What does Vietnam’s trade deal with the EU mean for the country and ASEAN?

Vietnam’s economy is expected to gain enormously from the FTA with the EU. However, the country will face major criticism unless it adopts labor and human rights reforms.

By Umair Jamal

In February, the European Parliament approved a free trade agreement (FTA) with Vietnam and last month, Vietnam’s National Assembly ratified the agreement with overwhelming support. 

According to a Reuters report, the agreement will “eliminate 99% of tariffs on goods traded between the Southeast Asian country and the bloc, and provide Vietnam with a much-needed post-pandemic boost.”

The agreement illustrates that the EU sees growing trade opportunities in Southeast Asia and the deal has the potential to bring the EU and ASEAN closer to region-to-region trade negotiations.

The European Union Vietnam Free Trade Agreement (EVFTA) is the second FTA between the EU and a Southeast Asian country, after the regional bloc’s agreement with Singapore. As a region, Southeast Asia is the EU’s third-largest international trading partner, after the US and China.

But the agreement also calls for Vietnam to implement institutional reforms, including improving its record on labor and human rights. Though the deal lacks any strong mechanisms to ensure Vietnam will comply, it still draws attention to the country’s problems with freedom expression and religion, as well as its repressive penal code and its refusal to allow independent civil society.

What does the agreement mean for Vietnam’s economy?

Currently, Vietnam enjoys trade preferences with the EU under the Generalized Scheme of Preferences. The EU is already one of the largest foreign investors in Vietnam—investments from the EU in Vietnam account for 50.1% of the country’s total FDI [foreign direct investment] projects and 50.6% of pledged funds.

In the coming years, improved market access and better trade resolution measures brought by the FTA will see EU investors inject still more capital into Vietnam.

Under the EVFTA, Vietnam’s exporters will also have access to the EU’s $18 trillion market. The Vietnamese government believes that the elimination of import duties will increase exports to the EU by 42.7% in the next five years—the tariff cuts will phase in gradually between now and 2035.

The World Bank recently said that the EVFTA has the potential to increase Vietnam’s gross domestic product (GDP) by 2.4% and its total exports by 12% by 2030. The agreement is also projected to lift hundreds of thousands of people out of poverty. “Such benefits are particularly urgent to lock in positive economic gains as the country responds to the Covid-19 pandemic,” the World Bank said.

What does the EVFTA mean for the EU’s Southeast Asia policy?

The EU’s free trade agreement with Vietnam illustrates that Europe continues to see significant business prospects in Southeast Asia. By the end of 2017, the EU had invested a cumulative $374 Billion in FDI in ASEAN.

The EU has also expressed a desire to pursue an FTA with ASEAN as a whole, though efforts have yet to progress much. Negotiations began in 2007 but ended in 2009 when individual countries in Southeast Asia started to push for bilateral trade negotiations with the EU.

The EU has now struggled for years to strike trade deals with major ASEAN countries. It took Vietnam around seven years to reach its agreement with the EU. The EU is now leading separate talks with Indonesia, the Philippines, Malaysia and Thailand but the negotiations are not likely to result in a similar trade deal unless these countries adhere to the EU’s trade policies.

The EU trade pacts with Vietnam and Singapore are also expected to hurt other ASEAN countries if the EU increases its investment in Singapore and Vietnam at the expense of other countries in the region. Vietnam’s FTA with the EU will have far-reaching impacts on Thailand’s auto industry, for one. Exports of Thai cars are likely to drop because of Vietnam’s trade and investment deals with the EU.

The EU, however, sees these bilateral trade and investment agreements as building blocks towards a future region-to-region agreement. The EU has been using its existing economic influence with individual ASEAN countries to push for a change in their trade policies. The European bloc may now use the agreements with Vietnam and Singapore to force other Southeast Asian countries into negotiations, as they stand to lose out if they don’t sign similar agreements.

The new deal requires that Vietnam adopt human rights reforms

For Vietnam to benefit from the FTA, it will have to improve its record on human rights, labor and the environment in order to comply with EU trade policy. The EU has voiced concerns about a number of rights issues, including the fate of political prisoners in Vietnam. To monitor Vietnam’s progress on this, the European Parliament has set up an inter-parliamentary delegation with Vietnam’s National Assembly.

The growing pressure on Vietnam from the European Parliament and international human rights bodies means that the country will have to review policies that enable religious persecution and other human rights abuses in the country. But the deal isn’t binding as far as consequences if Vietnam fails to comply.

The signing of a major trade agreement between the EU and Vietnam despite serious human rights concerns also shows that the EU can look past such issues if it suits the bloc’s economic interests. Vietnamese and international civil society organizations, including Human Rights Watch (HRW), wrote a letter to the European Parliament criticizing the decision to looks past rights concerns. “We regret that negotiations for the EVFTA and the IPA did not lead to more tangible human rights commitments from the Vietnamese authorities than the meagre ones included in the EVFTA’s sustainable development chapter, and that even for those there is no binding timeline nor penalties foreseen in case of failure to comply.”

Despite this, Vietnam will still face pressure from European governments and the EU if it doesn’t make changes.

Vietnam is a vibrant market and the potential for further economic growth has only increased because of the country’s FTA with the EU.

“If Vietnam can act in a decisive manner to close legal and implementation capacity gaps, it can capitalize a trade deal whose direct benefits are estimated to be largest in the country’s history,” said Ousmane Dione, World Bank Country Director for Vietnam. 

Going forward, the implementation of domestic reforms to address issues such as political, religious and human rights will benefit Vietnam’s economy and its image abroad.

About the Author

Umair Jamal
Umair Jamal is a freelance journalist and a Ph.D. candidate at the University of Otago, New Zealand. He can be reached at umair.jamal@outlook.com and on Twitter @UmairJamal15