EU-VIETNAM FREE TRADE AGREEMENT AND INVESTMENT PROTECTION AGREEMENT – UNMATCHED LEVELS OF MARKET ACCESS AND LEGAL CERTAINTY – WHAT YOU MUST KNOW

On 8 June 2020, Vietnam’s National Assembly ratified the EU-Vietnam Free Trade Agreement (EVFTA) and Investment Protection Agreement (EVIPA) following almost 10 years of negotiations. On 12 February 2020, the European Parliament gave it consent to the ratification of the EVFTA and EVIPA. On 30 March 2020, the Council of Europe ratified the EVFTA . Finally, on 1 August 2020, the landmark agreement entered into force. Regarding the EVIPA, the Vietnamese Government has provided the EU Delegation with a diplomatic note providing notification of the National Assembly’s ratification of the EVIPA, pending endorsement of the Member States’ parliaments.

The implementation of the EVFTA has, to date, shown many positive results. This is particularly meaningful for both Vietnam and the EU in this period when world economies are suffering from the consequences ofCOVID-19. For instance, the total value of Vietnam’s exports to the EU market reached US$ 27,65 billion in December 2020, a dramatic increase of 55.3 per cent compared to December 2019.[1] In addition, the Ministry of Industry and Trade announced that it has granted approximately 24,000 sets of Certificate of Origin with a turnover of nearly US$ 1 billion eligible for EU tariff preferences within less than 3 months of the EVFTA coming into force . As of mid-January 2021, exports to the European Union accounts for USD 12.90 billion for the following products: mobile phones and accessories, computers, electronic products and components, textiles, other machinery, equipment, tools and spare parts, footwear of all types, wood and wooden products, and fishery products.

I. LEGAL ENVIRONMENT

1. General market access for goods and services

The EVFTA is the most comprehensive and ambitious trade and investment agreement that the EU has ever concluded with a developing country in Asia. It is the second agreement in the ASEAN region, after Singapore, and it helps to intensify bilateral relations between Vietnam and the EU. Vietnam now has access to a market of around 448 million people and an average GDP of US$13,918 billion (with the exception of 2020 due to Covid-19’s impacts on the economy).[2] Meanwhile, exporters and investors from the EU also have further opportunities to access one of the largest and fastest-growing countries in the region. According to a report released in early 2020 covering 130 cities worldwide,[3] Hanoi and Ho Chi Minh City are ranked among the top-10 most dynamic cities due to their low costs, rapid consumer market expansion, strong population growth, and transition towards activities attracting significant amounts of Foreign Direct Investment (FDI). According to the World Bank, Vietnam has one of the fastest-growing economies in the world — 7.1 per cent GDP growth in 2018, and 7.0 per cent in 2019, 2.91% for 2020.[4] Even though this is the lowest GDP growth level of the country in the last 10 years due to impacts by the novel corona virus, it is still among the world’s highest, especially comparing to neighbouring countries such as Singapore that saw a GDP growth of approximately minus 6.
In addition, Vietnam has the fastest-growing middle class in the region. Vietnam’s middle class accounts for 13 per cent of the total population and this figure is expected to become 26 per cent by 2026.[5] Vietnam’s super-rich population[6] is also growing faster than anywhere else, and there is no doubt that it will continue to rise over the next ten years.

Market access for goods

Nearly all customs duties – over 99 per cent of the tariff lines – will be eliminated in the next 10 years. The small remaining number will be partially liberalised through duty-free quotas. As Vietnam is a developing country, it has liberalised around 65 per cent of the value of EU exports, representing around half of the tariff lines, at entry into force. The remaining duties will be eliminated over the next decade. This is an unprecedented, far-reaching tariff elimination for a country like Vietnam, proving its aspiration for deeper integration and trading relations with the EU.

Meanwhile, the EU agreed to eliminate duties for 84 per cent of the tariff lines and 71 per cent of its trade value for goods imported from Vietnam from 1 August 2020. Within seven years from the effective date of implementation, more than 99 per cent of the tariff lines will have been eliminated for Vietnam. This is a wider reduction compared with the 95 per cent of the tariff lines that the former TPP countries offer to Vietnamese imports. In the ASEAN region, Vietnam is the top country in exporting goods to the EU. However, the market share of Vietnam’s products in the EU is still small. Because of the EVFTA, the sectors that will benefit most are the main export sectors that used to be subject to high tariffs from the EU including textiles, footwear, and agricultural products. The EU is also a good point for Vietnam to reach other further markets.

Vietnam benefits more from the EVFTA compared with other such agreements, since Vietnam and the EU are considered two supporting and complementary markets. In other words, Vietnam exports goods that the EU cannot or does not produce itself (i.e. fishery products, tropical fruits, etc.) Meanwhile, the products imported from the EU are also those Vietnam does not produce domestically, including machinery, aircraft, and high-quality pharmaceutical products.

