Vietnam and the EU Reach Agreement in Principle on FTA

By Edward Barbour-Lacey

HCMC – On Tuesday, Vietnam and the European Union reached an agreement in principle on a free trade agreement (FTA) that would remove most tariffs on goods, among other benefits. This is the first such agreement that the EU has concluded with a developing country, such as Vietnam.

The newly announced agreement puts an end to the two and a half years of negotiation between the European nations and Vietnam. According to EU Trade Commissioner Malmström, the FTA will:

“Provide significant new opportunities for companies on both sides, by increasing market access for goods and services. Over 31 million jobs in Europe depend on exports, so having easier access to a growing and fast developing market like Vietnam, with its 90 million consumers, is great news. And Vietnam’s exporters will now get much easier access to the EU for their products, giving an important boost to the Vietnamese economy”.

RELATED: Dezan Shira & Associates’ Pre-Investment and Entry Strategy Advisory

The Commissioner also hailed the deal as setting the standard for trade relationships with the whole of Southeast Asia.

The EU is already a vital trade partner of Vietnam, representing a significant proportion of the Southeast Asian country’s global trade. In 2014, the EU was Vietnam’s 2^nd largest export destination – making up 18 percent of Vietnam’s total global exports. The EU is also the sixth largest foreign investor into Vietnam. Key trade statistics for 2014 include:

• 2 billion euros in EU-Vietnam trade
• 1 billion euros worth of products exported from Vietnam to the EU
• 2 billion euros worth of products imported by Vietnam from the EU

Key Vietnam export items include: electronics, textiles, footwear, coffee, rice, seafood, and furniture. Key EU exports include: electrical machinery, aircraft, vehicles, and pharmaceutical products.

Specifics of the FTA

The new FTA is a comprehensive agreement that covers a range of areas, and is expected to include the following:

• The creation of new market access opportunities in service and investment
• A strong commitment to the core labor standards and Conventions of the International Labor Organization (ILO)
• Support for the conservation and sustainable management of natural resources (including wildlife, forestry, and fisheries)
• A focus on Corporate Social Responsibility and fair and ethical trading schemes
• A legally binding link to the Partnership and Cooperation Agreement (PCA) that governs the overall relationship between the EU and Vietnam
• An adherence to the WTO rules laid out in its Government Procurement Agreement (GPA)
• The establishment of an efficient mechanism to resolve future disagreements
• The promotion of democracy and respect for human rights

Among the specific changes Vietnam will make as part of the agreement are the following:

• The elimination of tariffs on over 99 percent of all items
• The removal of almost all import duties over a 10 year period
• The liberalization of trade in financial services, telecommunications, transport, and postal and courier services
• The liberalization of EU investment (ex. removing or easing limitations on the manufacturing of food products and beverages)
• The improvement of its protection of Geographical Indications (GIs) for EU flagship agricultural products (ex. Champagne, Roquefort cheese, and Scotch Whisky)
• The allowance of EU companies to bid for Vietnamese public contracts

Among the changes that the EU will make are:

• The elimination of tariffs on over 99 percent of all items
• The removal of almost all import duties over a seven year period
• The elimination of duties with longer staging periods (up to seven years) for certain sensitive products, particularly in the textile apparel and footwear sectors
• Increased protection of Vietnamese GIs (ex. Mộc Châu tea or Buôn Ma Thuột coffee) and increased promotion of the import of said products

While a large number of products will see greatly improved trade conditions as a result of the trade deal, it is useful to look at a specific product, Scotch whisky, in order to see the significant ramifications of the deal. Without the FTA, this type of alcoholic product, once exported to Vietnam, would be subject to a 45 percent import tariff. However, under the deal, these tariffs will be steadily phased out. Scotch is already a growing export product to Vietnam, seeing growth of nine percent in 2014; this growth is expected to rapidly continue as a result of the FTA.

Work still remains to be done before the FTA is fully completed; this includes settling the remaining technical issues and finalizing the legal text of the agreement. Those involved with the process expect that the deal will be finalized within the next few months or by no later than the end of this year.

RELATED: Sign of a Deepening Relationship: Vietnam’s Communist Party Leader Visits the United States

The Vietnam-EU FTA is not the only trade agreement negotiation that Vietnam is hoping to wrap up in the near future; another key agreement on the table is the Trans-Pacific Partnership (TPP), a United States led trade deal. Upon completion, the TPP trade area would comprise a region with US$28 trillion in economic output, making up around 39 percent of the world’s total output.  If the TPP is successfully implemented, tariffs will be removed on almost US$2 trillion in goods and services exchanged between the signatory countries. Thus, Vietnam is well placed to see an exponential growth in its global trade in the coming years.

Import and Export: A Guide to Trade in Vietnam
In this issue of Vietnam Briefing Magazine, we provide you with a clear understanding of the current business trends related to trade in Vietnam, as well as explaining how to set up your trading business in the country. We also attempt to give perspective on what will be Vietnam’s place in the Association of Southeast Asian Nations (ASEAN) in 2015, and look at some of the country’s key import and export regulations.

Using Vietnam’s Free Trade & Double Tax Agreements
In this issue of Vietnam Briefing we explore how Vietnam’s Free Trade Agreements – and especially those via its membership in ASEAN – will affect foreign investment into Vietnam. We also go a step further and examine the specific, bilateral Double Tax Agreements that Vietnam has enacted, and how these can be further used to minimize profits and withholding taxes that would otherwise be levied upon foreign investors.

Developing Your Sourcing Strategy for Vietnam In this issue of Vietnam Briefing Magazine, we outline the various sourcing models available for foreign investors – representative offices, service companies and trading companies – and discuss how to decide which structure best suits the sourcing needs of your business.

• Previous Article Vietnam in the UK’s Pivot to ASEAN
• Next Article Report: Vietnam Primary Alternative to China’s Pearl River Delta