The newly signed EU-Vietnam Free Trade Agreement (EVFTA) is the first free trade agreement concluded by Vietnam to liberalize trade in goods across almost the entire economy, though the EVFTA is not limited to just this and the agreement in fact extends to include the trade in services and investment, too, opening up the Vietnamese economy to a greater degree than have all the country’s previous free trade agreements. The EVFTA also marks a milestone in allowing foreign investors to compete in state-organized competitive bidding, reducing the monopoly position of state enterprises, and promoting fair competition. These moves are not just of passing interest, since the EVFTA will help to open new opportunities for trade and investment in Vietnam and although the country may initially face challenges in adapting to the more stringent conditions that come with access to EU markets, over the longer term, this will help to sharpen the cutting edge of the Vietnamese export sector, attract greater levels of foreign investment to the country, and ultimately, raise the Vietnamese economy’s rate of expansion. Most notably, the EVFTA will help Vietnam build both its competitiveness and the potential of its economy over the long run. As for Thailand, the country is likely to suffer a number of negative side-effects as a result of these developments and Thai players are expected to see their ability to compete on price erode, while strengthening EU-Vietnamese supply chains may also expose Thailand to the risk of a shrinking share of both EU and Vietnamese markets in the coming period.
The EVFTA is an extremely comprehensive bilateral free trade agreement that will almost entirely liberalize the trade in goods between Vietnam and the EU, thus making it the most far reaching of all the FTAs that Vietnam has negotiated to date. However, the agreement also extends to cover the service sector and in particular, it specifies the proportion of shares that investors from the EU and Vietnam may hold in operations in the other’s service sector; under the EVFTA, these are set at a higher level than they are for investors from third party countries and in some cases, foreign investors may now hold up to 100% of shares in Vietnamese operations. Beyond this, the EVFTA is also the first FTA agreed by Vietnam to allow EU investors to bid on public sector contracts.
The difference in the time periods over which EU imports will be zero-rated by Vietnam reflect the different roles played by these goods in the Vietnamese economy.
To date, Vietnam has opened its service sector to the outside world by reducing and then removing barriers to investment and operations based on the 12 main divisions of the service sector identified by the WTO[5], although services have in addition been liberalized through the implementation of the ASEAN Free Trade Agreement (ASEAN FTA)[6], the provisions of which go further than do the WTO regulations. However, under the EVFTA, the service sector will be opened wider than was the case under any of these earlier agreements and this will extend through 4 ‘modes’. Mode 1 covers the cross-border supply of services, Mode 2 consumption overseas, Mode 3 commercial presence and Mode 4 the presence of natural persons for the provision of services[7] (in particular travel for business activities, such as to engage in negotiations or to transfer staff within a company). Table 3 shows that Vietnam will liberalize modes 1 and 2 in almost all of the divisions of the service sector (some types of financial services and transport will be exempt from this), while for Mode 3, operators from the EU will be able to hold shares in Vietnamese companies at a higher ratio than can those from ASEAN member states. It is also notable that in some services, liberalization is total and investments may be made without restriction. However, from the EU’s side, liberalization will depend on individual countries and this will vary for different services[8].
In the past, exports from Vietnam to the EU have grown strongly, partly as a consequence of the advantages accruing from having access to EU markets under the EU’s Standard GSP agreement and the resulting lower duties that have been imposed on Vietnamese goods. The EU is in fact Vietnam’s second most important export market and as of 2018, by value, it accounts for 17% of all Vietnamese exports (Figure 3). At the same time, the EU market has grown at the rapid average annual rate of 18.1%, somewhat faster than the average overall rate for growth in Vietnamese exports (17.5% per year). As stated above, this is partly because Vietnam has been able to export to the EU under its Standard GSP arrangement since 2009 and this has kept average duties collected by the EU at 2.8%, significantly below the average duty for all EU imports of 4.6% (Source: Eurostat), Vietnam is one of two countries in the ASEAN region that enjoys this benefit (Table 5), which zero-rates 66% of items imports to the EU, with the remaining 34% seeing only reduced rates of duty, although the exact rate depends on the class of goods being imported, and because of this, average duties under Standard GSP rules are lower than those collected by the EU on normal imports. That said, some product categories, and in particular ‘sensitive goods’ are excluded from this scheme and will face higher than average duties. This includes garments, leatherwear, and agricultural and food products (Figure 4).
Comparing the impacts of the EVFTA on Vietnam and other countries, the value of Vietnamese exports are expected to grow by 1.44%. Other countries will also see benefits for their export sectors and overall, the world economy will expand by 0.02% but the situation for Thailand is less positive, and of all the countries affected, Thai exports are likely to see the strongest negative impacts (Figure 6).
Currently, the EU is the 6th most important source of investment funds for Vietnam and foreign direct investment (FDI) from the bloc comes to a total of roughly USD2bn per year, or 5.6% of all FDI received by the country (Figure 7). In terms of investment targets, the biggest recipients of EU FDI are manufacturing, electricity generation and real estate.
