Game-Changing Opportunity from New Generation FTAs

9:54:18 AM | 10/6/2020

New generation free trade agreements (FTAs) such as CPTPP, EVFTA and EVIPA will provide opportunities for Vietnam to develop economy and improve institutions and policies.

Many advantages in trade and investment

Taking part in new generation FTAs ​​helps boost export growth, increase trade surplus and structure exports. The EU - Vietnam Free Trade Agreement (EVFTA) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) both have roadmaps to eliminate 99% of import duty in about 10 years.

To CPTPP, Vietnam is committed to abolishing import duties on 66% of tariff lines as soon as the Agreement takes effect and 86.5% of tariff lines after three years from the date of enforcement. The rest will have tax cut in 5-10 years. For some particularly sensitive items, Vietnam requires a roadmap of over 10 years or the application of a tariff rate quota (TRQ).

According to the Ministry of Industry and Trade, EVFTA will increase Vietnam's export value to the EU by about 20% by 2020; 42.7% in 2025; and 44.37% in 2030 compared to no agreement in place. At the same time, imports from the EU are forecast to grow at a lower pace than exports to this market, specifically 15.28% in 2020; 33.06% in 2025 and 36.7% in 2030.

At the macro level, EVFTA will help add to Vietnam's GDP by an average of 2.18 - 3.25% (2019 - 2023), 4.57 - 5.30% (2024 - 2028), and 7.07 - 7.72% (2029 - 2033). In addition, Vietnamese businesses will also benefit from merchandise and inputs of high and stable quality with a more reasonable price imported from the EU.

As EVFTA is brought into force after the Covid-19 epidemic is controlled, Vietnamese enterprises will have a great advantage from reduced/eliminated tariff barriers in the US$18 trillion EU market.

Similarly, on imports, Vietnamese businesses will also benefit from goods and raw materials of high quality and stability at a more reasonable price imported from the EU, especially advanced machinery, equipment, and technique/technology from EU countries will help improve productivity and product quality. Furthermore, when goods and services are imported from the EU into Vietnam, they will place higher competitive pressures on Vietnamese firms.

On investment, joining new generation FTAs ​​helps Vietnam attract FDI fund from member countries. Some FTAs ​​have a chapter on investment, including Vietnam's strong commitments on investment incentive and protection as well as investment dispute settlement. Vietnam may become a destination of foreign investment flows from FTA signatories.

Notably, with EVFTA, a new value chain of Vietnam with an important partner in the world will be formed. The investment environment is more open and more favorable when the more attractive prospect of exports will attract more FDI from the EU to Vietnam, especially to such areas as services, finance, automobile, manufacturing, information technology, high technology, and processed agricultural products.

Beneficiaries

With strong commitments to open up the market and to eliminate import duty on nearly 100% of tariff lines in new-generation FTAs, Vietnam will have more opportunity to increase exports, especially apparels, footwear, agricultural and aquatic products, and wooden furniture.

According to the Ministry of Industry and Trade, when EVFTA comes into effect, many Vietnamese products will be slashed to zero tax such as broken rice and grain products. The EU also pledged to abolish tax fruits and vegetables when EVFTA takes effect. As for fisheries, about 50% of tariff lines will be removed immediately and the rest will also be eradicated in 5-7 years. Vietnam’s export growth of some agricultural products will advance significantly until 2025 thanks to EVFTA, such as rice (by 65% ​​in 2025), sugar (8%), pork (4%), forest products (3%), meat and poultry (4%), beverages and tobacco (5%).

For the textile and garment industry, the EVFTA requires a "two-stage" (from fabric onward) origin rule for garments and textiles, meaning that, to be entitled to EVFTA preferential tariffs, Vietnam's garments and textiles must follow the “fabric forward” principle. The EU also allows the use of fabrics imported from Korea to make final products exported to the EU to enjoy EVFTA preferential tariffs. Meanwhile, CPTPP has relatively stricter conditions because the pact requires “yarn forward” origin, meaning that yarn and fabric must be manufactured in and/or imported from CPTPP countries to be entitled to the preferential tariff when exported to CPTPP countries.

Another opportunity that EVFTA brings to Vietnam's agricultural sector is the advent of agricultural investment projects with advanced technology and production practices. This will help enhance output and quality of agricultural products and make Vietnam's agricultural products gradually meet rigorous EU standards.

Accelerating institutional reform

The entry into new generation FTAs ​​helps Vietnam accelerate economic institutional reform, change growth model, improve business environment, and enhance transparency and timely response to such economic impacts. The most evident FTA benefit for Vietnam is the opportunity to perfect domestic laws in line with new commitments.

New regulations on intellectual property, labor, environment, transparency, State-owned enterprises and anti-corruption are included in new-generation FTAs. This will require Vietnam to amend and supplement its law system to ensure compatibility and compliance with FTA agreements.

Regarding solutions, the government will necessarily perfect institutions, enhance competitiveness, improve the investment environment, complete the legal system, ensure macroeconomic stability and inform regulations in new generation FTAs ​​for businesses and other relevant entities. Vietnam needs to focus on implementing these measures.

For enterprises, understanding regulations is pressing. In addition, they necessarily further raise product quality, ensure trust and reputation in business, and actively participate in the supply chain to gain benefits from new generation FTAs.

By Huong Ly, Vietnam Business Forum