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New EU-Vietnam FTA Enters into Force

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A new landmark free trade agreement between Vietnam and the European Union entered into force on 1 August 2020. 

The agreement provides expansive preferential treatment for both goods and services, recognition and protection of geographical indications for over 200 products, liberalized government procurement rules, and obligations for antitrust and mergers. It also contains sustainable development provisions including legally binding rules on climate, labour and human rights. As such, it is the most comprehensive agreement to be put in place to date between the European Union and any ASEAN Member State.

 

Overview

On 8 June 2020, Vietnam’s National Assembly ratified by unanimous consent the new free trade agreement between Vietnam and the European Union (the "EUVFTA") and the parallel EU-Vietnam Investment Protection Agreement (the "EUVIPA"). This followed the approval of both agreements by the European Parliament on 12 February 2020. The EUVFTA has now entered into force, with effect from 1 August 2020. The EUVIPA, which falls under the shared competence1 of the EU and its Member States, is now in the process of domestic ratification by the regional and national parliaments of the EU Member States. The following discusses the EUVFTA.  We will separately address the EUVIPA should that agreement be ratified and enter into effect.

The EUVFTA marks the second comprehensive trade agreement between an ASEAN Member State and the EU and may well be used as a template should the EU decide to pursue free trade agreements (“FTAs”) with additional individual ASEAN countries or with ASEAN as a regional bloc in the future. With the EUVFTA in place, Vietnam adds yet another strategic economic and trade partner to its FTA network. Vietnam currently has bilateral FTAs in effect with Japan, South Korea, Chile, and the Eurasian Economic Union (which includes Russia). It is also party to six regional FTAs, concluded by the ASEAN Member States with China, Hong Kong, India, and others, and is party to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (the “CPTPP”), which includes, among others, Australia, Canada, Mexico, and New Zealand.

The entry into force of the EUVFTA comes amidst growing global trade tensions with China. In conjunction with the on-going COVID-19 pandemic, this has contributed to the growing trend for companies to diversify their supply chains, with Vietnam quickly becoming a principal beneficiary. The EU is already Vietnam’s second largest (by value) destination for goods. The EUVFTA will provide further momentum to this important trade route and is an important step in providing further reassurance to investors in Vietnam from the EU, and other global businesses seeking to establish or further develop trading links between Vietnam and the EU, as to the basis on which fair and effective trade terms can be established and maintained.

 

Market access for goods

At the core of the EUVFTA is a near complete removal of tariffs between the EU and Vietnam, including the elimination of more than 99% of customs duties within 10 years. Immediately upon entry into force, 65% of EU exports (by product type) to Vietnam and 71% of Vietnamese exports to the EU will be duty free. Duties on other EU goods will be gradually liberalized over 10 years, and those on certain Vietnamese goods will be reduced over 7 years. The EUVFTA also provides for the application of tariff rate quotas for some remaining agricultural items where import duties are not phased-out. 

The EU is Vietnam’s second largest export market after the United States, representing 17% of its exports. While Vietnamese goods account for just 2% of the EU’s global imports, the value of EU imports from Vietnam has increased from US$8.63 billion to US$42.5 billion during the 2008-2018 period. In the other direction, Vietnam represents a smaller share – approximately 0.6% – of the EU’s exports, but the volume has steadily increased from US$3.39 billion to US$13.8 billion during the same 10-year period. Still, goods from the EU represent 6% of Vietnam’s total imports. Trade between the EU and Vietnam has steadily increased in recent years, with Vietnam exporting greater volumes of furniture, telephones, machinery, and footwear to EU Member States. Key EU exports to Vietnam include aircraft, machinery, pharmaceuticals, and electrical equipment.

Rules of origin

In order to benefit from the preferential customs duties under the EUVFTA, traders must comply with the agreement’s general origin rules or product specific origin rules and complete a government issued certificate of origin (EUR.1 Form) or origin declaration made out by a certified exporter (i.e., self-certification of origin). The EUVFTA allows for the bilateral cumulation of origin, whereby products made in one party and incorporating materials from the other party may receive preferential treatment. It also allows for limited cumulation of South Korean fabrics used in the production of textiles, and the possibility of cumulation of fisheries materials from other ASEAN Member States.

