The approval by the Vietnamese National Assembly of the EU-Vietnam Free Trade Agreement (EVFTA) and Investment Protection Agreement (EVIPA) [on June 8] is an historic achievement. It represents an extraordinary step ahead in the relations between the European Union and Vietnam and it embodies the most appropriate way to celebrate thirty years of diplomatic relations. What better anniversary present for both of us than laying broader and deeper foundations for the future?

Ambassador of the European Union Delegation to Vietnam Giorgio Aliberti speaks at a press meeting on June 8 after Vietnam's National Assembly ratified the EVFTA and EVIPA. Photo: EU Delegation

The EVFTA is expected to enter into force already this summer. It will bring immediate positive effects for businesses in both Vietnam and Europe. Since day one the cut to tariffs – which can sometimes be very substantial, in the range of 25% – will apply to 65% of the EU exports to Vietnam and 71% of EU imports from Vietnam. Gradually, almost all other tariffs will then be phased out over 10 years.

This may sound technical for the layman. For our business men and women, this means a substantial reduction of their costs and will result in more money in their pockets. As we all know, any tax and tariff reduction, as a relief in coping with the economic fall-out of the Covid-19 pandemic, is an important ingredient for relaunching our economies. The Free Trade Agreement is therefore an important element in nurturing the resilience of our economies. Not to forget that Vietnamese consumers will have a bigger choice and the opportunity to buy products of top quality with reasonable prices from the EU.

The elimination of bilateral tariffs and export taxes, together with the reduction of non-tariff barriers (NTBs) affecting the cross-border exchanges of goods and services, are expected to boost bilateral trade considerably. The export gains are estimated at EUR8 billion by 2035 for EU firms, while Vietnam exports to the EU are expected to grow by EUR15 billion. Vietnam exports to the EU are estimated to grow by around 18% according to an economic impact study of 2018. These figures fall short, however, to capture many of the dynamic gains that will result both for the economies and the societies.

It is a well-known fact that foreign direct investment (FDI) often follows strong trade relations. In return, more FDI is likely to further increase the trade potential between partners. In its amazing progress to a middle-income country, Vietnam now realizes that without further FDI its potential to become a regional hub and become part of global value chains may be limited. As clearly put in evidence in this pandemic, many Vietnamese companies suffer from the very concentrated dependency from a very limited number of countries. Footwear and textile producers recorded shortages of inputs. Car parts, rubber and plastics producers in Vietnam have lost their markets for supplying car production in Korea. Together with the EU-Vietnam Free Trade Agreement and the Investment Protection Agreement, today’s disruptions can also serve as an opportunity of re-organizing Vietnamese trade and investment relations. Vietnamese companies may want to consider whether they could diversify their supply chains, their production chains and their integration into value chains. Vietnam can diversify much better and therefore become less vulnerable to future global crises.

Both agreements offer Vietnam a chance of becoming a regional production hub. Photo: Reuters

Both agreements offer Vietnam a chance of becoming a regional production hub. Compared with peer economies in the region, Vietnam has a first mover advantage of 7 – 10 golden years of privileged access to the EU's market. Only Singapore, which has concluded and ratified the FTA before Vietnam, is in a similarly advantageous position. With the foundations of the new economic agreements with the European Union, the choice of new European partners is obvious and open to Vietnamese producers. It provides additional opportunities and facilitation for local start-ups and small and medium enterprises to grow into global companies.

It is likely and desirable that both agreements with the European Union will trigger a new wave of foreign direct investment from the EU into Vietnam. Investments from the EU are of top quality. European companies bring high skills, best practices of organization, and world-leading technologies to Vietnam. European foreign direct investment comes with high standards of corporate social responsibility for protecting and training workers and employees, as well as for respecting and protecting the environment. It allows Vietnam to promote economic growth, create better jobs at the same time while ensuring sustainable development. These spillover effects are essential for economies like Vietnam to avoid the middle-income trap.

These positive effects will of course only materialize if the promises and obligations of the agreements are swiftly put into practice. The customs officials, the regulatory authorities, the enforcement agencies will have to be aware of these new rules and follow them in their daily contacts with importers and distributors. This may imply changes to the current ways of dealing. The benefits of the agreements will directly depend on the level of transparency and predictability of government behavior in contact with business. Business people and investors are very shy and can flee to other places if the overall business environment is not favorable and stable.

The Covid-19 crisis showed some vulnerabilities in the process toward uncontrolled globalization. We all have to learn our lesson and find the most appropriate remedies. But if we believe that the future is to close ourselves behind national barriers we would risk missing the huge opportunities that come with economic interdependence. Reducing economic interdependence would make everybody poorer. If you take a closer look into the features of complementarity of our two economies, greater interdependence is really a win-win situation. Actually, Vietnam would reduce its vulnerability by engaging more with Europe. This is the way ahead and this is the spirit of the two trade and investment agreements just approved by the National Assembly, which indeed will lay very solid foundations on which Europe and Vietnam can further strengthen their relations.