HANOI – A proposed free-trade agreement (FTA) between the European Union and Vietnam promises to bolster already fast-rising bilateral trade. While both sides agree an FTA would on the whole be mutually beneficial, negotiations will likely be complicated by the potential socio-economic impacts a pact would have on Vietnam’s fragile transitional economy.
Negotiations, which started last June, are expected to be finalized by the end of 2015. The two sides cooperated earlier in a ”scoping” phase, in which the EU assisted Vietnam in meeting prerequisites for its 2007 accession to the World Trade Organization (WTO). The next phase of that cooperation, the European Trade Policy and Investment Support Project (EU-MUTRAP), will be crucial to addressing macroeconomic imbalances as Vietnam becomes more integrated into the global economy.
The EU is one of Vietnam’s leading trade and investment partners. In 2012, it became the largest importer of Vietnamese products, led by shipments of footwear, textiles, coffee, rice and seafood, after imports rose 22.5% year-on-year to a total value of US$20.3 billion and accounting for 17.7% of Vietnam’s exports. The EU is also one of Vietnam’s largest sources of foreign direct investment.
Last December, the EU concluded an FTA with Singapore. Negotiations towards a similar deal are underway with Malaysia, while official talks with Thailand were announced this month. While those potential deals promise to give European exporters greater access to the region’s dynamic markets, activist groups have complained that the stronger intellectual property rights to be included in the pacts will hinder access to various life-saving medicines.
FTA negotiations with Vietnam will aim to roll back tariffs and non-tariff barriers to trade. Other trade-related areas such as public procurements, regulatory issues, local market competition and intellectual property rights will also be prioritized by EU negotiators. Vietnam, on the other hand, is expected to push for more streamlined compliance mechanisms to meet rising EU import regulations on food hygiene, chemical residues, illegal fishing and legally cut timber.
Vietnamese food exporters in particular have complained that those regulations amount to non-tariff barriers and have made it more difficult to export their products to the EU. Last year, Vietnamese food exports were found to violate EU hygiene requirements on at least two occasions. The EU maintains discretionary power to ban the import of products if there are more than five violations in any given year.
Despite those obstacles, Hanoi aims to expand its presence in lucrative EU markets. Vietnamese negotiators are expected to press Brussels to grant Vietnam the preferential status given to market economies – a recognition that Hanoi has indicated it wants this included in any potential FTA.
That aim was underlined in January during Party General Secretary Nguyen Phu Trong’s European tour. During his meeting with European Commission President Jose Manuel Barroso, both agreed that the first rounds of negotiations were important ”to establish closer political and economic ties and all-sided cooperation and enjoy an equal partnership”.
Whether the negotiations are truly on an equal footing is debatable. ”The Vietnamese know quite well that the EU is negotiating with other Asian countries and cannot lag behind, otherwise the risk could be losing competitiveness,” said Claudio Dordi, team leader of the EU’s trade and investment support program for Vietnam.
Vietnamese exports could thus lose competitiveness vis-a-vis regional countries that already have an FTA in place with the EU while negotiations continue. Currently, average tariffs applied on goods ”Made in Vietnam” and exported to the EU are just over 4%, with products like garments, seafood and footwear subjected to higher rates of 11.7%, 10.8% and 12.5% respectively.
Tariffs applied to EU exports to Vietnam have been substantially reduced since Hanoi’s accession to the WTO, falling from an average of 13.7% in 2005 to 9.3% at present. Sectors such as automobiles, of which import taxes still average around 24.2%, would benefit immensely from a tariff-reducing FTA and possibly promote more EU investments.
”We always look at investments in Vietnam, but in this country there are young and professional people who have ideas and money and who might be interested in investing in Europe,” said Michael Behrens, chief executive officer of Mercedes-Benz Vietnam Ltd on the sidelines of the third EU-ASEAN business summit held in Hanoi this month. “This is the long term road which Europe should look at.”
Even though Vietnamese exports to the EU have risen in the past decades, enterprises will have to strengthen their competitive capabilities and product quality to sustain the trend. Weak accounting systems have made Vietnamese firms vulnerable to anti-dumping charges in the EU, seen in recent cases filed against Vietnamese tiger shrimp and leather shoe producers.
For sectors such as textiles, agreements on rules of origin will determine how much Vietnamese exporters benefit from a possible FTA. Garments labeled ”Made in Vietnam” are often produced using yarn and fabrics imported from China. Imported inputs from a more developed country like China has meant Vietnamese textiles are often excluded from the Generalized System of Preferences that the EU applies ”to address the special needs of the least developed countries”.
”Rules of Origins will be one of the major topics during the next rounds of negotiations,” said Dordi. He noted that the EU’s trade and investment support program with Vietnam gives technical assistance to Vietnamese firms to keep them up-to-date on EU technical standards and market information, including trends in consumer demand.
While Vietnam presses for greater access to EU markets, some analysts warn that Hanoi has not weighed the full potential impact of an FTA. ”Too much liberalization without a proper roadmap [and] compatibility with socio-economic development level[s] will create adverse impacts on the economy and restrict the benefits from service trade liberalization,” according to a recent research paper published by the Vietnam Peace and Development Foundation, an independent think tank.
Vietnam’s laggard and often mismanaged state-owned enterprises will be hard-pressed to compete with European competitors in liberalized service sectors such as ports, logistics and communications – all expected target areas for EU investment. While an EU-Vietnam FTA will likely create more opportunities for urban-based professionals and skilled labor, disadvantaged remote areas will face the risk of even wider social, economic and geographic development gaps.