Tag Archives: free trade

Cometh the EU-Vietnam Free Trade Agreement

The Vietnam – EU Free Trade Agreement (EVFTA), a new-generation free trade agreement between Vietnam and the EU’s 28 member states, is a comprehensive and high-quality trade pact that is expected to bring a range of benefits to both Vietnam and the EU.

For many years the EU has been the second largest overseas market for Vietnamese products and Vietnam’s second most important two-way trading partner after China. On average, Vietnam’s exports of commodities to the EU account for around 19 percent of its exports to global markets. This figure has seen double-digit growth for the past decade, annualised at 13-15 percent, and even reaching 25 percent in certain years.

The EVFTA, which is expected to be signed this year, will have a wide-ranging impact on bilateral trade and investment thanks to tariff cuts and strong commitments from both sides. The deal has been heralded as the most ambitious of its kind between the bloc and a developing nation, and one which will put an end to 99 percent of customs duties on goods. Some predictions are that the agreement will boost the Vietnamese economy by up to 15 percent of GDP and exports to Europe by a third or more.

On top of providing more development opportunities for Vietnam’s industries it will also help to improve the country’s investment environment and raise the quality of its export products.

What can investors expect to change with the new deal?

The most prominent benefits to be expected are an increase in the trade of goods promoted by the reduction or elimination of tariffs and non-tariff barriers, whereby key economic sectors as textiles, footwear and the high-technology industries in Vietnam would benefit most.

One sector in particular hoping for a big boost is fisheries. Under the EVFTA, aquatic products, excluding canned tuna and fish balls, will enjoy a zero tax for a maximum of seven years. Similarly, in good news for shrimp processing firms, Vietnam will enjoy a reduction in import duties on raw shrimp and export duties on processed shrimp to the EU.

The reduction of tariff lines will help Vietnamese seafood exporters reduce prices significantly, improve competitiveness and export turnover. Vietnamese aquatic firms will also have space to improve technology and product quality, join regional supply chains and diversify supply sources.

Additionally, Vietnam’s commitments to ensure an open and transparent investment and business environment will help to boost high quality investment from the EU into Vietnam.

Sink or swim

However, Vietnamese companies should also be aware of the challenges brought about by free trade agreements, and especially the EVFTA. These are related to higher requirements from the EU market in terms of transparency and competition, both for private and state-owned enterprises (SOEs).

The FTA is not necessarily seeking complete privatisation, but rather the opening up of those economic sectors where SOEs are present. Vietnamese enterprises may expect to see an impact from this process, provided that the FTA promotes reforms in public procurement.

The tax cuts will put a greater burden of competitiveness on domestic producers in terms of prices, product quality and food hygiene and safety. Firms will face a choice – either adapt and move up the global supply chain, or stand by while imported goods flood the market.

The livestock industry is forecast to be at the biggest disadvantage as taxes on chicken and pork will be cleared under an 8 to 10-year roadmap, while import duties on beef, milk and dairy products will be eliminated over a shorter period of 3 years. Consequently, over the short and long term, the animal husbandry industry will be under fierce competition with products imported from the EU.

Additionally, many Vietnamese products have not yet met the necessary food hygiene and safety regulations or the technical standards of importers.

To benefit from the trade deal’s incentives will require exports to satisfy the EU rules of origin, which presents its own challenges for several Vietnamese sectors. For instance, the EU has set rather stringent rules of origin on the cashew nut sector that depends on 63 percent of imported materials. To satisfy all EU regulations, Vietnam is required to use local raw material supply.

The EVFTA also stipulates detailed regulations on procedures and legally binding conditions covering the time-limit and manner in which countries must obey certificates of origin procedures for each specific case. This is a big challenge for Vietnam as the origin traceability capacity to prove those origins remain inadequate and the necessary system for such diligence is yet to be seen.

Short term pain, long term gain?

As Vietnam’s economy grows and the country continues to integrate more deeply into the global marketplace, the kind of dilemmas thrown up by pacts like the EVFTA will become more commonplace. In the short term, domestic firms may feel the heat as increased competition takes its toll. However, greater export opportunities and requirements to reach higher standards will underpin future economic growth.

If predictions are correct and the EVFTA is signed within the next few months, Vietnam is destined to become the most promising business destination for European businesses in ASEAN.

For more information about investing in Vietnam, please contact Giles at GTCooper@duanemorris.com or any of the lawyers in our office listing. Giles is co-General Director of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office.

Outcomes of APEC – the TPP is dead, long live the CPTPP

As the dust settles and Vietnam returns to some semblance of normality following this year’s APEC summit, regional business leaders and investors are left to consider the consequences of the forum.

 

This year marks the second time that Vietnam has hosted the APEC summit, and the event was largely considered a success for the country. Vietnam was placed in a difficult position, between the competing interests of the United States and China, requiring a deftness in diplomacy.