Non-tariff barriers

The EUVFTA reduces or eliminates non-tariff barriers in the automotive sector and with respect to export and import licensing and customs procedures. Notably, for non-agricultural items (except pharmaceuticals), Vietnam will accept products marked as “Made in EU.”

 

Market access for services

The EUVFTA covers a wide range of services sectors including financial services, professional business services, communication services, postal services, construction and related engineering services, health and social services, environmental services, and transport services. Many of the concessions offered by each party exceed those provided under the WTO trade in services agreement, including packaging services, building-cleaning services, interdisciplinary R&D services, and nursing services. In certain service sectors, such as telecommunications, foreign ownership caps are increased for EU investors in Vietnam. The agreement also commits Vietnam and the EU to include in the EUVFTA any new services commitments either party concludes with third countries in future.

Understanding on bank equity

The legal text of the EUVFTA includes a number of Joint Declarations and Understandings as appendices to the agreement, which, as per Article 17.21, form an integral part of the agreement. The Understanding concerning Bank Equity provides a commitment by Vietnamese authorities to “favourably consider” investments by EU financial institutions to hold up to 49% of chartered capital in two Vietnamese joint stock commercial banks within five years from entry into force of the EUVFTA. There is a specific carve out to exclude from this arrangement four commercial banks, being the Bank for Investment and Development of Viet Nam (BIDV), Vietinbank, Vietcombank, and Agribank in which the Vietnamese government is currently the majority equity shareholder. Given the consistent interest in Vietnam banks from overseas investors, we would expect EU financial institutions to seek to utilize this FDI exemption in due course. Moreover, this may indeed be a deliberate attempt by the Vietnamese government to introduce a more diverse investor base in its banking sector – the existing minority foreign investors in this sector are primarily Asian banks. However, the fact that this has been limited to only two Vietnamese banks is indicative that this may not be a precursor to broader reforms in foreign ownership of Vietnamese banks – this, together with how the Vietnamese government interprets this undertaking in the context of its broader regulatory framework, remains to be seen.

 

Intellectual property and GI protection

The EUVFTA contains a commitment by Vietnam in respect of the World Intellectual Property Organisation (“WIPO”) as a means to prevent unauthorized access of creative works and to protect material exchanged over digital networks, including the Internet. Specifically, Vietnam has undertaken to accede to WIPO’s Copyright Treaty (1996) and Performance and Phonogram Treaty (1996) within three years from entry into force of the EUVFTA. The Vietnamese government is reportedly finalizing its internal procedures and documents necessary for joining the two treaties. The EUVFTA also contains strong provisions for the protection of trademarks, patents, designs, plant varieties, and data protection (five years) for pharmaceutical, biologics and agrochemical products.

In addition, the EUVFTA covers geographical indications (“GIs”), which refer to names or signs used on products that correspond to a specific origin or geographical location. Under the agreement, Vietnam will recognize and protect 169 EU GIs (for example, in respect of specific wines and certain cheeses from the EU), and the EU will protect 39 Vietnamese GIs (including specified coffees, teas and sauces).

 

Government procurement

Infrastructure projects account for a large portion of public investment in Vietnam. The EUVFTA commits the parties to adhere to the general principles of national treatment, non-discrimination and increased transparency in the government procurement bidding process. This is intended to ensure that EU firms will be able to bid for public procurement contracts (goods and services and construction services subject to specified exceptions) on an equal basis with domestic bidders, taking into account the specified monetary value thresholds at and above which procurement is covered under the agreement. Nevertheless, the EUVFTA permits Vietnam to delay the implementation of several specified provisions for up to 10 years, and the Vietnam’s government procurement obligations will not be subject to dispute settlement for 5years.

Under the EUVFTA, the EU provides the same thresholds that it applies under the WTO’s Agreement on Government Procurement (the “WTO GPA”) and other FTAs, while Vietnam is granted a 15-year transitional period during which it will provide higher thresholds. Both the EU and Vietnam commit to opening the procurement of central government, sub-central and other entities, as detailed in the annexes to the agreement. Specifically, the EU commits to open the same central government entities as under the WTO GPA with certain exceptions. Vietnam commits to open up the procurement processes of 20 central government entities, including several ministries, departments and sub-agencies, 2 sub-central government entities (Hanoi City and Ho Chi Minh City) and 42 “other covered entities,” including Vietnam Railways and Vietnam Electricity.2

Vietnam is not yet a party to the WTO GPA.3  As a result, the public procurement commitments under the EUVFTA could provide EU firms with a competitive edge to penetrate into previously closed public procurement markets in Vietnam, including for infrastructure (roads and ports), public hospitals and power distribution.

