Hanoi hopes the early implementation of a European Union trade pact will accelerate growth, attract investment and hedge its economic reliance on China
When Vietnamese prime minister Nguyen Xuan Phuc traveled earlier this month to Germany to attend the G-20 Summit, the communist leader had a clear ulterior motive for his presence in the heart of Europe.
Vietnam and the European Union are tentatively set to agree to and ratify a wide-ranging free trade pact, known as the EU-Vietnam Free Trade Agreement, or EVFTA, by early 2018. The agreement was first envisaged in 2012 and once enacted is expected to accelerate trade between Vietnam and individual EU states.
Recent developments mean that timeframe could be delayed, due namely to a ruling that means each EU member state must individually agree to the deal. Phuc’s visit was to Germany was thus largely a lobbying effort to expedite the deal’s enactment.
An article published by Vietnam’s state-run media lists 14 different world leaders who Phuc met while in Hamburg for the summit. The list included European Council president Donald Tusk and European Commission president Jean Claude Juncker.
Vietnamese state media claimed the European leaders said they would try to speed up the EU’s review of the free-trade agreement, although neither of the two men has spoken publicly about their chat with Phuc.
It is reasonable to assume EVFTA’s ratification was also atop of the agenda when Phuc sat down with German Chancellor Angela Merkel, during which it was announced that the Vietnam-Germany Business Forum had overseen the signing of US$1.7 billion worth of new trade deals.
After the G-20 Summit, Phuc traveled to the Netherlands to meet his Dutch counterpart, Mark Rutte. There Phuc announced that Vietnam will lift restrictions on foreign investors in several areas, ranging from telecoms to banking.
Prevailing limits on how much foreigners can invest in Vietnamese companies would also be raised, particularly in state-owned enterprises that privatize, Phuc said. Phuc’s choice of the two European countries was no accident. Germany is Vietnam’s largest European trading partner; the Netherlands is its second.
It is estimated that Germany receives more than 20% of all Vietnamese exports to Europe, with bilateral trade worth almost US$9 billion last year. The Netherlands, meanwhile, is the largest European investor in Vietnam with US$7.7 billion in total committed capital. Trade between the two nations was worth US$6.7 billion in 2016.
For Vietnam, EVFTA is the next best thing to the Trans-Pacific Partnership (TPP), a monumental free-trade agreement between 12 Pacific Rim nations, including Vietnam, that US President Donald Trump withdrew from on his first day in office, effectively killing the deal. Vietnam was set to be one of the pact’s biggest beneficiaries.
After America, Europe is Vietnam’s largest export market, which readily purchases Vietnamese-made electrical equipment, footwear and garments. In 2006, trade between the EU and Vietnam was worth a paltry US$10 billion. A decade later, it has grown to US$48 billion.
Once EVFTA is signed and ratified, those trade flows are expected to accelerate, though quantified estimates have not yet been published by either side.
As Phuc wooed European leaders, his government was stepping up efforts to get Vietnamese businesses ready for the EVFTA’s enactment – whenever that might be.
Dang Hoang Hai, head of the European Market Department which operates in Vietnam’s ministry of industry and trade, warned this month that Europe’s stricter rules on quality and safety mean that many Vietnamese firms may not be able to trade with the EU.
Uniformity of goods will have to be maintained, analysts say, as will stability in supply chains. Agricultural firms, for example, will have to adapt to the EU’s strict “rules on origins” requirements. Electrical manufacturers, meanwhile, will have to deal with the stringent copyright laws that the EVFTA enforces.
Once the EVFTA comes into effect, shoddy goods and malpractice could see Vietnamese firms investigated, or worse. Hanoi clearly wants to avoid such future embarrassments, as they’ve endured with the US over poor food quality and anti-dumping charges.
With the hope that EVFTA will boost foreign investment from Europe, Phuc’s government has set to make the business climate friendlier for foreign companies. Vietnam jumped nine places in the World Bank’s latest ease of doing business ranking year on year.
In that direction, Vietnam’s finance ministry has sent teams to Europe to scout for new business openings. It’s European Market Department began cooperation this year with European distributors, including Casino, a French mass retailer, and the German wholesaler Metro Cash and Carry, to expand supply chains.
Vietnamese businesses are generally optimistic about EVFTA and its market-opening opportunities. Diep Thanh Kiet, vice chairman of the Vietnam Leather, Footwear, and Handbags Association, told local media in March that EVFTA’s zero percent tariff on exports to Europe could contribute to a doubling of his industry’s output by 2025.
That, he said, could allow Vietnam to overtake China as the world’s largest producer of footwear. (Vietnam is currently the second biggest globally).
With the demise of TPP and a desire to hedge reliance on China, Vietnam sees EVFTA as crucial for four main reasons, analysts say.
First and perhaps foremost, Hanoi is desperate for new foreign investment, especially for major infrastructure projects and energy production. In Europe, Phuc repeatedly spoke about the Paris climate accord, a major anti-climate change initiative signed last year, and asked European partners to help in Vietnam’s push for renewable energy.
Second, Vietnam believes European investors can use the country as a springboard for expanding into the rest of the region. Speaking in the Netherlands, Phuc said that EVFTA will allow the EU and the Association of Southeast Asian Nations (Asean) to “forge a deep and comprehensive economic connection.”
The EU does not currently have a free trade agreement with any Southeast Asian country. While the EU-Singapore Free Trade Agreement (ESFTA) was agreed in 2014, analysts believe it will be ratified later than EVFTA. For the EU, EVFTA is a first step towards a possible free trade agreement with Asean.
Third, unlike TPP, the EVFTA does not come with any requirements for more political liberalism. Under the TPP, the Vietnamese government would have had to allow independent trade unions to operate, an opening that no doubt made the authoritarian regime nervous.
Without such requirements, though EVFTA does advise certain reforms, Vietnam’s government will not be strong-armed into liberalizing its political environment for the sake of more trade.
There are reports, however, that human rights advocacy groups are starting to seize on the issue and are starting to pressure European legislators to amend the agreement to enforce stricter rules on human rights.
Fourth, some analysts believe that reformist elements in the ruling Communist Party supported TPP because it would have compelled faster economic liberalization. This, some believe, EVFTA will also do, mainly through stipulations on transparency and fairness in government contracts.
EVFTA mandates that EU companies must able to bid for public procurement tenders under the “same conditions” as Vietnamese companies. Some hope this will force the government to curb rampant corruption in state contracts, as well as speed the privatization of Vietnam’s many cash-hemorrhaging state-owned enterprises.