Getting legal framework up to speed with EVFTA

Vietnam Investment Review

The EVFTA is forecast to boost Vietnam’s GDP by up to 15 per cent Photo: Le Toan

With the EU-Vietnam Free Trade Agreement coming into force, Vietnam’s investment and trade ties with the European Union are expected to receive a new boost. However, materialising these expectations depends largely on the success of the country’s efforts to accelerate regulatory reforms.

The International Monetary Fund has announced its latest forecasts on the global economic outlook, stating that the heavy aftermath caused by COVID-19 is expected to drive many major economies to below-zero growth in 2020, including in the eurozone at -10.2 per cent.

More than a week ago, EU leaders agreed on an unprecedented coronavirus stimulus package worth €750 billion ($877.84 billion) to pull their economies out of the worst economic recession.

The European Commission, the executive arm of the EU, is tasked with tapping financial markets to raise the package, which includes €390 billion ($456.57 billion) to be allotted as grants, and €360 billion ($421.45 billion) in loans.

The funds will be distributed among the countries and sectors most impacted by COVID-19. It will support EU economies to stimulate consumption and beef up production, as well as export and import of goods and services.

“The EU is now one of Vietnam’s largest export and import markets,” said an expert from the European Union Delegation to Vietnam. “Thus, the newly-adopted package is expected to help drive the EU’s investment and trade relationship forward.”

Last year, the EU was Vietnam’s second-largest export market, which spent $41.7 billion, down 0.7 per cent on-year, importing Vietnam’s goods. In the first seven months of 2020, the EU was Vietnam’s third-largest export market, which earmarked $19.5 billion, down 5.9 per cent on-year.

Figures from the Ministry of Planning and Investment showed that as of July 20, Vietnam attracted more than $24 billion from the EU member states. The EU is one of the most important sources of foreign investment for Vietnam.

Vo Van Long, representative of the Association of Vietnamese Businesses in Germany, which embodies more than 1,000 Vietnamese businesses, said that Vietnam will benefit from the EU’s fiscal package though available calculations on the positive impacts are yet to be made. “Each nation will have their own calculations on the impacts of the package on their economies. The impacts on trade and investment with Vietnam will depend on the scale of cooperation between each nation with Vietnam. However, generally the impacts are positive,” he said.

“In Germany, each business can seek a prioritised loan worth €19,000 ($22,300) from the government to develop itself, and expand imports and exports,” Long said. “However, the biggest positive impacts will firstly come from the EU-Vietnam Free Trade Agreement (EVFTA). Vietnamese enterprises in Germany are waiting for the entry into force in order to boost exports to Vietnam thanks to slashed tariffs.”

New driver

According to the European Commission’s figures, the EVFTA could boost Vietnam’s booming economy by 15 per cent of GDP, with Vietnamese exports to Europe growing by over one-third. For the EU, the agreement is an important stepping stone to a wider EU-Southeast Asia trade deal.

Right after the agreement’s entry into force, regarding EU exports to Vietnam, 65 per cent of duties will disappear, and the remainder will be phased out gradually over a period of up to 10 years. For example, to protect the Vietnamese motor sector from European competition, duties on cars will remain for the full 10 years.

As for Vietnamese exports to the EU, 71 per cent of duties will be removed after the deal takes effect, and the remainder will be removed over a period of seven years.

Such boons will also likely help Vietnam woo more EU investment into Vietnam. The European Parliament stated that the EVFTA will make it easier for EU companies to provide services in Vietnam, for example in the postal, banking, insurance, maritime transport, and environmental sectors.

The EVFTA will also open up various Vietnamese manufacturing sectors to EU investment, for example food and beverages, tyres, ceramics, and construction materials.

In a specific case, Denmark’s SiccaDania is seeking to take root in Vietnam where it sees great potential in coffee planting, processing, and exports. In Vietnam, SiccaDania has co-operated with DEVEX, a German company, to provide process equipment that turns extracts from local coffee beans into instant coffee powder.

