The EU-Vietnam Free Trade Agreement (EVFTA), negotiated between the European Union and Vietnam to boost trade and investment between the two regions, is a significant economic milestone for Vietnam. Having come into effect on August 1 this year, the trade agreement will make substantial cuts to tariffs between the two trading partners, and will ultimately eliminate 99 per cent of all tariffs in the future.
The deal follows on from last year’s EU-Singapore Free Trade Agreement, which was the EU’s first bilateral trade agreement with a Southeast Asian nation, as well as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which includes ASEAN member states Malaysia, Singapore, and Vietnam, along with eight other signatory nations.
After just over a year of implementation, the CPTPP has contributed more than US$3.9 billion to Vietnam’s trade surplus.
Such trade deals can be an economic boon for ASEAN nations, and in the case of Vietnam, we expect to see this latest FTA drive substantial growth in trade and investment. Despite this, 71 per cent and 77 per cent of enterprises in Vietnam do not know of, or have only just heard about, the CPTPP or the EVFTA respectively, according to the most recent study by the Vietnam Chamber of Commerce and Industry.
This is not exclusive to Vietnam, though: in our experience at UPS, there are many businesses who are unaware of trade deals that their countries are a party to that could help their growth. The EVFTA is an excellent case study in how present and future trade deals can be the much needed wind in the sails of businesses today.
Strengthening lucrative trade lanes
The EU is already Vietnam’s second largest export designation. Vietnamese exports to the Eurozone have grown consistently in recent years, hitting a total of US$42.5 billion in 2018, representing a year-on-year growth rate of 11 per cent. They comprise mainly telecommunications equipment, electronics, footwear, textiles, and food products like coffee, rice and seafood.
Over the last few years, due to rising production costs in China, Vietnam has steadily emerged as an attractive alternative sourcing and production location. As countries around the world cautiously begin to reopen their economies after COVID-19 lockdowns, more companies will seek to build new resilience into their supply chains—and Vietnam’s value proposition is further strengthened by the EVFTA. With Vietnam being one of the first markets in the region to ease lockdown restrictions, the country is in a prime position to capture opportunities from pent-up investment demand and shifting global production trends.
Three key things to know about FTAs
1. FTAs Lower Duties and Simplify Customs Clearance
With the EVFTA having entered into force, 70 percent of Vietnamese exports will now enter the EU’s 26 Member States duty free. The remaining tariff lines’ items will be reduced gradually over seven years. Business owners should keep up to date on the prevailing tariffs applicable to their respective industries to take advantage of savings and competitive pricing. The agreement also simplifies the entry of goods including customs clearance procedures into the EU, but businesses should also be aware of customs requirements such as product origin, food safety and technical requirements; and the continued applicability of import and sales Value-Added Tax (VAT).
Fundamentally, what the rules of the EVFTA do is provide consistency and predictability, giving businesses in the region greater confidence to expand into this new market. In addition to the EVFTA, the advantage of this alignment on rules is particularly notable in multilateral FTAs, as they unify trade rules across several markets at once, and provide signatory nations with broader choices for international expansion.
2. FTAs Promote Supply Chain Diversification
With the EVFTA, together with markets such as South Korea, Japan, and Singapore, Vietnam becomes a member of an exclusive EU FTA Club with preferential access to 26 countries. Additionally, due to special rules of origin, Vietnamese goods made from inputs sourced from the above countries will help businesses further qualify for duty preferences. This is especially timely in the wake of tariff barriers and supply chain disruptions, with many businesses now seeking opportunities to diversify or reconfigure their supply chains to deal with current issues, or guard against future risk.
The special rules of origin are valuable to both to Vietnamese businesses, as well as companies based in other countries around the region that wish to use Vietnam as part of their supply chain into the EU. For example, with the EVFTA, cotton or fabrics sourced from South Korea that undergo sufficient processing in Vietnam are consequently considered as originating in Vietnam, allowing the products to qualify for lower duties to the EU. The flexibility offered here by the EVFTA can also be found in other FTAs, and it is important that businesses consider how such agreements may turn particular markets into ideal manufacturing hubs, or how they may offer them more options in strengthening and diversifying their supply chains.
3. Sustainability is Central to Success
One distinguishing aspect of the EVFTA is its focus on sustainable trade, and a shared vision on labor, corporate social responsibility and environmental conservation. These values will have far reaching potential to improve the competitiveness of Vietnamese businesses and their brands.
These rules, however, are not exclusive to the EVFTA—many new generation trade agreements have sustainability rules built in. On one hand, rules such as these can help to drive better outcomes in countries where regulations around these matters are underdeveloped, however, on the other, they also help to ensure a more even playing field for all involved—particularly in multilateral trade deals. In these circumstances, the rules ensure that no one party can undercut others by loosening environmental standards or exploiting workers, ultimately creating financial incentives to help enforce important values.
Removing Barriers, Facilitating Regional Growth
The EVFTA marks a new chapter in Vietnam-EU relations, and together with the EU-Singapore FTA, paves the way for more trade agreements with other ASEAN members and the EU, or even an ASEAN-EU multilateral FTA. The stage is set, but businesses must play their part. A big part of the success of these agreements is contingent upon businesses familiarizing themselves with them. As more countries look to join the CPTPP, and as negotiations continue on the Regional Comprehensive Economic Partnership (RCEP), businesses need to start factoring trade agreements into their supply chain and business planning—particularly as we prepare to restart economies.
Facilitation of international trade will be a driving factor in economic recovery, and it is vital that we harness the tools at our disposal to ensure this recovery proceeds as smoothly as possible.
The writer is managing director, UPS Vietnam &Thailand.