How Should Businesses Effectively Tap EVFTA?

9:55:17 AM | 8/9/2020

The European Union-Vietnam Free Trade Agreement (EVFTA) was negotiated by the two sides beginning in 2012 and was signed on June 30, 2019. EVFTA, effective from August 1, 2020, is extremely important in promoting trade ties between Vietnam and the EU, and opening up opportunities for Vietnamese goods to be exported to the EU market.

According to the agreement, for Vietnam's exports, as soon as the agreement comes into effect, the EU will eliminate import duties on 85.6% of tariff lines, equivalent to 70.3% of Vietnam's export turnover to the EU. Seven years after the pact comes into force, the EU will eliminate import duties on 99.2% of tariff lines, equivalent to 99.7% of Vietnam's export turnover. For the remaining 0.3% of export turnover, the EU pledged to provide Vietnam with tariff quotas having quota import tax to 0%.

As EVFTA comes into effect, it opens up a big market for Vietnam's seafood exports. According to the Import and Export Department (the Ministry of Industry and Trade), the EU is the largest seafood consumption market in the world. Every year, this region spends about €50 billion importing nearly 9.3 million tons of seafood products. The EU is currently Vietnam's third largest seafood export market, behind the United States and Japan. In 2019, Vietnam's seafood exports to the EU reached US$1.25 billion, accounting for about 15% of the country's seafood export.

With EVFTA, the reduction of import tax will enhance the competitiveness of Vietnamese seafood in the EU market. In which, the product that benefits most is shrimp, especially frozen black tiger shrimp and white leg shrimp. According to EVFTA commitments, the GSP tax rate imposed on black tiger shrimp for export is reduced from 4.2% to 0% upon EVFTA coming into effect; while the tax rate on frozen white leg shrimp gradually decreases to 0% after five years. This is the biggest advantage that Vietnamese seafood enterprises have over their competitors.

The second item is tuna, which are also advantageous products of many Vietnamese seafood exporters. Therefore, the EU's elimination of tariffs on fresh/frozen tuna products immediately upon the EVFTA coming into effect has an immediate positive impact on businesses that specialize in supplying these products.

For pangasius catfish, the EU tax rate for Vietnam in EVFTA is reduced from the current 5.5% to 0% in the third year after the EVFTA comes into effect. Some processed products with high basic tax rates (20%) such as oysters, scallops, squids, octopuses, clams, cockles, abalones, etc will enjoy growth thanks to the tax reduced to 0% as soon as EVFTA is in effect.

In addition to the immediate effect of taxation, the pure rule of origin for Vietnamese seafood in the EVFTA is deemed as more flexible.

According to Mr. Mai Ngoc Son, Director of Quy Nhon Frozen Seafood Joint Stock Company, with experience in exporting seafood products to the EU for many years, the tax reduction will help increase its advantages in this competitive market. In 2019, this enterprise exported nearly 800 tons of frozen shrimp, fetching US$4.7 million. This year, despite difficulties caused by the COVID-19 pandemic in the first two quarters of the year, it is estimated that the export turnover of Quy Nhon Frozen JSC will reach US$5 million.

However, this seafood exporter also anticipated many difficulties and challenges ahead when exporting to the EU due to strict technical barriers and quality standards, especially the issue of yellow cards.

Textiles and garments are also one of the industries greatly impacted when Vietnam enforces EVFTA. The EU is the largest market in terms of demand for textiles and garments with US$250 billion/year. In 2019, Vietnam's textile and garment exports to the EU reached US$4.3 billion, behind China, Bangladesh, India and Pakistan. The effect of EVFTA will help Vietnam's garments and textiles have a more competitive advantage.

According to Mr. Luong Huu Lam, Brand Manager of Giovanni Group, to produce high-end fashion products for local and EU markets, many types of fabrics are imported from Italy. Therefore, when EVFTA comes into effect, businesses will use materials from Italy to create high quality products in Vietnam and then bring them to EU markets for consumption. Thus, businesses can take advantage of tax incentives in both directions: importing fabric materials and exporting complete fashion products.

