FTA-driven Extensive Integration: Opportunities and Challenges

 

Most recently, Vietnam inked three important agreements, which may mark a major turning point in its international integration process, namely Vietnam - Eurasian Economic Union FTA (EAEU), Vietnam - EU FTA (EVFTA) and Trans-Pacific Partnership (TPP).

 

The Vietnam - Eurasian Economic Union FTA (EAEU) was struck on May 29, 2015 and made effective October 5, 2016. The Eurasian Economic Union comprises Russia, Belarus, Kazakhstan, Armenia and Kyrgyzstan.

 

The agreement allows Vietnam - the only country to date - to enjoy trade preferences with the EAEU. In general, the two sides will slash duties on 90 per cent of tariff lines, equivalent to 90 per cent of bilateral trade turnover.

 

Currently, the trade value between Vietnam and EAEU states is low. The bilateral trade value between the EAEU (with a population of about 183 million people) with Vietnam (a population of about 93 million people) is about US$4 billion. The FTA is expected to bring the value to US$10-12 billion by 2020. Vietnam’s shipments to the EAEU are forecast to rise 18-20 per cent annually.

 

Such contents as intellectual property, competition and sustainable development in this agreement are largely cooperative and compliant with Vietnam's commitments to the WTO and other FTAs (signed or under negotiation), thus creating the framework for the two parties to consider further cooperation when they deem appropriate.

 

Vietnam and the European Union (EU) concluded EVFTA negotiations in December 2015, marking an important step in the process of strengthening comprehensive and profound bilateral ties, especially trade and investment relations. With the level of commitments agreed, EVFTA is a high quality comprehensive pact that ensures balanced benefits for both Vietnam and the EU. The agreement is expected to provide strong motivations for mutual trade and investment development. Besides, with their strong complementarities in export structures, Vietnam and the EU also want EVFTA to bring positive impacts to both sides to drive economic growth, generate more jobs and maintain stable social security. To achieve EVFTA benefits, Vietnam and the EU agreed to complete ratification soon to bring it into effect in 2018.

 

In more than a decade, trade and investment relations between Vietnam and the EU have made great progress. The two-way trade turnover increased nearly 7 times from approximately US$6.3 billion in 2003 to US$41.2 billion in 2015, making the EU a leading trading partner of Vietnam. Of the sum, Vietnam’s exports to the EU valued nearly US$31 billion and the EU’s exports to Vietnam were worth more than US$10 billion. Importantly, the import and export structures of both parties are complementary rather than competitive and confronting. On investment, the EU is also a major investor in Vietnam with 1,809 valid projects with US$23.16 billion of investment capital, accounting for 8.7 per cent of FDI projects and for 8 per cent of registered FDI value in Vietnam.

 

EVFTA is expected to provide a boost for Vietnam - EU trade and investment relations. Accordingly, with respect to import duty, only about 42 per cent of exports from Vietnam to the EU are imposed zero tax and dependent on Generalised Scheme of Preferences (GSP). EVFTA will raise this rate to over 90 per cent after a stable roadmap. Or in other words, given the last year’s value, up to US$28 billion of Vietnam’s export value to the EU will be exempt from tariffs. Furthermore, the pact includes clear and effective provisions and mechanisms concerning trade in goods, rules of origin, SPS, TBT, transparency, intellectual property, embracing geographical indications, capacity building cooperation, trade and sustainable development. With commitments to open markets for goods, services, public procurement, investment policy commitments, State-owned enterprises (SOEs) and policy transparency, this agreement will increase high-quality investment flows from the EU to Vietnam.

 

The most notable is TPP. Participants account for almost 36 per cent of global GDP and more than a quarter of global trade. Vietnam is well positioned to benefit from this agreement. According to the Vietnam 2035 Report, when TPP goes into effect, Vietnam's GDP may expand by extra 8 per cent in 2035. Other analysts estimate that Vietnam will enjoy benefits at a 2-digit level, more than most of other TPP signatories. Vietnam may also take advantage of TPP commitments to carry out policy reforms which are particularly hard to do because of political and social implications.

 

To date, leaders of 12 TPP member countries have agreed to step up efforts to enforce the agreement, despite the objection of US president-elect Donald Trump.

 

To make good use of FTA advantages while limiting adverse impacts from the market opening in accordance with FTA commitments, Vietnam has introduced the following key solutions: Bettering the investment and business climate; enhancing national competitiveness; reviewing administrative procedures relating to business; developing and implementing programmes to raise local competitiveness index; building really effective business support programmes and strategies in the period of integration such as developing corporate brand names, providing information, developing supporting industries, facilitating business restructuring; reviewing economic restructuring scheme in the new context, with the focus put on research and assessment of impacts of TPP and FTAs on various sectors; reassessing agriculture and animal husbandry in relation to localities; and gradually divesting from State-owned enterprises, creating favourable conditions for private sector development.

 

The international economic integration with FTAs has opened great development opportunities for Vietnam, but seizing such opportunities is an enormous challenge as it requires the engagement of the entire political system and the business community of Vietnam.