SUSTAINABLE IMPACT ASSESSMENT OF THE

EU-VIETNAM FREE TRADE AGREEMENT

International Trade and Economics Series

June 2015
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 International Trade and Economics Series

SUSTAINABLE IMPACT ASSESSMENT OF THE

EU-VIETNAM FREE TRADE AGREEMENT
Paul BAKER1

ABSTRACT
Formal negotiations between the European Union and Vietnam for a comprehensive free trade
agreement began in June 2012 and were concluded in August 2015. The European Union has long
been a major trading partner of Vietnam, with broad complementarity existing between the two.
However, whilst average tariffs are relatively low between them, with a few notable exceptions for
some sensitive sectors such as seafood and textiles and garments, a number of measures applied
by each side restrict trade and investment in one form or another. This FTA Agreement is set to
remove tariffs on goods traded between the two sides, as well as export duties by Vietnam, create
new market access opportunities in services and investment, and liberalise Vietnam’s trade in
various services. From the analysis undertaken, it can be expected that this Agreement will benefit
Vietnam greatly, with Vietnam projected to grow significantly as a result of inflows of capital and
on-going productivity improvements.

THE NEGOTIATIONS
Formal negotiations between the European Union (EU) and Vietnam for a comprehensive free
trade agreement (FTA) began in June 2012, following less successful earlier attempts with the
Association of Southeast Asian Nations (ASEAN). In principle, these negotiations were concluded
last summer, on August 4, 2015, pending the settlement of outstanding legal and technical issues 2.
A comprehensive study was conducted and completed in 2014, with a view to assisting the
development of Vietnam’s negotiating strategy, as well as to consult with the business community
and concerned stakeholders regarding Vietnam’s interests.

The FTA covers (i) Market Access for trade in goods; elimination of tariff and non-tariff measures,
agreement on standards for key sectors, addressing SPS and TBT issues, trade facilitation and
customs cooperation, and rules of origin (RoO); (ii) Commitments for the liberalisation of trade in
services; (iii) Investment; (iv) Competition; (v) Government procurement; (vi) Regulatory
environment; (vii) Sustainable development, including labour issues; and (viii) State-owned
enterprises (SOEs) and the market status of Vietnam. The Agreement plans to remove nearly all
tariffs on goods traded between the two as well as export duties by Vietnam; to create new market
access opportunities in services and investment; and also includes the Vietnamese agreement to
liberalise trade in financial services, telecommunications, transport, and postal and courier
services3.

1
Paul Baker is the founder and Chief Executive of International Economics Ltd. He has regularly worked
in Vietnam since 2005 to carry out macroeconomic, trade and investment advisory services to the
Government of Vietnam. He has been a visiting lecturer in economics for Masters programmes at two
universities in Vietnam.
2
See http://europa.eu/rapid/press-release_IP-15-5467_en.htm
3
Ibid.

2
Sustainable impact assessment of the EU-Vietnam free trade agreement
P. Baker

VIETNAM AND THE EU AS COMPLEMENTARY PARTNERS

The EU is a major trading partner of Vietnam, with Vietnamese exports reaching €22.2 billion in
2012, and imports from the EU reaching €6.2 billion in 20144. Around one fifth of Vietnam’s exports
go to the EU, whilst 6 percent of Vietnam’s imports originate from the EU. As a result, Vietnam has
witnessed a growing trade surplus in goods with the EU. Since 2009, exports to the EU have grown
by a phenomenal rate (23 percent per year) while imports from the EU have grown by only 7
percent per year over the same period. The net effect in the trade balance has been to raise the
trade surplus by 34 percent per annum in favour of Vietnam.

Footwear, furniture, frozen fish

Figure 1. Main export markets for Vietnam
and coffee make up the major
90
Annual growth of exports from Vietnam 2010-14 (%)

exports from Vietnam to the EU,

80 UAE
whilst the major imports to
70 Vietnam include aircraft, cruise
60 ships, motor vehicles and
50 manufactured goods.
Segmenting trade according to
40
Hong Kong the WTO’s definition of
30 Thailand
India EU agricultural and non-agricultural
Korea
20 Malaysia Japan USA goods leads to the observation
Indonesia China
Cambodia
10 Australia that the greatest volume of
Singapore
0 trade is in non-agricultural
0 5 10 15 20 25 goods, whilst trade in
Share of Vietnam's Exports (2014) (%)
agricultural products is very low.
Source: ITC Trade Map Therefore, the trade surplus is
proportionally higher in non-
agricultural products, which is quite unusual to observe in trade patterns between a developing
and developed country.

