Vietnamese firms to face challenges post EU FTA

The twelfth round of free trade agreement (FTA) negotiations between the EU and Vietnam was held in Hanoi in March 2015.

The main topics of the negotiations were tariff and non-tariff barriers, rules of origin, investment, government procurement, intellectual property rights (IPR), and related regulatory issues.

If Vietnam succeeds in implementing the FTA with the EU, it would be-together with Singapore-the most successful ASEAN country in concluding bilateral FTA agreements.

Currently, as the EU is Vietnam’s second largest trading partner (after China), and is also among the largest investors in Vietnam, the signing of the FTA will initiate huge changes in the country’s investment environment, bringing with it several challenges for Vietnamese firms.

In 2013, the European Trade Policy and Investment Support Project (EU-Mutrap) sought to identify the opportunities and challenges facing Vietnamese enterprises arising from the EU-Vietnam FTA. The most prominent benefits to be expected are an increase in the trade of goods promoted by the reduction or elimination of tariffs and non-tariff barriers, whereby key economic sectors as textiles, footwear, and the high-technology industries in Vietnam would benefit most.

The possibility of cheaper European inputs may also benefit Vietnamese production and the development of distribution chains and local brands.

However, Vietnamese companies should also be aware of the challenges related to the FTA. These are related to higher requirements from the EU market in terms of transparency and competition, both for private and state-owned enterprises (SOEs).

The FTA is not necessarily seeking across-the-board privatisation, but rather the opening up of those economic sectors where SOEs are present. Vietnamese enterprises may expect to see a large impact from this process, provided that the FTA, as well as the Trans-Pacific Partnership (TPP) Agreement, promotes reforms in public procurement.

The upshot of this will be fair competition between private and public companies when adjudicating public contracts. This issue has been one of the main topics of the supported programmes of the World Bank and the International Monetary Fund in developing countries, given its special relevance for the development of business opportunities for small and medium-sized enterprises.

Additionally, European companies will compete for market share with other Asian competitors, particularly in high-quality products. Of course, aside from the potential increase in European foreign direct investment (FDI), Asian FDI is also expected to lead to newly-established enterprises in Vietnam seeking access to EU markets.

Therefore, the implementation of the rules of origin is a major challenge for the enforcement of the FTA. For this purpose, EU regulators are seeking to simplify EU rules of origin for institutions and economic sectors from the signing parties hoping to benefit from tariff reduction/elimination.

Although this topic has already been discussed with respect to specific economic sectors in Vietnam, including textiles, the specific challenges for this and other relevant economic sectors can only be assessed once the text of the agreement is finally published.

The issue of rules of origin is extremely complex, not only because the relevant sectors are part of dynamic and often complex global value chains, but also because different agreements come with different sets of rules of origin.

It is not only a serious issue in the context of the Vietnam-EU FTA, but also in the context of the TPP negotiations.

The Trade and Sustainable Development Chapter of the agreement with Vietnam is now a central topic for the EU institutions. In May 2015, EU institutions organized a roundtable in Brussels with EU stakeholders on trade, sustainable development, and human rights in EU-Vietnam relations.

The main concerns were the promotion of International Labour Organization (ILO) standards, corporate social responsibility (CSR), and environmental standards. This chapter would also be a binding framework for business practices in Vietnam.

Labour issues represent a major concern for Vietnamese enterprises in key economic sectors such as textiles and electronic assembly.

Environmental standards are also an important challenge for Vietnamese enterprises. FTA negotiations refer mainly to the multilateral environmental agreements, but the concrete scope of these standards for Vietnam will be defined in the text of the FTA.

Finally, the enforcement of the FTA would require that corporate CSR be incorporated in the business strategies of the stakeholders, under the parameters of internationally agreed principles and instruments such as those highlighted by the European Parliament: the OECD Guidelines for Multinational Enterprises, the ILO Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy, the UN guiding principles on business and human rights, as well as the UN Principles for Responsible Investment and Reporting.

Contact Managing Partner Patricia Leers for further information and guidance concerning your projects in Vietnam and/or with Vietnamese counterparts.