 

Antitrust and mergers

Under the competition chapter of the EUFVTA, Vietnam and the EU agree to maintain competition laws and ensure relevant authorities apply those laws in a non-discriminatory and transparent manner. In an effort to address anticompetitive conduct and promote procedural fairness, the agreement commits the parties not to undertake agreements that may restrict or distort the scrutiny or competition of a potential merger and acquisition. 

 

Trade and sustainable development

The EUVFTA commits Vietnam and the EU (to the extent not done so already) to (i) ratifying the eight fundamental Conventions of the International Labour Organisation (the “ILO”); (ii) respecting, promoting and effectively implementing the principles of the ILO concerning fundamental rights at work; and (iii) implementing the Paris Agreement, as well as other international environmental agreements, including acting in favour of the conservation and sustainable management of wildlife, biodiversity, forestry, and fisheries. This will involve independent civil society in monitoring the implementation of these commitments by both sides. Vietnam has already made some steps towards adhering to its commitments, including ratifying ILO Convention 98 on collective bargaining in June 2019, adopting a revised Labor Code in November 2019 and passing a resolution to allow Vietnam to accede to the ILO Convention 105 on the abolition of forced labor in June 2020.

The EUVFTA also broadly supports sustainable infrastructure development, including a preference for the use of renewable energies and energy efficient goods and services. A dedicated chapter on non-tariff barriers to trade and investment in renewable energy generation covers specific rules with respect to licensing and authorization procedures, adherence to existing international standards, and local content requirements.

 

Implications of Brexit on the EUVFTA

The EUVFTA should remain in effect until the end of the year while the United Kingdom (UK) is still in a customs union with the EU. The situation from 1 January 2021 will depend on whether the UK and Vietnam decide to agree on their own bilateral agreement, although this is unlikely in the near term as Vietnam is not now one of the priority FTA countries for the UK (which include the EU, the United States, Japan, Australia, and New Zealand). The issue of potential diagonal or extended cumulation of origin between the UK, the EU and Vietnam (i.e., where parts originating in countries not party to an FTA, for example the UK from 2021, can count as “originating” and thus help satisfy the preferential origin rule of a product) will depend on the willingness of all three parties to agree to this. The EU at this stage does not foresee the possibility of such extended cumulation in its FTA discussions with the UK for any FTA.

 

Outlook

The EUVFTA represents a key milestone in the EU-Vietnam relationship and further strengthens bilateral economic integration and rules-based trade liberalisation. Already, Vietnam has undertaken concrete steps to implement the agreement. For example, Vietnam’s Ministry of Industry and Trade established five working groups in May 2020 to assist relevant government agencies with various aspects of the agreement, including implementing rules of origin, certification and legal documentation; conducting market research on the demands and tastes of EU consumers; understanding EU policy and management measures that may affect Vietnamese exports; rolling out education campaigns on the benefits of the agreement; and combatting origin fraud.

Looking ahead, the co-operation mechanisms and institutional reforms embedded in the EUVFTA (as well as the EUVIPA if fully realised) should boost Vietnam’s position as a regional centre for attracting investments despite the disruptions caused by the COVID-19 pandemic.

 

Find out more about business response to the Coronavirus outbreak:
Coronavirus: Managing business impact and legal risks

 

1 In 2017, the Court of Justice of the EU found that certain provisions of the EU-Singapore FTA concerning non-direct foreign investment and investor-state dispute settlement (ISDS) did not fall within exclusive EU competence and needed to be ratified by the national parliaments of the EU Member States. In an effort to unblock opposition to the trade agreement, the EU and Singapore therefore agreed to split the agreement into two separate agreements. The EU-Vietnam negotiations followed the same process. In 2018, the portion of the agreement covering investment was broken out into a separate investment protection agreement, the EUVIPA. The process for national ratification of the EU-Singapore IPA is ongoing and is expected to take at least two years.
Details are available in Annex 9-B here.
3 Vietnam became an observer of the WTO GPA on 5 December 2012.

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