In the recent past, FDI from the EU has grown at the healthy rate of 10.5% per year (CAGR 2009-2018) and, reflecting investors’ continuing interest in the Vietnamese economy, FDI from most of the major economies in the EU has risen at double-digit rates in this period (Figure 8). Given these trends and the boost to investment that the EVFTA will provide, investment will likely continue to be attracted to the country.
Figure 9 illustrates the impact of EVFTA customs and duty exemption on investment, and while this is forecast to rise by 5.5% in Vietnam, this will be offset by losses in other countries, including Thailand. These shifts will be partly driven by the natural drive to increase investments and to expand production facilities in Vietnam.
In light of the boost to exports and investment, and the lift given to competitiveness by exempting Vietnamese exports to the EU from its import duties, Vietnam’s economy is forecast to grow by 0.267%, while for many other countries, including Thailand, the economic impacts are expected to be negative. Most seriously affected will be Cambodia since the country’s exports are strongly reliant on the EU (the bloc accounts for 40% of all Cambodian export sales) and the structure of Cambodian exports is similar to those of Vietnam, with a strong emphasis on clothing and finished garments.
Together with the increased cooperation in other spheres as set out in the EVFTA, liberalizing services and investment will continue to have positive impacts on Vietnam over the long term.
The analysis outlined above evaluates the impacts of the EVFTA only with regard to the liberalization of the trade in goods (or of zero-rating trade between Vietnam and the EU) but the provisions of the EVFTA extend beyond this and the agreement will have significant impacts on trade and investment opportunities in Vietnam and thus on future economic growth. Details of this are given below.
Taking into account the effect of the trade diversion and investment relocation that is likely to come in the wake of the enforcement of the EVFTA, third party countries are forecast to experience some negative consequences, and the analysis given above (figures 6 and 9) shows that total Thai exports are expected to see a 0.005% drop, while investment inflows to the country will fall by 0.052%; although these impacts may appear to be only slight, it should be noted that Thailand is in fact among the countries expected to be most heavily impacted by these changes to international trade.
At present, Thailand is an important source of imports to Vietnam (Figure 12). This is because Thai exports are attractive to Vietnamese buyers since both countries are signatories to the ASEAN FTA and so Thai exports have an advantage with regard to their customs rates, but once the EVFTA comes into force, the customs rate levied on EU goods imported into Vietnam will fall from an average of 4.8% (Figure 13) to 0%, and so importers will tend to import more goods from the EU at the expense of Thai products. Work by Krungsri Research shows that in fact, the introduction of free trade between the EU and Vietnam will lead to a -0.17% decline in the value of exports from Thailand to Vietnam (Figure 14) because in the first year of the EVFTA’s operation, 48.5% of products imported from the EU to Thailand will be zero-rated. Goods categories that will tend to be negatively affected in the initial period will include polyethylene (HS390120, HS390210) radio transmitters, modems and wireless LAN equipment (HS851762), diodes and semiconductors (HS854140) and circuit boards (HS854231).
Currently, the EU imports a greater proportion of goods from Vietnam than it does from Thailand (Figure 15) but the bloc buys broadly similar categories of goods from the two countries. The most important exports to the EU are of machinery and electrical equipment, clothing, seafood and chemicals but the EU collects duties at an average rate of 6.3% on Thai goods (Figure 16), which is significantly higher than both the average of 2.7% that it levies on Vietnamese goods and the average for all imports to the EU of 4.6% (Source: Eurostat). In light of this, when the EVFTA comes into force and the EU waives duties on imports from Vietnam for a full 85.6% of product categories (see Table 1 for details), Thai goods will inevitably lose their price competitiveness relative to Vietnamese alternatives and as such, the value of Thai exports to the EU is expected to fall by -0.098% (Figure 17). Goods that are most likely to be initially affected by this will include clothing and leatherwear, food, beverages and tobacco, agricultural, fishing and forestry goods, and transport equipment.
Although the extent of the impacts on Thai exports of zero-rating customs duties for Vietnamese exports to the EU may appear small, in the near future, the ability of Thailand to attract inward investment and to sell on export markets will come under increasing threat from a rising number of challenges. These are outlined below.
The EVFTA, which should come into force during 2020, represents a major step for Vietnam in opening up new opportunities for trade and investment, as well as for reforming and developing the domestic economy but the agreement is, as described above, more far reaching than any of Vietnam’s earlier FTAs and because of this, the country may experience significant teething problems as the private and public sectors adjust to meet these new requirements. (i) Manufacturers may find it difficult to meet the EVFTA’s rather strict requirements over sourcing goods, with this being especially difficult for garment manufacturers, the country’s second most important export industry. This is because Vietnam lacks a significant fiber and textile industry, a crucially important upstream supplier of inputs to its textile factories, and so the latter have to import 60-80% of their raw materials (mostly from China and elsewhere in the ASEAN region). However, the EU has specified that imports of clothing from Vietnam have to be made from inputs sourced from either Vietnam or South Korea (South Korea also has a bilateral trade agreement with the EU). (ii) Signing the EVFTA makes it necessary for Vietnam to overhaul and to develop a range of different standards, including those on sanitary and phytosanitary measures (SPS) and the ambient air quality standards, and meeting these goals will require the investment of time, money and human resources. (iii) The EVFTA also compels Vietnam to develop its economy and its governance in a number of different ways, including reform of state operated enterprises and other parts of the state system, increasing fair and open competition, improving the protection of human rights and raising labor standards.
