Impact of the EU-Vietnam FTA on businesses

The Project at A Glance

Negotiations between the European Union (EU) and the Association of Southeast Asian Nations (ASEAN) started in 2007. However, after reaching an impasse, both Parties agreed on a pause. The EU thus began negotiating with individual ASEAN Member States from 2009 onwards. In this context, the EU launched formal negotiations for a comprehensive trade agreement with Vietnam in June 2012. The parties undertook their eighth round of negotiations in June 2014. This study was conducted in order to assist in the development of Vietnam’s negotiating strategy and consult with the business community and concerned stakeholders with regard to Vietnam’s offensive and defensive interests.
International Economics Consulting Ltd. coordinated a team of 16 persons to prepare a qualitative and quantitative impact assessment study of the FTA in order to support the business communities in preparing their positions in the trade negotiations.

What We Found

Vietnam and the EU are complementary trade partners, with Vietnamese exports to the EU reaching €21.3 billion in 2013. This represents about a quarter of Vietnam’s exports. On the other hand, approximately 13 per cent of Vietnam’s imports originate from the EU. Since 2009, exports to the EU have grown at a significantly rapid pace of 28 per cent annually. With the coming into effect of a potential trade agreement between the EU and Vietnam, these are some of the expected results:

Macroeconomic Impacts: Vietnam could stand to record significant gains in national income. The FTA could increase overall growth in the country by around 7-8 % over and above the growth that would occur in the absence of any FTA. Under the “modest” scenario the gains could amount to approximately US$2.2 billion in 2020 and US$3.9 billion in 2025.
Trade Impacts: Vietnam’s exports to the EU are estimated to increase by around 50% by 2020. However, there is a substantial amount of trade, which could be potentially deflected from other countries. With regard to imports, Vietnam is also expected to witness a rise in imports as a result of the FTA. Imports from the EU may increase by up to 43% by 2020.
Tariff Revenue: As a result of the phasing out of tariffs, there is a likelihood that the FTA leads to a loss in tariff revenue. Based on the modest scenario, it is estimated that by 2020 Vietnam’s tariff revenue on imports from the EU are reduced from US $355 million to US $187 million.
Environmental Impact: There are some concerns that the FTA would have negative impacts on the environment and sustainability. However, it appears that the FTA would have no additional impact on forestry output or paper products. There is also no indication that the FTA would increase palm oil production in the country, thereby leading to no issues with deforestation.

Our Strategy and Impact

In order to reap the most benefits from the FTA, Vietnam should aim to tackle the border measures that hinder bilateral trade flows. At the sectoral level, there are numerous constraints that may impede the benefits of the Agreement. It will be important to tackle these issues. The two parties should also aim to cooperate and improve transparency and predictability in their policies and establish an effective dispute resolution framework.
Vietnam should also consider the implementation of safeguard measures, aligned with the WTO Agreement on Safeguards and Agreement on Special safeguards in Agriculture in order to protect its industries whenever they experience unforeseen import surges.
Moreover, it is important to take into consideration that the Agreement is likely to be viewed as a model for agreements with other ASEAN FTAs. The other Parties will also demand similar access. This may lead to trade diversion as Vietnam’s preferential access will be eroded once the other ASEAN countries also sign FTAs with the EU. Moreover, with the potential coming into effect of the TPP, Vietnamese trade may also be significantly diverted away from the EU towards the US, Japan, Australia and other TPP markets.

Our Core Solutions

With the rapid proliferation of trade agreements worldwide, there are new market and investment opportunities for countries to explore. At International Economics Consulting, based on our extensive experience in international trade, we assist our clients by providing a detailed analysis of the key impacts of new trade agreements on their operations and competitiveness through an assessment of tariff, and non-tariff barriers, provisions on rules of origin, customs efficiency, the effectiveness of transport networks, and sustainability provisions, among others.
We can help assess the opportunities in different markets, determine the feasibility and viability of projects, and benchmark the wider ecosystem to support business growth. We also support clients in navigating the policy landscape regarding international trade by establishing robust monitoring and evaluation framework through sophisticated real-time dashboards and reporting systems to ensure the best outcomes.