The European Union (EU) and Vietnam have reached an agreement in principle for a free trade deal that will remove the majority of tariffs on goods traded between the two economies, and liberalize investment and services in Vietnam.

 

After two and a half years of discussions, the free trade agreement (FTA)  will eliminate more than 99% of tariffs, creating a benchmark for new agreements between EU and fast-growing Asian economies.

 

With the deal, Vietnam will liberalize 65% of import duties on EU exports. EU duties will be removed over a seven-year period.

 

The European Commission said after a phone call with the EU trade commissioner Cecilia Malmström and the Vietnamese minister of industry and trade, Vu Huy Hoang, on August 4, all issues of substance have been agreed.

 

Malmström says: "We have a deal. This finely balanced agreement will boost trade with one of Asia's most dynamic economies. It sets a new, better, and modern model for Free Trade Agreements between the EU and developing countries, and establishes a good standard for the trade relationship between the EU and South East Asia as a whole."

 

Regarding the investment sector, the FTA will be able to ensure an open and conducive business and investment environment, particularly it will help to promote the capital flow from the EU and gives Vietnam the opportunity to become a hub while connecting the EU’s trade and investments with the region. Both sides have achieved a lot, but the provisions concerning the investment protection and dispute settlements are still being negotiated.

 

"Vietnam is a growing economy and once this agreement is up and running, it will provide significant new opportunities for companies on both sides, by increasing market access for goods and services. Over 31 million jobs in Europe depend on exports, so having easier access to a growing and fast developing market like Vietnam, with its 90 million consumers, is great news. And Vietnam's exporters will now get much easier access to the EU for their products, giving an important boost to the Vietnamese economy. Both sides have worked extremely hard in the past few months to achieve this breakthrough,” says Malmstrom.

 

 

Pham Hong Hai, CEO of HSBC in Vietnam, says the deal will advance trade relations between one of the world’s biggest economic blocs, and one of Asia’s most dynamic economies.

 

“With trade between the EU and Vietnam has been increasing three-fold in the past decade to 28 billion per year, the FTA is expected to raise this number to significantly higher levels. And with the removal of nearly all tariffs on goods traded between the two regions, Vietnam stands to benefit from even more freer exports to one of its already biggest export markets,” he adds.

 

The deal was a first such agreement that EU signed with a developing economy. HSBC says Vietnam and the Asean region as whole is a priority region for the bank for future investments.

 

In a research note, Trinh Nguyen, an economist for HSBC, says the EU Vietnam Free Trade Agreement is a game-changer.

 

“Going beyond many other free trade agreements between advanced and developing economies, the EU Vietnam FTA is ambitious and relatively comprehensive,” writes Nguyen.

 

“It will address non-tariff barriers to trade in relation to standards and regulation, provide for protection of intellectual property including geographical indications, liberalize government procurement, impose disciplines on support for state owned enterprises (SOEs), liberalize services and investment (though provisions for investor-state dispute settlement remain under negotiation), and promote social and environmental protection as well as human rights,” she adds.

 

“We believe this will bring upon major changes to not just to Vietnam’s trade performance but also to its investment and service landscape,” Nguyen says.

 

The agreement in principle must now be fleshed out in detail by the negotiating teams, who will "settle some remaining technical issues and finalise the legal text."

 

The European Commission expects this process to be completed by the end of 2015. Once the final text is agreed, the parties will then proceed to ratify the agreement and only then can the agreement enter into force.

 

In the case of the EU, the ratification process may take a year or more depending on the speed of review by both the Council and European Parliament and the nature of the required consultation with EU member states, according to Nguyen.

 

 

 

·         In 2014, the EU was the second trading partner for Vietnam after China (not including trade within ASEAN), representing 10% of total Vietnamese trade.

 

·         The EU was Vietnam’s second export destination (after the US), with the EU purchasing as much as 18% of Vietnam's global exports.

 

·         In 2014, EU-Vietnam trade in goods was worth over €28.2 billion, with €22.1 billion of imports from Vietnam into the EU and €6.2 billion of exports from the EU to Vietnam.

 

·         Vietnam's key export items to the EU include telephone sets, electronic products, footwear, textiles and clothing, coffee, rice, seafood, and furniture. EU exports to Vietnam, meanwhile, are dominated by high-tech products including electrical machinery and equipment, aircraft, vehicles, and pharmaceutical products.

 

·         Total bilateral trade in services amounted in 2013 to €2.9 billion, with a slight surplus for the EU.

 

·         The EU is one of the largest foreign investors in Vietnam. In 2013, EU investors committed a total of more than €500 million in Foreign Direct Investment and thus remain Vietnam's sixth largest foreign investor partner.

 

·         Since 2013, Vietnam has been the EU's fourth most important trading partner among the ten ASEAN Member States, surpassing the EU’s bilateral trade with Indonesia.