The EU-Viet Nam Free Trade Agreement enters into force

On 1thAugust 2020 the EU-Viet Nam Free Trade Agreement (FTA) entered into force: it is one of the two components of the EU-Viet Nam Trade agreement signed on 30 June 2019 in Hanoi, that also includes the Investment Protection Agreement (IPA). The EU-Viet Nam FTA is the second European ‘new generation’ bilateral trade agreement, as the EU-Singapore Free Trade Agreement that entered into force on 21 November 2019. The EU-Viet Nam FTA fall in the subject of Article 207 of the Treaty on the Functioning of the European Union (TFEU) which enables the EU to sign trade agreements on subjects not only confined to the reduction of customs duties and non-tariff barriers on tradeable goods and services, but also related to other important provisions, such as intellectual property protection, foreign direct investments (FDI), public procurements, competition and sustainable development.

According to opinion 2/15 (March 2017) of the Court of Justice of the European Union (CJEU), an IPA is exceeding the provisions given by Article 207 because the agreement relating to non-direct foreign investment and those relating to dispute settlement between investors and States do not fall within the exclusive competences of the EU. That is why both the EU-Singapore and EU-Viet Nam’s IPAs were concluded together by the EU and the Member States. In this cases, Member States are bound to ratify these agreements according to their constitutional provisions. On the other hand, as we already noticed, all the provisions of the FTA fall under the exclusive competences of the EU: in other words, it is signed and approved only by the EU institutions according to Article 207 TFEU.

The EU-Viet Nam FTA took origin in the failure of the negotiations for an FTA between EU and the whole ASEAN region, started in 2007 and suspended in 2009. Taken together, the bilateral trade agreements between Viet Nam and Singapore are important steps for the EU to strength its ties with all the 10 ASEAN Member States, in order to reach the final goal to settle talks for a future EU-ASEAN region-to-region agreement. Furthermore, the EU set up bilateral trade talks with Malaysia, Thailand, Philippines and Myanmar that are still ongoing. This agreement could rise as a benchmark in the trade talks between EU and these ASEAN countries. Indeed, the latter are refrained to sign an FTA with the EU mainly due to their concerns regarding the ability of the EU to talk in a single voice.

Viet Nam has been a vibrant economy with an average annual economic growth of 6.82% since the launch of the  Đổi Mới (Renovation) policies, a set of economic reforms that started in the ’90 with the ultimate goal to create a ‘socialist-oriented market economy’ following the blueprint of the Chinese experience. This data is substantially higher than the average GDP growth of low and middle income countries for the last three decades, computed by the World Bank to 4.47% and 5.01% respectively.

In the last two decades the EU-Viet Nam trade rapidly increased following the positive performances of the Vietnamese economy. For Hanoi, the EU stands as an important market for the Vietnamese export and as a substantial source of revenues. According to the Vietnamese General Statistic Office (GSO), from 2015 to 2018 Viet Nam gained an average annual net gains of US$ 25.08 billion from the EU-Viet Nam trade flow, bringing in 2018 the EU as the second largest export market for Hanoi after United States, leaving the third stage to China. This highly unbalanced trade flow is also one of the main reasons that brought Bruxelles to set trade talks with Viet Nam since 2007. The EU hopes to recalibrate the trade balance in a more ‘equal’ way as Japan did in the past decades, even though maintaining the European Generalised Scheme of Preferences (GSP) for the developing countries. The GSP has allowed many Vietnamese products to be imported into the EU duty-free or with reduced duties since 1971.

Europe is the end-market for some key Vietnamese manufacture products such as telephones, computers, electronic components, footwear and agro-products. The GSO data show that in 2018 the EU trade represented nearly one third of the Viet Nam’s telephone export. The EU also contributed to the 16% of the Vietnamese revenues coming from the export of computers and electronics and to the 29% for the footwear export. Moreover, Hanoi is considered one of the best destination to delocalize the EU supply chains for some relevant European companies such as for the Italian Piaggio Group and for the French AIRBUS. The Viet Nam-EU trade flow steady grew not only in quantity but also in quality. The success in exporting its fishery products to the EU, with its high sanitary and phytosanitary standards, has enabled Viet Nam to unlock other key markets such as Japan and the United States. The fishery sector is also linked with the preservation of the Vietnamese maritime resource in its surrounding waters and in its Exclusive Economic Zone (EEZ), involving some hot issues like the territorial claims over the South China Sea.

