The UK’s Trade Deal with Vietnam Builds on Hanoi’s Accord with the EU

January 12, 2021 Posted by Vietnam Briefing Written by Bob Savic Reading Time: 5 minutes

By Bob Savic, Advisor to Dezan Shira & Associates

The UK-Vietnam free trade agreement (UKVFTA), which entered into force on 1 January 2021, was covered on Vietnam Briefing under “Vietnam, UK Sign Free Trade Deal, Look to Strengthen Ties” on December 31, 2020. As per that article’s coverage, the UKVFTA is based on the terms of the EU-Vietnam free trade agreement (EVFTA) and is one of several ‘continuity agreements’ based on existing European Union (EU) trade agreements with third countries of which the UK was a member prior to its departure from the EU on 31st January 2020.

This article looks to highlight and examine areas of differences between the two agreements relevant to UK business.

The UKVFTA establishes an economic partnership between the UK and Vietnam underpinned by a comprehensive free trade area. In this respect, there are several new provisions on preferential tariffs, tariff-rate quotas, and rules of origin. Various other measures have been introduced to promote financial, e-commerce, and other services, while upholding the EVFTA’s reciprocal access in public procurement, maintaining a level playing field in competition and subsidies, continuing with similar levels of protection for intellectual property and retaining an equal focus on sustainable development.

Tariff commitments and TRQ changes

Commitments on tariffs for both the UK and Vietnam have, generally, been transitioned without changes. This has meant that tariff preferences applied by the UK on imported goods from Vietnam remain the same, like those applied by the EU, at the end of the UK’s transition period with the EU on December 31, 2020. Vietnam has also committed to applying the same preferences to imported products from the UK, that it applies to products from the EU.

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The only exception to tariff commitments being transitioned without modification relates to the size of tariff-rate quotas (TRQs). TRQs allow for a certain quantity of a product to enter the market at a zero or reduced tariff rate. Imports above that quantity are subject to a higher tariff rate – usually the Most Favored Nation (MFN) rate. These have been modified to accommodate the UK no longer being an EU state and in accordance with the UK being a smaller importer and exporter with Vietnam than the EU. In order for traded products to continue benefiting from the use of TRQs, these quotas have been set at levels allowing for continuity of the two countries’ historical trade flows. A further provision was added in relation to a review of TRQs for rice, following three years from the UKVFTA’s entry into force.

Where no transitioning of TRQs occurred, then goods imported from Vietnam, covered by TRQs in the EVFTA, would likely have meant UK businesses being faced with higher MFN tariffs making such imports more costly. In light of these adjustments, the overall impact on UK producers resulting from these modified TRQs is expected to be limited.

Rules of origin

During the UK’s transition period with the EU, all UK content was considered as “originating” in the EU, resulting in UK exports being categorized as ‘EU origin’. This meant that originating materials from the UK and EU, and those processed there, could be used interchangeably in bilateral trade with existing EU FTA partners, such as Vietnam. This was no longer applicable when existing EU FTAs ended being valid for the UK. At this point, the categorization of UK exports transferred from ‘EU origin’ to ‘UK origin’. Consequently, EU content no longer contributed towards satisfying the origin requirements for preferential treatment of either party.

To enable continuity for business under the UKVFTA, it was agreed that EU materials should be recognized (i.e. cumulated) in the UK and Vietnam exports to one another. Furthermore, EU processing should be recognized (i.e. cumulated) in UK exports to Vietnam. In the absence of this new provision, UK exporters to Vietnam, who depended on using EU content, may have been required to pay higher MFN tariff rates. The impacts would, of course, have varied across industry sectors.   

Being a bilateral agreement, the UKVFTA does not provide for either party’s direct trade with the EU, including, for example, where UK and Vietnam-based exporters use content, from each other, in exports to the EU. Accordingly, the UK and Vietnam prepared a Joint Declaration to update Protocol 1 of the UKVFTA to reflect a trilateral approach with the EU, in terms of rules of origin, from the inception of the new UK and EU trade agreement on December 31, 2020.

Services

The provisions of the EU’s FTAs’ services chapters with various partner countries, including their depth of commitments, can differ extensively. As a result, the EVFTA’s services provisions have been comprehensively modified to deliver continuity in service commitments between the UK and Vietnam. Several changes have been added to the prohibitions of performance requirements of the EVFTA. The amendments provide greater clarity in relation to the operation of UK competition law and UK mergers and takeovers regulation, while not affecting the enforcement of commitments between private parties.

Appendix I of the UKVFTA replicates, alongside a few modifications, the “Understanding concerning Bank Equity” which was concluded between the EU and Vietnam in connection with the EUVFTA. Moreover, Vietnam agreed to a proposal, by the UK’s financial sector, allowing for total equity held by foreign investors, in banking institutions, to reach 49 percent of an enterprise’s chartered capital in one Vietnamese joint-stock commercial bank. This was a modification of the EU – Vietnam understanding, which permitted this for no less than two Vietnamese joint-stock commercial banks previously.

Government procurement

The UKVFTA has retained the EU-Vietnam commitments on liberalizing public procurement markets and ensuring enforceable market access. The only main change involved the UK providing Vietnam with details for publication of notices, in the UK, which replaced references to the Official Journal of the EU. Notices will also only become applicable when an automatic system for translation and publication of summary notices in English is set up and operational in Vietnam.

Competition, subsidies, and state enterprises

The UKVFTA maintains provisions for ensuring open and fair competition relating to the regulation of industrial subsidies and state-owned enterprises contained in the EVFTA. Further clarification requires that each party should not grant subsidies where these significantly and negatively affect or are likely to so affect bilateral trade. Nonetheless, the UK will have rights to subsidies classified as being permitted or reduced, by the World Trade Organization (WTO).

Intellectual Property and Geographical Indicators

The UKVFTA keeps the intellectual property protections provided in the EVFTA. These extend to “Irish Whisky/Irish Whiskey/Uisce Beatha Eireannach” and “Irish Cream”. These ‘cross-border Geographical Indicators’ (GIs) mean these brands can be produced anywhere on the island of Ireland and will continue benefiting from protection under the EVFTA. The UKVFTA also clarifies that the GI for sottish farmed salmon will continue receiving protection under Vietnam’s domestic laws.

Sustainable development

The EVFTA’s chapter on trade and sustainable development has been fully incorporated into the UKVFTA. The EVFTA’s sustainability chapter refers to various non-EU international agreements regarding the governance of policy areas such as labor and the environment. Since both the UK and Vietnam are members of these international agreements, their provisions will continue applying within the context of the UKVFTA.

Other matters

The UKVFTA sets out processes by which the UK and Vietnam have agreed to amend any provisions after its entry into force. It also enables the establishment of a joint Trade Committee to amend the agreement’s annexes and protocols that are subsequently adopted. However, this does not commit the UK to making any changes after the agreement is effective. As regards important areas such as trade remedies and dispute settlement, the UKVFTA replicates the effects of provisions in the EVFTA.

Given this agreement’s achievements in enabling high quality substantive economic integration and transparency, between the UK and Vietnam, it should not be merely considered an end, in itself, but a component of the UK’s strategic focus on expanding engagement in the Asia-Pacific.

Bob Savic is a London based consultant with Dezan Shira & Associates. The firm handles British investment into Vietnam and has offices in Hanoi, Ho Chi Minh City and Da Nang. Please email the practice at vietnam@dezshira.com for assistance or visit us at www.dezshira.com.