Statistics on services are limited but according to 2007 GTAP 8 statistics, whilst Vietnam enjoys a
large surplus in travel and transportation services, it holds a deficit overall in commercial services
with the EU, particularly in professional services. The EU put total bilateral trade in services at €2.9
billion in 2013, with a slight surplus for the EU5. Vietnam’s trade in services has been relatively
buoyant but has systematically recorded a deficit that has been growing in the last five years,
reaching €1.4 billion in 2013.

Investment from the EU in Vietnam has also been significant, much in line with the large inflows
from all countries since Vietnam joined the WTO in 2007 6. Investment levels peaked at 40 percent
of GDP after accession, and subsequently fell to around 20 percent, the lowest level since market
reforms began7. Whilst FDI flows have recently slowed down due to the global financial crisis and

4
See http://europa.eu/rapid/press-release_IP-15-5467_en.htm
5
Ibid.
6 See https://www.wto.org/english/thewto_e/acc_e/a1_vietnam_e.htm

7
P. Baker (2015) Vietnam’s International Trade Performance, in IEC, International Trade & Investment Review,
Vol. 1, No. 1, February, p5

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 International Trade and Economics Series

some overheating in the economy, they remain at around US$7 billion a year, with EU investors
committing more than €1.3 billion in 2015 to become Vietnam’s third largest foreign investor.

The degree of trade complementarity between Vietnam and the EU is quite high, being higher with
the EU than some ASEAN countries, with the most significant exceptions being Japan and
Malaysia8. Vietnam trades proportionately less with the EU than would be expected based on the
importance of the EU in world trade. Therefore, there are expected to be major opportunities to
expand trade between the two. Moreover, a simple static trade flow analysis indicates that there
is potentially an additional US$100 billion, which could be generated in trade, if Vietnam could
increase production (and exports to the EU) in products it currently exports to the rest of the world.

PROTECTIONIST MEASURES IN BOTH MARKETS HAVE CONSTRAINED

THE LEVEL OF TRADE IN THE PAST
Vietnam’s average tariff applied to EU products was around 10 percent prior to the Agreement. A
few minor products retain tariff-rate quotas, such as those on eggs, sugar, tobacco, and salt.
Vietnam’s merchandise exports to the EU faced an average tariff of around 5 percent, although
this hid a number of tariff peaks. The highest tariff rates are applied to garlic, at 300 percent, but
there are also very high tariffs on beef and dairy products. Taking into account trade flows, the
most significant tariffs in the EU are on textiles, clothing and footwear as well as frozen fish fillets;
sectors where Vietnam enjoys very high comparative advantage. EU exporters to Vietnam also
face significant barriers, with specific items experiencing peak tariffs, notably alcohol and tobacco
products at 100 percent, as well as motor vehicles, particularly motorcycles, agricultural products
and some textiles9. Aside from these peaks, tariffs remain relatively low between the EU and
Vietnam. However, there are a number of measures applied by the EU and Vietnam which restrict
trade and investment in one form or another. These behind-the-border restrictions include non-
tariff measures (NTMs) related to SPS, and norms and standards on export restrictions. Beyond
the number of NTMs actually initiated by the EU, 27 special safeguard mechanism instruments are
also in force, whilst Vietnam also has a high number, particularly in the application of tariff
measures and export taxes.