This new FTA will significantly boost the overall trade exchanges between the two partners as it stands as one of the key elements of the Hanoi’s strategy to bring Viet Nam at the centre of several free-trade areas in order to diversify its trade partners, hedging against China’s growth. Hanoi has signed seven major FTA in the last decade such as the 2018 Comprehensive and Progressive Agreement on Trans-Pacific Partnership (CPTPP, headed by Japan, a key geopolitical partner for Viet Nam in the South China Sea territorial disputes), the 2015 Eurasia Economic Union (EEU, headed by Russia, an historical defence suppliers for Hanoi) and the 2015 Viet Nam-South Korea FTA. As an ASEAN country Viet Nam also has secured positive outcomes from the FTA signed by ASEAN and several Indo-Pacific countries, such as China (2003), South Korea (2006), Japan (2009), Australia and New Zealand (2010) and India (2010).

In terms of cumulative investments by the end of 2018, stockholders from the EU had invested more than US$ 23.927 billion into 2133 projects in Viet Nam, making the EU 5th largest FDI partner in terms of total stock. Anyway, the whole EU ranks only 6th in the 2018 FDI flow data by country, with only US$ 1068.3 billion invested in Viet Nam, far beyond Japan, the first investor for this ASEAN country, with more than US$ 6 billion FDI and over US$ 730 million ODA (Official Development Assistance) provided to Hanoi in 2018. When the IPA will enter into force (after the approval of all the Member States) it is expected to significantly boost the EU investments in Viet Nam, making the EU one of the leading investors for Hanoi, bridging the gap with other important Viet Nam’s investors like Japan, China and South Korea.

Like a common FTA, the EU-Viet Nam Free Trade Agreement sets a gradual liberalisation of the bilateral trade flows, stimulating a convergence on the regulation and standards and on the dismantle of nearly all the tariffs and quotas that, in the past, surged as the main obstacles for the development of the EU-Viet Nam trade relations. Just from the 1stof August, 65% of the EU export and 71% of EU import from Viet Nam have come in duty-free. The remaining trade – except for a few products – will be liberalised after 10 years for the EU export and after 7 years for the EU import. Article 2.14 of the agreement forbids the contracting parties to act any prohibition and discrimination on the import and export of goods between them according to the WTO rules. Nevertheless, the Appendix 2-A-4 of the agreement include a short list of goods (mainly used consumer goods) where Viet Nam could impose limited import restrictions. Hanoi also agreed to lift roughly all its 603 tariff lines subjected to export duties from five to twelve years from the entry into force of the agreement.

For the first time in the EU FTA experience, this agreement includes the concept of ‘remanufactured goods’ which is increasingly important for many policy objectives and for the protection of the environment. Until now these remanufactured goods were considered by Viet Nam to be ‘used’ goods that are generally prohibited to be imported. Therefore, this category of remanufactured goods opens trade for many high value products like in the medical device area and in the car sector.

Hanoi acknowledged for the first time in an FTA the marking of origin ‘Made in EU’ for non-agricultural goods. This will allow manufacturers to make a broader use of EU’s internal market without obliging them to establish specific systems of differentiating production locations inside the EU. This new ‘origin label’ will not obviously enable the Member States to use more traditional markings of origins. Moreover, the agreement guarantees the recognition and the protection of 169 European Geographical Indications (GI) in the Annex on Intellectual Property. The GI enable to univocally identify a product as originating in the territory of a specific country (for example a region or a locality) where its quality-features and reputation are bound.

One of the sectors most affected by the agreement is the pharmaceutical one. According to Eurostat, pharmaceutical products account over 9% of the EU export to Viet Nam. The FTA will secure easier access to high-quality innovative drugs for the Vietnamese population and will considerably enhance the cooperation in the fight against COVID-19. Roughly half of the EU pharmaceuticals export has come duty free from the 1stof August, and the rest will gradually be liberalized in the next seven years. Furthermore, Viet Nam will allow foreign pharmaceutical companies to establish foreign-invested enterprises within its borders in order to import drugs that have duly been authorized to be sold in Viet Nam. These provisions will potentially support Hanoi in the production and distribution of the future COVID-19 vaccine, strengthening the EU-Viet Nam cooperation in the healthcare sector.

Regarding the food sector, on the other hand, the FTA provides high standards of safety and protection. Viet Nam committed itself to apply the high EU standards on food security adopting the so called ‘pre-listing’ approval procedure. In other words, Hanoi will automatically allow food imports from a Member State when the Vietnamese authorities approved the underline category of food products from the EU regulators and when they are assured that the competent authority of the Member State has the capacity to check and monitor compliance of the EU food requirements. In doing so, Viet Nam will refrain to make individual inspections, that are allowed only if the Vietnamese authorities have doubts about a particular establishment and wishes to undertake inspections. In the latter case, unlike other FTA negotiated by EU, all the related additional costs of the inspections will not be covered by the EU. The agreement establishes also a bilateral Specialized Committee on Sanitary and Phytosanitary that will meet annually to ensure the right implementation and effectiveness of the FTA provisions in this area.

