The Free Trade Agreement between the European Union and Vietnam promises to bring not only business opportunities and economic growth but also adverse impacts on the national economy and challenges to local enterprises.
The 11th negotiation round of the EU - Vietnam Free Trade Agreement (EVFTA) concluded on January 23 in Brussels after four long days. The Deputy Head of Vietnam’s delegation told VET that the two sides made progress in resolving various issues from previous rounds. The signing of the agreement seems to be on schedule but a variety of possible impacts remain undetermined and preparation seems lacking.
According to Mr. Paul Baker, Project Expert at The European Trade Policy and Investment Support Project (EU-MUTRAP), six main sectors - textiles, footwear, automobiles, high-tech, crafts and wood - may record high growth, but besides the promising potential Vietnam will have to deal with particular challenges and those industries will also have to face impacts from the new environment created by the EVFTA, just as they would with any other FTA.
Meanwhile, enterprises from the EU can easily establish wholly-owned subsidiaries in Vietnam and compete in areas where the country’s enterprises are at a disadvantage or lag behind, such as logistics, ports, and consumer products. With the expertise in management and excellent product quality of EU enterprises that may establish their own raw material factories and support industries, the consumption of local products will likely decrease as a result and many manufacturers and even service providers may be eliminated from the new game on their home ground.
In the ‘away game’, the standards imposed by the EU are among the strictest in the world and the most difficult and most expensive to achieve. Strict regulations on the environment and animal welfare have always been critical challenges for developing countries, especially Vietnam. Additionally, as the EU already had its eye on Vietnam for breaking certain regulations in dumping cases, the EVFTA may therefore set stricter requirements on Vietnam in many respects.
In some export industries with particular advantages, the EU will require the removal of non-tariff barriers such as subsidies from the Vietnamese Government. Vietnamese enterprises will also have to comply with specific provisions on hygiene, the environment, labor and technological processes. This will make it even harder for Vietnam’s small- and medium-sized enterprises to meet requirements, due to their limitations in technical and financial capacity and their products may be barred from entering the EU.
The banking sector will be one of the main targets in the opening up of service sectors under the FTA. There is no basis, however, to predict a sharp increase in foreign direct investment (FDI) from the EU to the sector as Vietnam is yet to be an attractive destination for European banks, which have not grown well in the region. Alternatively, the increasing liberalization in the provision of banking services across borders allows European bankers to approach individuals and organizations in Vietnam without having to establish a commercial presence in the country.
In the context of preferential tariffs and trade liberalization in the FTA with the EU, Vietnam may be required to comply with certain standards of international financial stability. Demands from the EU for transparency and the faster processing of paperwork will be one of the biggest impacts of the FTA, as happened under the bilateral trade agreement between Vietnam and the US that opened the door for Vietnam to join the WTO.
Meanwhile, the average tax rates applied on most EU exports to Vietnam are low: 3.4 per cent for machinery, 2 per cent for pharmaceuticals, 1.3 per cent for medical equipment, and zero per cent for aircraft. Nevertheless, some pharmaceutical products are imposed a high tax rate of around 10 per cent while crucial industries such as automobiles are subject to tax rates of up to 90 per cent. For this reason the implementation of the EVFTA is certain to affect State budget revenue from import duties.
Bilateral FTAs and regional FTAs all ultimately aim to strengthen economic integration, bringing essential benefits to the countries and their businesses and stakeholders. This aim requires Vietnam reform its management at the national level to increase its bargaining power in negotiating FTAs and reduce any possible impact. Management reform has always been identified as an important part of economic structural reforms and a vital factor in supporting long-term economic growth in order to gain economic benefits through trade and investment with the EU.
The signing of the EVFTA also carries the risk of Vietnamese enterprises being acquired by European giants and the risk of Vietnam falling into the “trade liberalization trap” if the domestic economy fails to implement comprehensive reforms. Based on previous analysis of the opportunities and challenges posed by the EVFTA, to be able to make the most of the agreement the State as well as businesses need to adopt certain solutions and preparations.
For the State, to reduce the costs of compliance standards of the EU such as technical barriers to trade (TBT) and sanitary/phyto-sanitary measures (SPS), Vietnam should sign general agreements and even specific agreements for each case. The achievement of such agreements, especially in areas in which Vietnam’s exports have the potential to access the EU, will give Vietnamese manufacturers and exporters a comparative advantages and prioritized market access, which may be equal to or even greater than those from FTA tariff concessions.
In addition, the State should also help businesses raise their awareness in dealing with non-tariff barriers, or renegotiate with their partners to support import businesses to overcome any other common barriers. For example, if the EU launched new standards for chemicals used in products imported from Vietnam, Vietnamese enterprises must find ways to guarantee that the EU is ready to cooperate with Vietnam to help them meet such standards.
For businesses, as mentioned above, the objectives of the EVFTA should not stop at traditional areas such as trade in goods and services but must also be expanded to the other fields, including intellectual property, public procurement, and sustainable development, etc. Vietnam’s business community should therefore have access to up-to-date information on the market opportunities the EVFTA may bring, in particular information relating to tax incentives and technical barriers. Moreover, enterprises should also speak louder for themselves during the EVFTA negotiations to ensure their legitimate interests are heard.
What is more important is that Vietnamese enterprises undertake greater efforts in improving product and service quality while enhancing technological innovations, etc., to strengthen their position on their home ground while taking the opportunities to reach out to the EU market.