The EU is Vietnam’s third-largest goods export market, with trade exceeding USD35 billion. But sales to Vietnam of just USD12 billion make it only the EU’s 31st biggest export destination. However, from August 2020, trade in both directions will benefit from an agreement that gradually eliminates 99 per cent of tariffs.
EVFTA, the EU-Vietnam free-trade agreement, will also streamline customs procedures, facilitate investment, and covers labour rights and climate change.
Vietnam exports mainly labour-intensive goods while the EU sells capital-intensive and high-tech products. The agreement immediately eliminates Vietnamese tariffs on 65 per cent of imports from the EU while the EU removes tariffs on 71 per cent of imports from Vietnam.
EU exporters of machinery, medical equipment, chemicals, plus iron and steel, will immediately have duty-free access into Vietnam. Meanwhile, Vietnam’s tariffs on vehicles, petroleum oils and poultry from the EU will be phased out over 10 to 15 years.
The biggest gains will be for Vietnamese exporters of clothing and footwear, coffee, furniture, fruit and nuts, fish, leather, plastics and electronics. These are the country’s top exports to the EU and tariffs will be liberalised relatively quickly.
Tariffs of up to 78 per cent currently applied to European car imports will be eliminated after 10 years. Vietnam will also align with international motor vehicle standards and recognise EU conformity certificates for cars and parts, reducing the need for additional testing and certification after three to five years.
And while it will be seven years before most EU pharmaceuticals sales to Vietnam are duty-free, exporters can participate in Vietnamese public procurement contracts after two years of the deal taking effect, and bid for up to 50 per cent of contracts after 15 years.
Ratification of EVFTA came as global trade plunged because of the coronavirus outbreak. Vietnam’s exports shrank nearly 10 per cent in the April-June quarter compared with a year earlier amid declining demand from the West.
As many economies look to reduce trade exposure to China following the pandemic, EVFTA provides a means for EU and Vietnamese businesses to diversify trading partners.
But it may hurt businesses in markets without a trade deal with Vietnam or the EU. Exports of Indian or Cambodian clothing to the EU could become less competitive as tariffs on Vietnamese products are liberalised, for example.
However, Vietnamese garments will be eligible for preferential access to the EU only if they are manufactured using textiles sourced locally or from the EU (or from South Korea, which also has an EU trade deal). Cutting and sewing must also take place in Vietnam or the EU.
And as almost 60 per cent of Vietnam’s fabric imports come from China, to benefit fully from EVFTA, Vietnam needs to develop its domestic textiles industry or rejig supply chains – and that could take years.
The trade agreement presents opportunities for Vietnam and the EU. But although both parties have made some commitments on digital trade – prohibiting customs duties on electronic transmissions and co-operating on issues such as electronic signatures – Vietnam does not yet meet EU requirements for data protection. That prevents data from flowing freely between both economies.
First published 2 July 2020.Would you like to find out more? Click here to read the full report (you must be a subscriber to HSBC Global Research).
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