“Vietnam is a strong, growing economy in Southeast Asia, with more than 96 million consumers. For SiccaDania, this represents an important market to cement the company’s presence in the region, following the establishment of its Singapore office,” said Christine Holt, director of Global Sales & Marketing at SiccaDania. “Simplifying export procedures, the EVFTA will cut red tape and make it easier to export to Vietnam, for example by making customs requirements more transparent.”

She added that the agreement also includes a chapter on trade in services. “This will make it easier for SiccaDania to provide after sales service to its customers in Vietnam. Our technology is giving a boost to Vietnam’s coffee industry. The EVFTA will enable us to further develop our strong and competitive position in our sector in Vietnam.”

In another case, Bulgarian wine producer Burgozone Ltd. is looking to take advantage of the EVFTA. Vietnamese tariffs and customs duties on European wines are currently 50 per cent. The new agreement will gradually remove these tariffs over a seven-year period.

With the EVFTA, Vietnamese authorities will have to ensure that distribution licences given to European producers in Vietnam are not discriminatory in any way. This will benefit companies such as Burgozone that hope to expand in the future.

“Our company supports the agreement because this will help our company in its expansionary strategy and support our efforts in entering this growing wine market. By cutting export costs, our high quality wines will be competitive on the local market and we will be able to offer to the Vietnamese consumer a premium Bulgarian wine,” said Biliana Marinova, managing director of Burgozone.

The EVFTA is also expected to give a helping hand to Swedish glove-maker Hestra, as its new rules of origin will make it easier to trade products tariff-free when they include inputs from other countries the EU has trade agreements with.

Hestra exports textiles and wool from the EU to its factory in Vietnam, where it makes its gloves. With the agreement, these gloves can then be shipped to the EU tariff free.

“With the free trade agreement in place, we would look to invest in a new factory in Vietnam with 200-400 employees, alongside our current factory. This would not only be a good opportunity for our company, but also create more job opportunities for the local community,” said Svante Magnusson, owner of Hestra.

To-do list

According to the European Union Delegation to Vietnam, European investors and businesses are interested in three key factors in Vietnam – infrastructure, human resources, and the investment and business climate, which would need remarkable improvement now.

Until now, Vietnam’s foreign investment attraction policy relied heavily on tax breaks, concessional rates, and import duty exemptions, while many investors have come to Vietnam because of the investment incentives and low labour costs. Experts said attracting innovative, technologically-advanced investment requires a more sophisticated investment policy and the correct tools.

Therefore, Vietnam should continue working towards removing existing trade and investment barriers and improving business climate, according to one expert from the delegation. In this context, transparency is key for investors to know the regulations and procedures to follow – and a fair, transparent, stable, and predictable business climate tops EU businessmen’s priorities when they mull on their investment plans.

“It’s also vital that Vietnam guarantees a stable legal framework for investors to operate and a functioning enforcement system. We urge Vietnam to improve the recognition and enforcement of foreign arbitral awards and to set up a grievance system for investors to avoid disputes,” said the expert from the delegation. “Vietnam is also strongly encouraged to accede to the International Centre for Settlement of Investment Disputes.”

Importantly, EU investment also requires highly-skilled workers. This offers Vietnam an excellent chance of job creation with secure income, international-standard working environment, acquiring management skills and technical knowledge, and transfer of technologies. Nevertheless, accompanying this opportunity is a challenge that the educational system of Vietnam must cope with to satisfy the needs.

Vietnam can be proud of its hardworking labour force and high literacy rate. However, working with European companies requires better preparation, and more practical and technical knowledge and experience.

The delegation believed that the EVFTA will address some of these issues. It will strengthen transparency about regulations in Vietnam, and will also increase intellectual property rights protection beyond the standards of the World Trade Organization: EU innovations, artworks, and brands will be better protected against being unlawfully copied, including through stronger enforcement provisions.

But most importantly, the EVFTA will create a stable legal framework for trade and investment relations between the EU and Vietnam that will enable both sides to cooperate and achieve a win-win solution.

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