However, there are not many businesses that can take advantage of EVFTA to access raw materials from Europe with competitive prices and taxes as the case of Giovanni Group. Most domestic textile and garment enterprises are struggling to meet the rule of origin.

For example, in the case of Garment 10 Corporation Joint Stock Company, export orders to the EU account for up to 60% of the processing, purely according to customer orders, and the rest is exported by FOB method (enterprises have their own sources of materials). In the structure of production items, Garment 10 does not import fabrics from the EU, but from China and Taiwan, of course, these fabrics will not be eligible for preferential treatment.

Besides, it is worth mentioning that 85% of Vietnam's textile and garment enterprises have capital scale of less than VND50 billion, 15% have over VND50 billion (of which only 3% having VND500 billion), so there are not enough resources to invest in raw materials to enjoy incentives in EVFTA.

In order for Vietnamese enterprises to successfully implement the agreement, the Prime Minister has recently approved the EVFTA Implementation Plan, assigning tasks and responsibilities to concerned agencies and organizations to carry out measures for the full and effective implementation of this agreement.

In the coming time, in addition to regular tasks, ministries, ministerial-level agencies, government agencies, people's committees of provinces and centrally-run cities need to concretize and organize the implementation of basic tasks such as: Propagating EVFTA and markets of EU countries; building laws and institutions; improving competitiveness and developing human resources, policies and guidelines for trade unions and labor organizations at enterprises; and promoting policies of social security, environmental protection and sustainable development.

Mr. Hardy Diec, Managing Director, FedEx Express Indochina

The demand for international logistics services and solutions has increased steadily as Vietnam has seen more investment in the manufacturing industry.

The recent FTAs that have come into effect, such as CPTPP and EVFTA, have boosted investment access and freer trade with these trading partners. These FTAs allow Vietnam to take advantage of reduced tariffs and at the same time attract companies to relocate or expand manufacturing in Vietnam and export to partners throughout ASEAN. Improved trading access will offer greater opportunities to small and medium-sized businesses (SMEs). It will be imperative that logistics providers are ready and capable to support SMEs’ expansion plans. Robust and efficient supply chain solutions will benefit customer needs greatly, alongside the rapid growth of e-commerce.

E-commerce, both domestically and through cross-border trade, is driving growth for logistics offerings within the industry. Vietnam’s e-commerce market reached US$5 billion in 2019, an accelerated growth of 81% as compared to 2015, and it is expected to hit US$23 billion by 2025 .

To ride this growth, access to a global transportation network will remain a key ingredient in marrying the two worlds – the digital and physical – and making them work for the customer’s business.

We believe that Vietnam has significant potential in the global supply chain.

We will adapt our business strategy in Vietnam while staying focused on our long-term priorities. These include using our extensive networks to and from Europe and tapping into new trade lanes within Asia Pacific, Middle East and Africa (AMEA) region. The Intra-Asia and Asia-Europe lanes are expected to outgrow the Trans-Pacific lane. Intra-regional trade now accounts for more than half of Asian trade. Access to and connections between those markets remain one of the most vital elements for SMEs.

For Vietnam to gain prominence in the global supply chain landscape, the key goals are improving connectivity via national highways, railways, and airways and enabling logistics firms to lower transportation and service costs; further streamlining tax and customs clearance processes and expanding the talent pool of professionals specifically trained in the logistics field to serve future demand. 

Mr. Yoon Young Kim – Cluster President Vietnam & Cambodia of Schneider Electric

We have been here since Vietnam first opened its economy to foreign investment and have experienced double-digit growth in many years thanks to the country’s fast-growing economy. We are proud to have contributed greatly to Vietnam’s development agenda being among the largest European investors here.

