OVERVIEW
On 2nd December 2015, after nearly 3 years with 14 rounds of negotiations, President Donald Tusk, President Jean-Claude Juncker and Prime Minister of Viet Nam Nguyễn Tấn Dũng announced the conclusion of the negotiations of the EU-Vietnam Free Trade Agreement (EVFTA). Both parties are undertaking the necessary steps to finalise the ratification process for the Free Trade Agreement (FTA) to enter into force in 2018.
EVFTA is considered one of the most comprehensive and ambitious trade and investment agreements that the EU has ever concluded with a developing country. It is the second agreement in the Association of South East Nations (ASEAN) region after Singapore and it will intensify the bilateral relations between Vietnam and the EU. Vietnam will have access to a potential market of 500 million people and a total Gross Domestic Product (GDP) of USD 15 000 billion (accounting for 22% of global GDP). The other way around, exporters and investors from the EU now have further opportunities to access one of the fastest-growing countries of more than 90 million people in the region.
The real wages of skilled laborers may increase by up to 12% while real salary of common workers may rise by 13%. The macro economy will be stable and inflation rate controlled. Vietnam’s business activities will be booming in the next few years once the EVFTA officially comes into force and Government’s policies, as well as institutional reforms, start showing their positive effects.
Moreover, Vietnam’s GDP is expected to increase by 0.5% annually and increase in exports of 4-6% per year. If this trend continues until 2020, Vietnam’s exports to the EU will increase by USD 16 billion. Until 2025, the EVFTA is estimated to generate an additional 7-8% of GDP above the trend growth rate.
MARKET ACCESS FOR GOODS
Nearly all customs duties – over 99% of the tariff lines will be eliminated. The small remaining number is partially liberalised through duty-free quotas. As Vietnam is a developing country, it will liberalise 65% of the value of EU exports to Vietnam, representing around half of the tariff lines, at entry into force and the remaining duties will be eliminated over the next ten years. For some products, Vietnamese duties will be eliminated over a sevenyear period such as motorcycles with engines larger than 1500cc, car parts and about half of EU pharmaceutical exports. The market will be opened for most of EU food products, i.e. wine, spirits and frozen pork meat after seven years. For dairy products, after a maximum of five years. This is an unprecedented far-reaching tariff elimination for a country like Vietnam, proving its targets for deeper integration and trading relations with the EU.
From the EU’s side, the EU agreed to eliminate duties for 84% of the tariff lines for goods imported from Vietnam immediately at the entry into force of the FTA. Within 7 years from the effective date of the FTA, there will be more than 99% of the tariff lines being eliminated for Vietnam. The EU will eliminate duties for some sensitive products in the textile and footwear sector over a 5-7-year period, with a double transformation rule (instead of a strict yarn-forward rule as in the TPP) and will allow Vietnam to import fabrics from South Korea as an exception to the general rule. The EU also offers access to some Vietnamese sensitive agricultural products via duty-free quotas (rice, canned tuna, surimi, sweet corn, sugar products, etc.). Vietnamese exports of textile, clothing and footwear to the EU are expected to more than double by 2020 as a result of the EVFTA.
We note that, in the region, besides Vietnam, Singapore also concluded an FTA with the EU in 2014. However, this does not affect the competitiveness of Vietnam in trading with the EU. This is due to the fact that Vietnam mainly exports textiles, footwear, agricultural products, etc. while Singapore’s main exports are machines, chemical products and transport equipment. Moreover, while the EU is accelerating procedures to negotiate FTAs with different countries in the ASEAN region, Vietnam should take advantage of this golden time before FTAs with others in the region are concluded and to become a regional hub.
MARKET ACCESS FOR EU SERVICE PROVIDERS
Although Vietnam’s World Trade Organisation(WTO) commitments are used as a basis for thes ervices commitments, Vietnam has not only opened additional (sub)sectors for EU service providers but also commits deeper than 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 makes commitments are, for example: interdisciplinary research and development (R&D) services, nursing services, physiotherapists and para-medical personnel, packaging services, trade fairs and exhibitions services and building-cleaning services. Moreover, it is noteworthy that the EVFTA contains a MFN clause that allows one party to grant the other party the best treatment that the former is negotiating with other partners under another framework.
We set out below certain Vietnam’s commitments in key sectors with reference to its commitment to the WTO.
Distribution sector
The WTO requires an Economic Needs Test (ENT) for the establishment of outlets for retail services (beyond the first one). The EVFTA requires the same but adds cases for ENT exemption and timeline for ENT abolishment after five years.
Distribution of cigarettes and cigars, publications, precious metals and stones, pharmaceutical products and drugs, explosives, processed oil and crude oil by foreign investors are still prohibited.
| wtO | eVFtA |
|
The establishment of outlets for retail services (beyond the first one) shall be allowed on the basis of an Economic Needs Test (ENT) |
In case of establishing an outlet less than 500m2 within the area planned for trading activities and already completed construction of infrastructure, ENT is not required.
5 years from the date of entry into force of the Agreement, the requirement of the ENT will be abolished. |
Power/ energy
| wto | eVFtA |
|
N/A |
Commitments are made in 3 sub-sectors: (i) Production of electricity; transmission and distribution of electricity on own account; (ii) Manufacture of gas; distribution of gaseous fuels through mains on own account; and (iii) Production of steam and hot water; distribution of steam and hot water on own account. |
Maritime transport
| Sub-sectors | wto | eVFtA |
|
Maritime transport services |
Mode 3 Market Access (MA): joint venture with maximum 49% foreign ownership |
Mode 3 MA: joint venture with maximum 70% foreign ownership |
|
internal waterways transport Passenger transport Freight transport |
Mode 1: No commitment Mode 3: joint venture with maximum 49% foreign ownership |
Mode 1: No restriction Mode 3: joint venture with maximum 51% foreign ownership |
Securities services
| wto | eVFtA |
|
Commitments on 6 sub-sectors Mode 3: foreign securities service suppliers are permitted to establish representative offices and joint ventures with maximum foreign ownership of 49%. After 5 years from the date of accession, securities service suppliers with 100% foreign-invested capital shall be permitted. |
Same commitments in 6 sub-sectors
Commitments on 2 additional services: Provision and transfer of financial data processing; and credit reference and analysis. Mode 3: Same as the WTO |
Telecommunication Services
Non facilities-based services: WTO/ASEAN Framework Agreement on Services (AFAS): maximum 65% foreign ownership forever but in the EVFTA after 5 years, this could be 75%.
Other services – Virtual Private Network (VPN): maximum 70% foreign ownership forever but in the EVFTA after 5 years, this could be 75%.
CONCLUSION
Vietnam is a country of changes and currently offers increasing opportunities for foreign businesses. The underlying strength of the economy is reflected in, among others, controlled macroeconomic indicators, strong productivity gains and extensive integration into the regional and global economy. It is now time for foreign investors to start their business plans and grasp the upcoming clear opportunities.
Please do not hesitate to contact Oliver Massmann under omassmann@duanemorris.com if you have any questions or want to know more details on the above. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.
Thank you!