With better market access for goods from the EU, Vietnamese enterprises can source EU materials, technology, and equipment at a better quality and price. This, in turn, improves their own product quality and eases Vietnam’s burden of over-reliance on its other main trading partners.

The EVFTA is considered as a template for the EU to further conclude FTAs with different countries in ASEAN with the ultimate aim of concluding a region-to-region FTA once there is a sufficient critical mass of agreements with individual ASEAN countries.[7] This process could take about 10-15 years. Thus, Vietnam should take advantage of this window of opportunity, before FTAs with others in the region are concluded and take effect, to become a regional hub.

Market access for EU service providers: Although Vietnam’s WTO commitments are used as a basis for the services commitments in the EVFTA, Vietnam has not only opened additional (sub)sectors for EU service providers, but also made commitments deeper than those outlined in the WTO, offering the EU the best possible access to Vietnam’s market. (Sub)sectors that are not committed under the WTO, but under which Vietnam has made commitments, include Interdisciplinary Research & Development (R&D) services; nursing services, physiotherapists and para-medical personnel; packaging services; trade fairs and exhibitions services and building-cleaning services.
When these reach international standards, Vietnam will have the chance to export high-quality services, resulting in not only an increase in export value but also export efficiency, thus helping to improve the trade balance.

Government procurement

Vietnam has one of the highest ratios of public investment-to-GDP in the world (39 per cent annually from 1995).[8] However, until now, Vietnam has not agreed to its Government procurement being covered by the Government Procurement Agreement (GPA) of the WTO.[9] Now, for the first time, Vietnam has undertaken to do so in the EVFTA.

The FTA commitments on Government Procurement mainly deal with the requirement to treat EU bidders, or domestic bidders with EU investment capital, equally with Vietnamese bidders when the Government purchases goods or requests a service worth over the specified threshold. Vietnam undertakes to follow the general principles of National Treatment and Non-discrimination. It will publish information on intended procurement and post-award information in Bao Dau Thau (Public Procurement Newspaper)[10] and information on the procurement system at muasamcong.mpi.gov.vn and the official gazette in a timely manner. It will also allow sufficient time for suppliers to prepare and submit requests for participation in responsive tenders and maintain the confidentiality of bidders The FTA also requires its parties to assess bids based on fair and objective principles, evaluate and award bids only based on criteria set out in notices and tender documentation, and create an effective regime for complaints and settling disputes.[11] These rules require parties to ensure that their bidding procedures match the commitments and protect their own interests, thus helping Vietnam to solve its problem of bids being won by cheap but low-quality service providers.

Government procurement of goods or services, or any combination thereof, that satisfy the following criteria falls within the scope of the EVFTA Government Procurement rules:

Table: Government Procurement Rules under the EVFTA

Table – Government Procurement Rules under the EVFTA


Investment Dispute Settlement

This is now covered in the EVIPA. In disputes regarding investment (for example, expropriation without compensation or discrimination of investment), an investor is allowed to bring the dispute to the Investment Tribunal for settlement. To ensure the fairness and independence of the dispute settlement, a permanent Tribunal will be comprised of nine members: three nationals each appointed from the EU and Vietnam, together with three nationals appointed from third countries. Cases will be heard by a three-member Tribunal selected by the Chairman of the Tribunal in a random manner. This is also to ensure consistent rulings in similar cases, thus making the dispute settlement more predictable. The EVIPA also allows a sole Tribunal member where the claimant is a small or medium-sized enterprise or the compensation of damaged claims is relatively low. This is a flexible approach considering that Vietnam is still a developing country.

In case either of the disputing parties disagrees with the decision of the Tribunal, it can appeal to the Appeal Tribunal. While this is different from the common arbitration proceeding, it is quite similar to the two-level dispute settlement mechanism in the WTO (Panel and Appellate Body). We believe that this mechanism could save time and costs for the whole proceedings.

The final settlement is binding and enforceable from the local courts regarding its validity, except for a five-year period following the entry into force of the EVIPA (please refer to further comments in the Legal Sector Committee’s chapter on Judicial and Arbitral Recourse).

Conclusion

The EVFTA has created sustainable growth and mutual benefits in various sectors and is, by all means, an effective tool to balance trade relations between the EU and Vietnam. Vietnam is making continuous efforts and progress to meet the high standards set out in the EVFTA, and is currently offering greater opportunities for foreign businesses entering Vietnam’s market. It is now time for foreign investors to implement their business and investment plans and grasp these amazing opportunities.

For more information on the above, please do not hesitate to contact the author Dr. Oliver Massmann under omassmann@duanemorris.com. Dr. Oliver Massmann is the General Director of Duane Morris Vietnam LLC, Member to the Supervisory Board of PetroVietnam Insurance JSC and the only foreign lawyer presenting in Vietnamese language to members of the NATIONAL ASSEMBLY OF VIETNAM.