The EVFTA is a great achievement for a better relationship between Vietnam and EU countries on the exchange of expertise, competency and technology and for sustainable development. With this regard, we can expect that Vietnam participates in not only labor-intensive supply chains, but also in a “new normal” which we define in Schneider Electric as Tailored, Sustainable, Connected 4.0.

Looking from Industry perspective, new circumstances such as the pandemic have reinforced the importance of agility, efficiency, and resiliency by accelerating Digital. There are four trends in Industries that our CEO Jean-Pascal Tricoire has shared recently: (1) the transition to remote technology; (2) Resiliency - industry needs to focus on connectivity, predictiveness, and preventiveness and across the whole chain, automation and analytics need to be implemented; (3) Efficiency acceleration by the integration of energy and automation, the vertical integration of end-point to cloud and the lifecycle integration; (4) Sustainability as a priority. Schneider Electric’s most comprehensive digitization offers a portfolio of energy management, machine management, assets management and facilities management help thousands of manufacturers worldwide accelerate their local operations adopting Industry 4.0 and be ready for the future at the local cost. We look forward to supporting enterprises by both leveraging the momentum from the EVFTA and contributing to their Industry 4.0 progress.

Mr. Brad Kelly, General Director/CEO Mercedes-Benz Vietnam Ltd

After 25 years since we first established our company here, Mercedes-Benz continues to ensure we respect and comply with the investment and business framework of Vietnam, which is especially important for a high integrity organization like Daimler.

Vietnam is in the top 70 among 190 countries in “Doing Business 2020” published by the World Bank. In SEA, Vietnam is ranked 5th. This represents major progress in recent years, but there remains room for improvement. It should be multilateral interaction between the government and enterprises, as well as the supporting role of organizations like VCCI.

EVFTA brings about more potential and opportunities for both Vietnam and the EU, especially for Vietnam to penetrate such a significant market with relatively high value of turnover and premium products. Vietnamese companies should prepare the necessary resources to be competitive yet compliant with the framework in Europe. I see great opportunities for Vietnam companies over the coming years because of the EVFTA.

For MBV, we have more solutions to build our business strategy in Vietnam. When tax barriers are removed, customers are definitely the beneficiaries who have more choices at competitive pricing. I look forward, in the years ahead, to be able to provide many new vehicle solutions to the people of Vietnam to meet their automotive needs.

Mr. Shoeib Reza Choudhury - DHL Express Vietnam’s General Director and Country Manager

As a major logistics player in Vietnam over the past three decades, DHL Express continues to support our customers in moving their shipments to the 220 countries and territories throughout the pandemic. We are continuously investing to make our service even more convenient for our customers and these latest service points are another milestone in that journey. This is all part of our mission to be the international express provider-of-choice in Vietnam.

During the global COVID-19 pandemic situation, all DHL Express service points and facilities in Vietnam are equipped with comprehensive protective measures, to ensure the safety and wellbeing of staff and customers alike. These include, but are not limited to, mandatory mask-wearing at all times, handwashing, two-meter distancing, and sanitizing of countertops and work stations.

It is our goal at DHL Express to support our customers in reaching their business goals by tailoring our services to the needs of their business. As a prerequisite, we have been investing heavily in our international network. Rising volumes in the e-commerce market have increased the demand for logistics expertise and in response, DHL Express has invested comprehensively in new lower carbon-emission aircrafts, expanded its green fleet, enhanced its global hub and gateway network and top-of-the-line sorting technology armed with multiple processing capacities. These advances and those to come will help us, our customers and partners, to contribute significantly to improving our ecological footprint.

Mr. David M. Jackson - CEO of Colliers International in Vietnam

Investing US$8.71 billion (in 2018), the EU is one of the largest foreign investors in Vietnam. Therefore, the signing of the EVFTA once again helped Vietnam with fresh opportunities to attract capital flows from the EU. In addition to serious efforts of the Government and people of Vietnam to stamp out the pandemic, the Government is considering support packages for businesses and people affected by Covid-19, amendmending the land law and streamlining procedures to facilitate real estate transactions, which will help the property market recover faster and the economy regain growth momentum in the last three months of 2020.

