gradually reduce most tariffs, regulatory barriers, and red tape and promote should create opportunities for EU entrepreneurs to do business and invest in Vietnam. 

The European Union-Vietnam Free Trade Agreement (EVFTA) is the second FTA between the EU and an ASEAN country, after Singapore. Vietnam is the second country to sign trade and investment agreements in the region. 

It took over eight years and a dozen rounds of dialogue for both sides to negotiate the EVFTA. Nicolas Audier, chairman of EuroCham in Vietnam,  welcomed the voting results: “The EVFTA is now more important than ever, as trade wars and a global pandemic disrupt normal business operations on an unprecedented scale. Free, fair and rules-based trade is the best roadmap to economic growth, and Vietnam will now have privileged access to an EU consumer market of around 500 million people who will be keen to do business with and invest in a strong, secure, and prosperous nation at the heart of Asia.”

Such agreements illustrate the strength of EU-Vietnam relations and the opportunities Europe sees in the Southeast Asian country. The EU achieves a long-term goal to widen its influence and expansion in ASEAN markets by targeting Vietnam and European entrepreneurs will have better access to one of the fastest-growing economies in Southeast Asia when the agreements come into effect. Despite the coronavirus pandemic disrupting and causing a global economic slowdown, Vietnam is expected to still enjoy 4.8 percent economic growth this year and is expected to bounce back up to 6.8 percent growth in 2021. 

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Like the provisions of the World Trade Organization (WTO), the EVFTA is a comprehensive and beneficial agreement for Vietnam and the EU. The agreement will “eliminate 99 percent of its import duties over 10 years and the EU will do the same over seven.” Vietnam will lift 49 percent of its import duties on EU exports and phase out the rest over 10 years.

Vietnam can also take advantage of institutional reforms and bilateral cooperation mechanisms and reaffirm to investors that the country is the regional center for attracting investments in term of improving technology, human resources, and labor productivity. The Vietnam Ministry of Trade considered that signing these agreements will create opportunities to participate in restructuring new supply chains amid the fallout from the coronavirus pandemic.

Vietnam has surpassed its regional rivals Indonesia and Thailand and is the EU’s second most important trading partner in ASEAN. Now EU companies will have the opportunity to bid for contracts with Vietnamese ministries and state-owned enterprises throughout the country. Vietnam will allow EU investors to bid for public procurement contracts for ministries such as the Ministry of Defense, Vietnam Railways Corporation, and dozens of public hospitals directly under the control of the Ministry of Health. The EU Commission estimates the agreements would help exports to Vietnam increase by 29 percent in 2035 and increase its GDP to $29.5 billion.

“We want to work with partners in Vietnam, including representatives from ministries, airports, seaports, hydro-meteorological stations, environmental agencies, and industrial and urban development agencies,” said project and systems development manager Martin Gazak of meteorology and climatology company MicroStep-MIS.

It is estimated that EU investors had invested more than $23.9 billion in 2,133 projects in Vietnam in 2018. EU investors are active in 18 economic sectors, including manufacturing, electricity, and real estate. It is also expected that there will be a rapid and sustainable growth in technology and credit finance sectors in Vietnam after the EVFTA comes into effect. The coronavirus pandemic caused some problems for Vietnam’s economy in the short term. While it will take a while for the travel and hospitality industry to recover, the pandemic hs opened up opportunities for digital health, health and hygiene products, and e-commerce operators. 

Singapore has enjoyed economic growth since signing its free trade agreements. Those agreements helped local companies and investors access overseas markets, clear their goods more quickly and easily, and enjoy tariff concessions, preferential access to certain sectors, and IP protection. According to a study by the Singapore Ministry of Trade and Industry, FTAs saved businesses about $730 million in tariffs and bilateral trade increased by $9.7 million and bilateral investments rose by 26 times.

The Singaporean story could be an example from which Vietnam can learn. However, in 2018 Harvard University economist Dani Rodrik argued in the Journal of Economic Perspective that while such free trade agreements increase the volume of trade, the distribution of those gains is another matter: “A trade agreement captured by an alternative set of special interests may make things worse just as easily as it makes them better.” He also wrote that “such an agreement can move us away from the efficient outcome, even if it takes the guise of a free trade agreement and expands the volume of trade and investment.”  Rodrik noted that the impact of FTAs are fundamentally uncertain and protectionism is on the rise. 

These trade agreements will provide benefit for both sides and foreign investors can seize opportunities to invest in Vietnam. But it is too soon to conclude the positive impacts of these agreements. The spotlight will now shift to how potential gains and losses translate into reality for both sides, and who might win more.