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The European Union-Vietnam Free Trade Agreement (EVFTA) was signed in the spirit of comprehensive cooperation and balanced interests of Vietnam and the European Union (EU). It is a new-generation FTA expected to bring strategic benefits for Vietnam through the potential development of trade and investment with one of its largest and most important partners.
- EVFTA facilitates export diversification in the center of Europe
As soon as EVFTA took effect on August 1, 2020, the Vietnamese Government, together with relevant ministries and sectors, issued a series of guiding documents and plans to implement EVFTA. One year after the Agreement entered into force, 19 ministries, sectors and 57 cities and provinces nationwide issued EVFTA implementation plans. Although the Vietnamese legal system has undergone important changes before the Agreement was signed to be compatible with the requirements of EVFTA, by now, there are still some shortcomings related to specialized laws and law enforcement issues. Of which, the most notable are issues related to intellectual property (IP) and environmental standards because there remain many differences in the interpretations of reg-ulations by each party. In addition, regarding labor rights, the EU insists that Vietnam will be in violation if it does not meet provisions guaranteeing workers the right to freedom of association (under Convention No. 87) and substantive recognition of the right to collective bargaining (under Convention No. 98). Looking at what Vietnam has done before and one year after the EVFTA took effect, Vietnam appears to be pursuing the strategy, “easy wins first, difficult tasks later”. Therefore, it is foreseeable that the speed of legislative changes (reform) will slow down in spite of the EVFTA requirements.
- The shift of the import market
It is phenomenal that one year after the EVFTA was signed, Vietnam’s total imports from the EU reached 16.51 billion USD, up more than 24% compared to a year before EVFTA took effect. The breakthrough growth was seen in the imports of computers, electronic products and components. Other products experienced no sudden changes, except for the increase in pharmaceuticals and decrease in machinery and equipment imports (in line with the pandemic context).
In general, imports growing faster than exports signals the shift in trade patterns between Vietnam and the EU towards reducing trade surplus. Decreasing trade surpluses does not mean Vietnam is facing disadvantages in its trade relations with the EU. With an increase of imports from the EU, assuming that domestic demand does not change too much in a short time, it is an evidence showing imports shifting away from other markets. This implies that in the past, businesses and consumers who had to import from the markets with cheaper prices (and therefore lower quality) have switched to importing goods from the EU with higher quality at competitive prices thanks to tariff reduction. As such, domestic consumers could benefit from this. The EU is overwhelmingly strong producer of pharmaceuticals, machinery, equipment and particularly technology, which are essential for Vietnam’s development.
- COVID-19 entails huge negative impacts, but that does not obscure the internal problems of the economy
During the first year implementing EVFTA, Vietnam, EU and the rest of world suffered greatly from COVID-19 pandemic. Therefore, overall trade outcomes brought about by the Agree-ment may be obscured by trade consequences of the pandemic. To separate these two effects, the research team developed a simulation model to estimate the impacts of EVFTA alone in the first year of implementation. Modelling results showed that under the assumption that the COVID-19 epidemic does not exist, and other conditions remain unchanged, including the absence of the EVFTA, Vietnam’s export value last year could have reached 45.46 billion USD (compared to the actual figure of 39.7 billion USD). When applying tariff exemption and reduction policies under EVFTA, the export value of goods could reach 51.04 billion USD, an increase of 12.27% com-pared to the case where the EVFTA has not been signed and there is no COVID-19. Meanwhile, the actual figure after the first year of EVFTA implementation, export turnover was only 39.7 billion USD, showing severe consequences of the COVID-19 pandemic. In other words, without COVID-19, we would have witnessed an explosion of Vietnam's exports to the EU in the first year of implementing EVFTA. Hopefully, this great potential will be fully tapped after COVID-19 pandemic is eliminated.
- Along with the changing international and regional context, Vietnam must continue its reform process to take advantages.
Vietnam is leading in two-way trade with the EU and can be considered as a gateway for the EU to access Southeast Asia and possibly China. However, this advantage is not infinite. The EU is currently negotiating FTAs with other regional countries, namely Thailand, Malaysia, the Philippines and Indonesia (after the deadlock in negotiations for a comprehensive EU-ASEAN). All are competing directly with Vietnam over merchandise exports to the EU. Therefore, Vietnam must optimize the first-mover advantage and opportunity to maintain and promote its existing advantages in trade relation with the EU. In order to achieve long-term and sustainable benefits from EVFTA, instead of focusing on immediate benefits from export, import or service growth, Vietnam must understand the downsize of the “low hanging fruit” strategy, as analyzed above. In other words, if Vietnam stops at fundamental reforms and avoid or delay more extreme - and more sophisticated - reforms, its current advantages as one of the first ASEAN members (only after Singapore) to have signed an FTA with the EU, will fade quickly. This is something that the leg-islative apparatus and policy makers must take into account in order to build on the achievements recorded under EVFTA.