A pre-Covid-19 study conducted by the Ministry of Planning and Investment of Vietnam showed that EVFTA and EVIPA will likely increase Vietnam's GDP by 4.6% and boost exports to the EU by 42.7% in 2025.

Among 28 EU member states investing in Vietnam, the Netherlands always takes the lead in registered value. By the end of 2019, the country ranked first among EU members, with 344 projects and US$10.05 billion, accounting for 39.43% of the EU’s total investment fund in Vietnam (26 projects and US$692.76 million more than a year earlier). Consul General Carel Richter said that, in the next five years, 200 Dutch businesses are expected to invest in Ho Chi Minh City. The Netherlands hopes that the city will be well prepared for this investment inflow.

Following the Netherlands closely are France, the United Kingdom and Germany. Due to the Covid-19 pandemic outbreak, the trade value between Vietnam and France sank 18.66% year on year to US$1.77 billion. However, according to experts, France’s FDI flows into Vietnam will soon likely increase when the EVFTA comes into effect, with many commitments already made to facilitate investment and trade.

EVFTA is expected to leverage the Vietnamese economy to recover, go back to the growth trajectory and attract more quality investors from Europe in the medium and long term.

Mr. Ewers, Attorney at Law (Germany), Foreign Registered Lawyer (Vietnam) is Country Manager Vietnam and Branch Manager HCMC of Rödl und Partner.

Vietnam's economic focus is constantly getting more and more future-oriented. This includes the ongoing revision of the Law on Investment, which is planned for 2021 with many amendments. With its rapidly developing and transparent investment environment, the liberal market economy holds great potential for foreign investors, particularly in the fields of renewable energy, high-tech and IT (not least thanks to its tax-friendly policies). Vietnam offers a good basis for foreign investors due to its rapidly growing middle class and a high number of consumers. The focus on traditional agricultural and labor-intensive industries, such as textiles and timber, is still there, but is currently shifting. Vietnam scores particularly well as an interesting diversification option to China.

Vietnam continues to develop positively. Remaining shortcomings are gradually being reduced in order to make the country even more attractive – especially for foreign investors. Even in view of the coronavirus, which is also hitting the economy in Vietnam hard, the development can be seen in so far as positive, as economic growth of 2.8% is still forecast for 2020. This is particularly the case as Vietnam is one of the few countries that has been able to keep the virus in check so far despite a new outbreak in Danang in the end of July 2020.

The EVFTA allows EU entrepreneurs a strongly improved access to Vietnam's market either as cross-border business or by way of establishing a local service entity. It sets a good basis for sustainable growth, mutual benefits in several sectors and will be helpful, in the current time of global pandemic and the future beyond, to balance trade relations between the EU and Vietnam. Foreign investors will face a range of new opportunities and may consider Vietnam as a very interesting business destination in the ASEAN/ASIA region.

Notably, limitations on the participation of foreign capital in terms of maximum percentage limit on foreign shareholding or the total value of individual or aggregate foreign investment are now similarly banned as measures which restrict or require specific types of legal entity or joint ventures. This will allow foreign investors to hold 100% of shares and hence fully control the company in Vietnam in sectors which previously required a joint venture with a local partner.

The fact that within ten years of entering into force 99 percent of all customs duties on goods deliveries from Europe will be eliminated will further strengthen the importance of the EU as a sales market for Vietnamese goods and vice versa. The EU is already Vietnam's second most important export market after the USA (after Vietnamese customs statistics, exports in 2019 were 41.5 billion US dollars). It remains to be seen, however, to what extent this effect is prevented or reduced in the short and medium term by the coronavirus.

Source: Vietnam Business Forum