Economic cooperation between Vietnam and the European Union (EU) is about to turn a new page in history as the Vietnamese National Assembly is moving very close to ratifying the EU-Vietnam Free Trade Agreement (EVFTA).
In that context, Vietnamese businesses, especially those in the areas of garment & textile, leather & footwear, and agro-forestry and fishery exports, should keep themselves ready when the “avenue” for trade with the EU is connected.
A boost for post-pandemic export recovery
The EVFTA is expected to create a big “push” for Vietnam’s exports to the vast EU market, particularly for the aforementioned commodities, with which Vietnam has many competitive advantages. Accelerating exports to the EU is one of the important solutions that the Vietnamese Government is determined to promote in overcoming the difficulties for the economy due to negative impacts from COVID-19.
Nguyen Thi Thu Trang, Director of the WTO and International Trade Centre under the Vietnam Chamber of Commerce and Industry (VCCI), said that market demand has declined amidst the complicated developments of the pandemic around the world, but it will possibly hike when the disease has passed. Specifically, when the EVFTA takes effect, it will drive enterprises to re-boost their export activities. Therefore, businesses need to closely monitor the COVID-19 situation in order to introduce appropriate production and business plans, as well as shift the form of trade promotion towards utilising online advertising and connection to maintain and develop their markets, thus ensuring that business activities will be restored soon after the disease stoppage.
Vietnam’s trade missions in the EU, Belgium and Luxembourg recently recommended that Vietnamese export companies should consider the manufacturing and reserving of goods to meet orders from the EU when favourable conditions come. In the near future, if the pandemic is controlled and the EVFTA comes into effect, the factors negatively impacting Vietnam’s exports to the EU will be reduced. Garment & textile products – one of the items benefitting the most from the EVFTA – will be in good hands when the EU lifts coronavirus lockdowns. Notably, after this crisis, the market may have many changes, both in the size of orders and the ways to conduct activities. It is predicted that EU businesses will significantly change the manner in which they carry out their import-export activities, which requires Vietnamese garment & textile exporters to stay updated on the situation and make timely adjustments. In addition, industries that are less dependent on the supply chain, such as agricultural products, will get benefits immediately after the EVFTA comes into force.
A favourable factor is that the economic structures of Vietnam and the EU have no direct competition, but rather complementary competition. Vietnam’s strength goods are not the strengths of the EU and vice versa. However, according to Nguyen Thi Thu Trang, Vietnamese firms will have to bear certain costs to adjust their production. For example, to meet the rules of origin under the EVFTA, businesses must change the supply of raw materials, from abroad to domestic sources. Domestic supplies will cost more, but this will give enterprises an advantage when exporting their products to the EU.
Opportunities to diversify markets
Recently, the Multilateral Trade Policy Department (under the Ministry of Industry and Trade) announced that all preparations have now been completed. Businesses should also ready themselves, because as long as the EVFTA is approved by the Vietnamese NA and the two sides completes the notification process as prescribed, the agreement will officially take effect for both the EU and Vietnam.
The group of experts at the RMIT University Vietnam stated that it is high time for Vietnam to diversify its trading partners in a stronger manner to reduce dependence on one or two key markets regarding both imports and exports. The EVFTA is an essential factor in that process, especially as the global supply chain has been severely affected by the decline in production and trade activities due to COVID-19.
For such an open economy with a high trade-to-GDP ratio as Vietnam, problems related to fluctuations can escalate rapidly, particularly when import and export activities have an important but unsustainable linkage with large markets such as China. Regarding the US market, Dr. Nguyen Quang Trung (RMIT University Vietnam) said Vietnam’s high and constantly growing trade surplus with the US may also be unsustainable, and could even fall into a difficult situation, as domestic businesses have not yet mastered the main stages in the global value chain. In recent years, Vietnam has constantly reported a trade deficit with China, while trade surplus with the US is on an increasing momentum. Building an overall balanced trade account will help the economy become more stable and enhance its resilience against peripheral shocks like the COVID-19 pandemic.
It remains unclear when the current global coronavirus crisis is over and when its indirect effects on the economy will be addressed. Therefore, experts emphasised an urgent need for the Vietnamese economy to promptly seize opportunities and take actions to diversify the markets, thereby reducing the severity of risks faced. In this regard, the EVFTA may be vital, alongside other international deals such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).
Making sound preparations for long-term benefits
According to Dr. John Walsh (RMIT University Vietnam), the EVFTA is the most stable agreement for Vietnam because it sets stricter rules, which all partners are required to abide by. That means there will be fewer opportunities for countries to pursue short-term gains, whether intentional or not. The new-generation FTAs will also give Vietnam the chance to enhance its position on the global trade map, beyond advantages such as low labour costs or abundant agricultural resources, to work towards technology transfer and taking advantage of skills of young labour force. The competitiveness of Vietnam’s streng products will be further strengthened as the energy industry is transformed to meet low carbon emissions standards. Moreover, when the Vietnamese economy and consumers become familiar with imported goods from the EU in new areas, the retail and distribution industry will be empowered to prepare to welcome other products in similar categories from around the world.
Dr. Nguyen Quang Trung said that Vietnam is the second ASEAN member nation to sign an FTA with the EU. However, such determination needs to be accompanied by fast, decisive and reliable actions to help the economy to thrive further. Seven years after the EVFTA comes into effect, the EU will eliminate more than 99% of tariff lines, equivalent to more than 99% of Vietnam’s export revenue to this market. Vietnamese companies will also benefit from superior EU products at low prices and can use them in their production processes, thereby improving output and profits of Vietnam’s export goods. As product competitiveness increases, Vietnam will have stronger foundations to boost trade through the harmonisation of legal conditions, rules of origin, and customs management and administrative provisions, as well as the recognition of each other’s appropriate standards and regulations. However, Vietnam will also face challenges from the requirements of new agreements. The private sector must be prepared to meet the challenges of upgrading supply chains and value chains, aiming to ensure that all links in the chains will best comply with international practices.
According to the Ministry of Planning and Investment, the EVFTA is expected to help Vietnam’s export revenue to the EU expand by 42.7% by 2025 and 44.37% by 2030 compared to the no-deal scenario. In addition, Vietnam’s total export turnover is expected to grow by an average of 5.21-8.17% in the first five years of implementing the agreement, 11.12-15.27% in the next five-year period, and 17.98-21.95% for the subsequent five years.