 

Most media outlets were more concerned with President Trump and what would be his first appearance at a multilateral forum in the Asia-Pacific region. Widely-expected faux pas did not materialise, but neither did much news on the US’ position towards the region. Trump’s keynote speech was short on surprises, following familiar themes of protectionism, isolationism and criticism of predatory economic policies. Essentially, the speech underlined what we already know – that under the Trump administration the US would be taking a step back from the Asia-Pacific region and trade will need to be conducted on a bilateral basis.

 

In a marked contrast to the American tirade, China’s President Xi Jinping presented himself as a champion of economic openness and globalisation. Xi espoused a vision in support of a multilateral trade regime, and received hearty applause in return from the amassed delegates.

 

Putting his words into practice, Trump’s subsequent stop in Hanoi saw the signing of US$12 billion in commercial deals, including in the natural gas, transport and aviation sectors. In particular, national carrier Vietnam Airlines signed a deal worth US$1.5 billion for engines and support services from US firm Pratt & Whitney.

 

Despite the very different stalls set up by the attendant superpowers, Vietnam managed to balance itself somewhere in between. In a joint statement, Vietnamese President Tran Dai Quang and Trump reaffirmed the importance of the countries’ Comprehensive Partnership, and agreed to promote bilateral trade and investment.

 

Vietnam also stood in support of Xi’s signature policy, the Belt and Road Initiative. Specifically, both sides agreed to enhance economic and trade cooperation, with a particular focus on infrastructure.

 

Regional and international media praised Vietnam’s hosting of the summit and the final Economic Leaders’ Week, highlighting the country’s commitment to economic integration, sustainable growth and support for micro, small and medium enterprises (MSMEs). In the eyes of many, Vietnam has cemented its position at the centre of APEC’s economic structure. The country took advantage of the opportunity to enhance its prestige in the international arena and show others the strides it has made in development since it last hosted APEC.

 

Resurrecting the TPP

 

Trump’s election last year seemed to herald the demise of the Trans-Pacific Partnership (TPP), at least in its current form. Without US support, the trade agreement was surely destined to be forgotten or watered down to the point where it becomes worthless.

 

The US withdrawal failed to dampen enthusiasm for the trade pact, however, with Japan and Australia strongly advocating the continuation of talks, and protecting the gains made in the original TPP negotiations.

 

Following discussions in Danang, the 11 countries still backing the TPP agreed to its resurrection, and renaming, as the Comprehensive Progressive Agreement for the TPP (CPTPP). The move represents a clear rebuke to Trump’s ‘America First’ focus on bilateral deal-making. Despite a last-minute wobble from Canadian Prime Minister Justin Trudeau, the members agreed on keeping core elements of the original deal that would advance open markets, combat protectionism, and strengthen regional economic integration.

 

Vietnamese leaders were certainly sorry to see the US turn its back on the TPP; knowing that access to American markets would have brought significant economic benefits. Although a deal is better than no deal, the CPTPP is expected to have a more modest impact on the nation’s economic future.

 

The National Center for Information and Forecasting predicts that under the CPTPP, Vietnam’s GDP could increase by 1.32 percent, compared to a potential 6.7 percent with the TPP. Similarly, the export growth rate is estimated at 4 percent, instead of the 15 percent previously. If the CPTPP is ratified, Vietnam would also be able to expand its export markets, with opportunities to reach Canada, Mexico and Peru.

 

Nevertheless, there is still room for the CPTPP to be derailed – the pact requires domestic ratification by each member economy. While Japan has already done so, other members, particularly Canada, could require longer to officially validate the pact.

 

There are, however, reasons to be optimistic. Many were certain the US withdrawal would be the death knell for trade pacts like the TPP, only to see America’s Asia-Pacific allies regroup and move forward on their own. There is clear commitment to regional economic integration, with or without America’s blessing.

 

A multilateral trade deal would provide much-needed clarity for businesses, especially smaller ones, in entering new markets. Universal standards would make life a lot easier for the region’s many MSMEs looking to expand their operations across borders. Those working in the digital sector would benefit from a framework on data security, privacy, intellectual property and e-commerce.

 

Even after Trump withdrew the US from the TPP, the original template survived almost wholly intact. The bar remains high, and the remaining members now have the opportunity to hash out a progressive framework for continued economic growth.

 

Although Donald Trump received the most attention in Danang, the main achievement of APEC may be the reanimation of a deal he sought to kill. This time the harsh rhetoric may have had an unintended consequence – pushing the region even further towards economic integration and free trade.

 

For more information about doing business in Vietnam, please contact Giles at GTCooper@duanemorris.com or any of the lawyers in our office listing. Giles is co-General Director of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office.

