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Leveraging the EU-Vietnam Free Trade Agreement for development

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European Union and Vietnamese flags are seen at the signing ceremony of EU-Vietnam Free Trade Agreement at the government office in Hanoi, Vietnam, 30 June 2019 (Reuters/Kham).

In Brief

The EU-Vietnam Free Trade Agreement (EVFTA) was approved by the European Parliament in February 2020 and is expected to be approved by the National Assembly of Vietnam at its meeting in mid-2020. Although the COVID-19 outbreak may delay the meeting, the approval of the Agreement is a top priority.

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The Agreement marks an important step forward for Vietnam, providing the impetus for domestic firms to develop their export capabilities and for Vietnam’s government to continue institutional reform. EVFTA also reflects a deeper institutionalisation of export opportunities during a time when global trade is constrained by the COVID-19 crisis.

EVFTA provides a platform for Vietnam to continue helping domestic firms penetrate the EU market. The Agreement aligns Vietnamese firms with European standards on sourcing and production, potentially lifting product quality and reliability as Vietnam seeks to strengthen its global brand image. Meeting standards will help Vietnam’s products compete on more equal footing in EU markets.

Based on calculations using data from the World Trade Organization, Vietnam’s yearly exports to the EU increased tenfold over the past decade — from approximately US$4 billion in 2005 to over US$41 billion in 2018. Vietnam’s share of yearly ASEAN exports to the EU increased from 5 per cent in 2005 to 26 per cent in 2018. In 2018, Vietnam became ASEAN’s top exporter to the EU. This meant rapid growth in Vietnam’s EU trade surplus (from US$1.87 billion in 2005 to over US$28 billion in 2018).

The volume of Vietnam’s EU exports and trade surpluses underscore EVFTA’s strategic role in expanding Vietnam’s export markets and facilitating industrial restructuring by compelling firms to diversify product portfolios and move up the value chain.

The current moment requires Vietnam to embrace two key priorities: deepening integration with the EU market and turning EVTFA into a driving force for domestic reform.

To realise the full potential of EVFTA Vietnam must help domestic businesses strengthen their EU market share by gaining insights into EU markets and business standards, improving product quality and reliability and adopting a culture of innovation.

These efforts should be tailored to product groups that advance the national development agenda. Priority product groups should be determined according to the proportion of total domestic exports of the product group to the EU, the growth rate in exports of the product group to the EU over the preceding three years, the proportion of total ASEAN exports of the product group to the EU, the potential of the product group to raise value-add and increase labour productivity and the role the product group may play in the longer-term development of EU–Vietnam trade relations.

These guidelines point to several strategic product groups that Vietnam should target in efforts to deepen trade with the EU. These include electrical machinery and electronics products, toys and sports goods, unprocessed fish and seafood, footwear, aviation equipment and optical and medical equipment.

Electrical machinery and electronics products stand apart, with robust performance on all criteria: US$17.8 billion in export value to the EU, a 42.5 per cent share of Vietnam’s total EU exports, 15.2 per cent growth from 2015 to 2018 and a 38.2 per cent share of ASEAN’s EU exports.

But other product groups are strong only on some criteria. For example, footwear is the second largest product group in EU export value (US$4.86 billion) and holds a dominant share in ASEAN’s EU exports (64.5 per cent) but its growth over the last three years was below 5 per cent.

These characteristics are shared by raw agricultural produce and most labour-intensive product groups. Examples include un-knitted garments, coffee, tea, spices and unprocessed fish and seafood. Policies should aim to help firms in such product groups invest in technology to increase value-add, reform business growth models and enhance distribution channels. Export volume expansion should not be a primary goal.

Other product groups experience modest exports but enjoy rapid growth and should play an increasingly important role in integrating Vietnam into the global supply chain of high value-added products. Examples are optical and medical equipment and aviation equipment. These product groups should be the target of policy support for investment and the adoption of international standards and practices.

The EVFTA provides policy transfer and learning opportunities that can drive domestic reform. The EU as both an institution and governance structure has provided pathways for lesser-developed members to upgrade development platforms and meet the rigorous standards of membership. Ireland, Estonia and Poland have used the imperatives of membership to accelerate governance and economic reforms.

Vietnam should view EVFTA as a mandate to improve conditions for development. The first step is to identify the degree to which Vietnam meets EU standards on key development measures like product safety, environmental protection, transparency, policy effectiveness and the management of the digital economy. The findings will provide a strategic roadmap to help Vietnam catch up with EU standards within the next few decades. This is a practical and achievable way to facilitate Vietnam’s transition to full development by 2045, when the country celebrates 100 years of independence.

A nation’s ability to advance its development agenda lies not only in the will to effectively seize global market opportunities but also in the ability to use the proceeds of those opportunities for industrial upgrading and institutional transformation. EVFTA is an opportunity for Vietnam to make a historic imprint by establishing its status as an economic and development frontrunner within the rising wave of ASEAN nations.

Vu Minh Khuong is Associate Professor at the Lee Kuan Yew School of Public Policy, The National University of Singapore.

Kris Hartley is Assistant Professor at The Education University of Hong Kong.

One response to “Leveraging the EU-Vietnam Free Trade Agreement for development”

  1. More significantly, EV-FTA is a defensive capacity for Vietnam to deploy against the #1 export destination USA with unpredictable Trump and his tariffs – should he be reelected or not!

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