12 Feb, 2018

The EU-Vietnam Free Trade Agreement: 4 major benefits for Vietnamese enterprises

The EU-Vietnam Free Trade Agreement (EVFTA) concluded negotiations by the end of 2015 and is expected to bring about 4 major benefits for Vietnamese enterprises.

Benefit 1: The opportunity to increase exports to the EU market

EU – a market of 500 million high-income consumers has always been one of the major export destination of Vietnamese enterprises over the past time. However, in fact, Vietnam’s exports of $34 billion in 2016 to the EU only account for roughly 1.5% of total EU imports. In addition, less than half of Vietnam’s current exports to this large market benefit from zero tariffs. These modest figures can be explained by various factors such as the high tariffs imposed by the EU on many items from Vietnam, the strict requirements for high quality goods, food hygiene and safety, costly transportation due to geographical distances, etc. However, when EVFTA is implemented, the tariff liberalization will be applied for almost 100% of the export items from Vietnam and this will play a vital role in removing obstacles for Vietnamese enterprises to export to the EU market.

Benefit 2: The EVFTA agreement will establish a more stable and long-term tariff mechanism for Vietnamese enterprises.

At present, one of the reasons why Vietnamese enterprises export more goods to the EU is because they are receiving relatively favorable tariffs from the Generalized System of Preferences (GSP). This is a tax incentive mechanism applied by the EU to support less developed countries exporting goods to the EU. Due to the unilateral application, this mechanism is periodically reviewed by the EU on its own criteria and whether Vietnam’s goods are entitled to GSP tariffs for the next period or not is fully decided by the EU. In addition, items that are deemed sensitive will not be completely abolished from the tax. However, when the EVFTA Agreement comes into force, a stable bilateral incentive mechanism will be established. Import duties on the EU market will be gradually reduced in accordance with the commitments agreed by the two sides. After seven years from the date of entry into force of the agreement, more than 99% of the goods, including many sensitive items, will be subject to zero tariffs.

Benefit 3: Domestic manufacturers will have an import source with reasonable prices and better quality

In addition to export activities, Vietnam companies also need to import machinery, equipment or raw materials for industrial and agricultural production. The Vietnamese people are increasingly diversifying their consumption needs, targeting high-quality products that are limited in domestic production such as cars, cosmetics and pharmaceuticals. These products from EU always in lead in terms of quality, however, the price is relatively high as compared to the other country that Vietnam have been sourcing from. With the elimination of import duties in the EVFTA, Vietnamese businesses and consumers will have the opportunity to purchase the above items at a more affordable price. Another important benefit is that the EU market will help domestic companies diversify their import markets, avoiding too much reliance on familiar markets.

Benefit 4: Vietnam’s enterprises will have the opportunity to cooperate and strengthen their relation with EU businesses.

EU is a highly developed economic sector with advance level of technology. Therefore, by cooperating with EU businesses, including through EU investment, Vietnam companies are likely to enhance their professionalism and management skills and will be able to apply EU technology in the production process. This will ultimately contribute to better products and services that Vietnamese enterprises offer.