Spotlight on APEC and Vietnam

While Vietnam’s central city of Danang is abuzz with preparations for the upcoming APEC Economic Leaders’ Week, and the much-anticipated visit by US President Donald Trump, businesses and investors are waiting for clearer signals on the US approach to the country and the region.

 

Unlike the visit of former president Barack Obama in 2016 and his administration’s ‘Pivot to Asia’ policy, Donald Trump has been less forthcoming about his stance on Southeast Asia. The moves that have been made – scrapping the Trans-Pacific Partnership (TPP) for example, heavily suggest the US is pivoting away again, and have seriously dented Vietnam’s free trade aspirations.

 

Some remain upbeat, saying that President Trump’s attendance at the APEC Economic Leaders’ Meeting in Danang this November is a positive sign, underscoring the US’s commitment to the partnership between the two nations and the region as a whole.

 

Trump’s speech at the summit will likely be the first articulation of his administration’s strategy towards the Asia-Pacific region. The White House has indicated a United States’ “vision for a free and open Indo-Pacific region.” The details of this vision will no doubt have a big impact on the way international businesses view the region in the years to come.

 

Planned meetings between Trump and Vietnamese leaders in Hanoi are hoped to continue the thawing of relations that was accelerated under the Obama administration. During Obama’s visit in 2016, the arms sanctions that had been in place for over five decades were lifted, effectively transforming Vietnam into one of the United States’ leading comprehensive strategic partners in the region. Companies from the two countries inked new commercial deals involving planes, engines and wind energy, worth more than US$16 billion. Now, Vietnam is a major trading partner and free-trade advocate.

 

Politically, it is hoped that some more flesh will be put on the bones of the US foreign policy towards Southeast Asia, particularly on subjects like the South China Sea.

 

Focus on free trade

 

Setting aside predictions on US behaviour, the summit in Danang will gather economic leaders of 21 APEC members to discuss issues of shared concern, including the future of trade in the region – an issue of heightened importance considering the demise of the TPP. APEC is a key trading bloc, comprising 39% of the world’s population, 59% of its GDP and 48% of its trade. It is also a proponent of free trade, and since its inception in 1989 average tariff rates among members have fallen by nearly two-thirds – from 13.3 per cent in 1989 to 5.1 per cent in 2015, while intra-regional trade has risen more than seven-fold. Vietnam’s average most-favoured-nations (MFN) tariffs declined from 18.5 per cent in 2007 to 9.5 per cent in 2015.

 

All APEC member economies have set trade and investment liberalisation as a priority, through reduced trade barriers and the promotion of the free flow of goods, services and capital among APEC economies.

 

The region as a whole has enjoyed strong economic growth, and Vietnam is considered an attractive investment location, with opportunities bolstered by an emerging middle class, a young population, a skilled labour force, competitive labour costs, strong GDP growth and a stable political climate.

 

Indeed, the trade liberalisation process encouraged by APEC is having a positive effect on FDI inflows into Vietnam. Japan in particular is showing a healthy interest, currently positioned as Vietnam’s second-biggest foreign investor, with 3,523 valid investment projects, registered at US$46.15 billion. Even without the TPP, Vietnam’s involvement in a number of other free trade agreements helps improve the country’s attractiveness to foreign investment.

 

If Vietnam continues adopting APEC-promoted institutional reforms, and thus reduces the fees and risks associated with doing business in the country, this attractiveness can only improve. Currently, more needs to be done to create a business-friendly investment environment and reassure businesses that trade and investment disputes can be resolved with little fuss. Reassuring investors is a key priority for Vietnam to maintain its growth trajectory. The successful involvement of the country in forums like APEC helps to present an image of economic stability and strong leadership underscores its commitment to issues raised at the summit.

 

All eyes on Danang

 

Through hosting the 2017 summit, Vietnam has the opportunity to showcase itself as a business tourism and conference destination. Discussions in Danang will seek to establish new drivers for economic growth and cement the role of APEC in tackling common challenges in the region. Vietnam’s position of leadership will enhance its stature on the world stage and initiatives raised could attract global interest.

 

Large-scale FDI projects from APEC members have already made significant contributions to Vietnam’s socio-economic development. Giants like Samsung, Intel and Honda have established a presence in the country and could consider increasing their investments. Smaller players may also see similar potential.

 

For local businesses, the APEC meeting presents a golden opportunity to promote trade and investment with foreign partners. Representatives from thousands of international enterprises are expected to descend on the beachside resort, allowing for prime networking and the establishment of partnerships. Vietnam’s investment climate has improved markedly since it last hosted the summit in 2006, so observers can expect even more deals to come out of Danang.

 

For more information about Vietnam and APEC, please contact Giles at GTCooper@duanemorris.com or any of the lawyers in our office listing. Giles is co-General Director of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office.