Krungsri Research believes that overall, the EVFTA will have a positive impact on the development of the Vietnamese economy over the long term, especially on exports and investment and this will lead to a greater level of economic growth. Analysis using the GTAP model (Table 8) shows that exempting all Vietnamese imports to the EU from customs duties will have positive impacts across the Vietnamese economy, leading to a 28.0% rise in the value of Vietnamese exports, a 5.5% increase in investments, and a 0.267% combined boost to economic growth. Exports that will benefit most strongly from this will include textiles, leatherwear and footwear, food, beverages and tobacco, transport equipment and agricultural, fisheries and forestry goods. However, from Thailand’s point of view, this is an unwelcome development because the impacts of EVFTA enforcement will be largely negative, and total exports, investment and economic growth will all suffer as a result. Although the analysis indicates that in strictly numerical terms, the initial impact will be limited, Thailand will (apart from the signatories themselves) be among the countries most heavily affected by the EVFTA, with exports of transport equipment, consumer goods, machinery and equipment, and electronics the most seriously disrupted. Most importantly, the signing of the EVFTA will help lift total Vietnamese exports even further and there is a danger of Vietnamese exporters increasingly leaving their Thai competitors further and further behind. Indeed, in 2019, with a value of USD 263 bn compared to USD 246 bn, Vietnamese exports pulled ahead of those from Thailand for the first time (Figure 18).
The benefits arising from the EVFTA will not just originate in the zero-rating of Vietnamese exports to the EU. Rather, Vietnam will also benefit from the lower cost of its goods and Vietnamese exporters will be presented with increasing opportunities to integrate into EU supply chains, while the additional provisions of the agreement, which are more far reaching than any of Vietnam’s other FTAs, will help to facilitate the entry of foreign investors into government auctions for public contracts, to reduce the influence of state monopolies and to develop fair competition in Vietnamese markets. Raising standards in this way will then help to build competitiveness in the economy and this will provide Vietnam with an important opportunity for boosting exports, attracting greater investment inflows and developing the economy.
[1] EU and Vietnamese officials signed 2 agreements, the EU-Vietnam Free Trade Agreement (EVFTA) and the EU-Vietnam Investment Protection Agreement, which covers investor protection, mediation and dispute resolution.
[2] At present, Vietnam is a signatory to 10 free trade agreements (including both bilateral and multilateral agreements). These are the ASEAN FTA, the ASEAN-Japan FTA, the ASEAN-China FTA, the ASEAN-South Korea FTA, the Vietnam-Japan FTA, the Vietnam-South Korea FTA, the Vietnam-Chile FTA, the Vietnam-Eurasian Economic Union FTA, the ASEAN-Hong Kong FTA and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).
[3] The latest situation with other EU-ASEAN FTAs is that the EU-Singapore FTA (EUSFTA) has been agreed and will soon be enforced, the Philippines and Indonesia are currently negotiating with the EU, and Malaysia has temporarily suspended its negotiations (source: Ministry of Foreign Affairs). As for Thailand, the government is considering the possible costs and benefits for the country of negotiating an FTA and is in the process of gathering opinions from smaller stakeholders in preparation for restarting discussions with the EU over a prospective Thai-EU FTA (source: Department of Trade Negotiations, November 21, 2019).
[4] In addition to liberalizing trade in goods and services and in investments, high standard free trade agreements also typically cover customs rates and formalities, ease of trade, the activities of state enterprises, government procurements, laws relevant to trade competition, clarity and transparency in the application of the law, law governing trade and conflict resolution, the ease of doing business, and the strengthening of mutual capabilities and cooperation.
[5] To provide a basis for negotiations over the provision of services, the WTO has divided the service sector into 12 subgroups (these classifications rely on the UN Central Product Classification (CPC)). These groups cover: business services, communication services, construction and related engineering services, distribution services, education services, financial services, environment services, health-related and social services, tourism and travel-related services, recreation, cultural, and sporting services, and other services. Member states of the WTO may liberalize each of these subgroups to a different degree.
[6] Within the ASEAN zone, liberalization of the service sector is governed by the ASEAN Framework Agreement on Services (AFAS), which has been in effect since 1995. The AFAS is based on the principle of progressive liberalization, and at present this process is at the stage of the 9th Package of Commitments (Source: The Association of the Southeast Asian Nations). However, almost all ASEAN member states (with the exception of the Philippines) have agreed to replace the AFAS with the ASEAN Trade in Services Agreement (ATISA) and if all members do indeed sign the latter agreement, this will then come into force within 180 days of the ASEAN Secretary-General being informed of this (information correct as of September 13, 2019).
[7] European Commission, “Specific Commitments on Cross-Border Supply of Services”.
[8] European Commission, “Liberalization of Investment, Trade in Services and Electronic Commerce”.