The FTA also covers the important market of Viet Nam’s public procurements. Viet Nam is one of the countries with the highest ratio of public investment to GDP in the world, indeed since 1995 it has maintained at over 39% annually with a large part invested in infrastructure projects. Viet Nam and the EU have agreed to discipline the public procurements market in line with the WTO Government Procurement Agreement (GPA) provisions, a treaty which Hanoi is not yet a member of. According to the FTA, the EU companies will be able to bid for public contracts under the same conditions as the Vietnamese companies for a wide range of entities, classified in three main ‘sections’: all the Vietnamese ministries, the two major sub-central governmental entities (Hanoi and Ho Chi Minh City) and two utility-related State Owned Enterprises (Electricity of Viet Nam and the Viet Nam National Railways) plus 34 hospitals managed directly by the Ministry of Health. Each section is subjected to a threshold value that enables EU companies to tender those procurement activities that are carried out by covered entities purchasing listed goods of a value exceeding the given threshold. These thresholds will be submitted to a scaling-down process lasting fifteen-years that will bring them to a level comparable to the ones provided by the GPA.

Regarding the sustainability of the trade relations, the contracting parties are deeply committed to promote mutual support to improve labour and environmental policies and to ensure that the increase of the trade and investments flows will not have negative externalities in the labour and environmental domains. The agreement addresses the effective implementation of each of the four International Labour Organisation (ILO) labour standards and the progressive ratification of all the ILO Conventions.  On the environmental side both the two parties have ratified several conventions within the Multilateral Environmental Agreement (MEA) framework, such as the UN Convention on Biological Diversity and the UN Framework Convention on Climate Change. The agreement obliges the parties to provide the nationals with standards beyond or equal to those provided by the ILO ad MEA conventions.

The contracting parties are also committed to ensure new investments opportunities beyond the traditional flows of goods, offering access the service markets exceeding the WTO commitments. Viet Nam agreed to partially liberalise a wide range of service’s sectors such as business services, computer services, postal services, social services and environmental services. Now is possible for EU suppliers to provide cross border higher education services in Viet Nam. Regarding the financial services, EU investors are allowed to transfer cross border financial information and financial data processing as well as supply advisory intermediation and other auxiliary financial services. On insurance, cross border retrocession is now possible while EU investors can establish themselves in Viet Nam to provide health insurance services. The Maritime transportation services are also deeply liberalised by the agreement, especially concerning cross border passengers and freight transportations.  The FTA provides better condition for EU investors in establishing their companies in Viet Nam to provide these services, including the maintenance and repair of vessels. EU investors are also allowed to supply maritime agency services while EU managers will be able to work in maritime agencies. Furthermore, the agreement promotes a series of rules on e-commerce (or in other words, the use of electronic means to conduct business), such as the prohibition of costume duties on electronic transmissions, the setting of forums to discuss issues related to e-commerce and liability  exemptions for online intermediaries.

Finally, this FTA significantly improves the existing WTO dispute settlement procedures in various aspects. First of all, the overall procedure is faster, cutting the 860 days required for settle a WTO dispute to 425 days. The FTA established a more efficient panel composition with a mandatory use of roster lists of arbitrators, which is designed to enhance mutual trusts between the panel’s members as well as the efficiency and automaticity of the panel selection process. Panel hearings will be open to the public, even though certain confidentiality rules will also be guaranteed. Each party had also the choice to submit amicus curiaesubmissions to the panel.

Viet Nam will become more and more an attractive market for the European companies and an important partner for the EU Member States in the Indo-Pacific region. The US containment strategy toward China gave to Viet Nam a pivotal position in taking profit from the reshuffle of the global value-chains. There are increasing prospects that China’s economy will become more isolated in the near future thanks to the US foreign action, leading the other industrialized countries to revise their economic interdependency toward China. Thanks to the EU-Viet Nam Trade Agreement each Member States is provided by a preferential way to access and taking advantage of the Vietnamese economy and, at the same time, contributing to the flourishment of the Vietnamese nation. Indeed, the new trade relations between the EU and Viet Nam will settle a relevant starting point to enhance the EU Member States presence in the whole ASEAN area.