Both the EU and Vietnam have undertaken significant commitments at the WTO under the GATS.
Vietnam undertook specific commitments in 11 services sectors (out of 12 categories) and 110
subsectors (out of 155) under the GATS. The Vietnamese also indicated that 100 percent foreign
ownership is permitted in most of the services sectors and subsectors under Vietnam's GATS
schedule. The EU undertook commitments in all 12 services sectors and in 115 subsectors (of the
155). Since the GATS, the EU has engaged in a number of bilateral FTAs which have gone beyond
these commitments, and is looking to secure the same from its partners. In contrast, Vietnam’s
commitments in services in bilateral or regional agreements have not gone beyond their GATS
commitments. It is important to note the degree of restrictiveness applied by countries in the field
of services, as reported by the business community. The results reveal major restrictions applied
by the EU for professional services, which are specific to each Member State. Vietnam also applies
restrictions in mode 4 and maintains significant restrictions on mode 3 mainly through the

8
P. Baker (2015) Vietnam’s International Trade Performance, in IEC, International Trade & Investment Review,
Vol. 1, No. 1, February, p6
9
For further details on tariff rates see, P. Baker (2015) Vietnam’s International Trade Performance, in IEC,
International Trade & Investment Review, Vol. 1, No. 1, February, p7

4
Sustainable impact assessment of the EU-Vietnam free trade agreement
P. Baker

requirement of joint ventures with a majority share for the Vietnamese party 10. Vietnam also
applies major restrictions in transport, which includes coastal shipping, as well as in
communications. Significant reductions in current trade costs through liberalisation are necessary
to bring Vietnam and the EU to the OECD average.

The FTA goes deeper on mode 4 liberalisation than either party has gone before in previous trade
agreements, and both sides have made significant market openings in other modes for trade in
services.

OVERALL, THE STUDY EXPECTS THE FTA TO BRING LARGE BENEFITS FOR
VIETNAM
Using general equilibrium (CGE) and partial equilibrium models, the 2014 study 11 estimated the
expected impacts arising from a negotiated FTA between the EU and Vietnam using a standard
Sustainability Impact Assessment Framework with a time horizon until 2025. The study compared
concessions made in other recent FTAs to determine the likely scenarios, with the main result
emerging that Vietnam should benefit greatly from an FTA with the EU.

Vietnam is projected to grow significantly as a result of inflows of capital and on-going productivity
improvement, with the FTA estimated to generate an additional 7-8 percent of GDP above the
trend growth rate until 2025. The analysis indicates that the industrial sector in Vietnam will
experience the largest net gains from an FTA, in particular the textile, clothing, and footwear
sectors. Gains are also evident in agriculture, although meat and dairy production could be
adversely affected. In general, Vietnam’s exports to the EU are estimated to increase by around 50
percent by 2020, well above the growth in the base, with a further boost expected from full FTA
implementation in 2025.

Using the GTAP model to simulate partial liberalisation of the services sector, it would be expected
that services contribute to 24 percent of the output of Vietnam’s economy compared with 42
percent for the goods sector. In the EU economy, by contrast, services contribute to 43 percent of
output. In general, the increase in total trade in services is modest. Unlike the trade in goods,
impediments in the services sector involve regulations rather than tariffs, so it is not always
possible to model liberalisation by removing a tax as to do so would involve redistributing tax
revenue that is not in fact collected. Therefore, the approach taken increases productivity in
bilateral trade between Vietnam and the EU, which implies that the reduction in Vietnam’s trade
costs benefits the EU.

Investment flows, which are estimated to increase from the EU, are likely to lead to further
dynamic gains. This could create large production shifts, which are not easily captured by the
model and so the potential levels may be higher than predicted. Under a negotiated FTA, Vietnam’s
exports to the EU are estimated to increase by an additional 10 percent until 2025. However, the
trade balance with the EU will deteriorate owing to additional imports of capital goods from the
EU, although it will remain positive until 2025. The size of the trade balance will depend on the
level of investment flows, intermediary inputs and other macroeconomic and monetary variables.

10
For further details see, P. Baker (2015) Vietnam’s International Trade Performance, in IEC, International
Trade & Investment Review, Vol. 1, No. 1, February, p8
11
Baker, P., Houng P.T.L., Vanzetti, D. et al (2014) Sustainable Impact Assessment EU-Vietnam FTA, MUTRAP,
Hanoi, September

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 International Trade and Economics Series

THE ENVIRONMENTAL AND SOCIAL IMPACT WILL LIKELY BE MODEST

The EU also recognises the value of upholding sustainability and environmental requirements in
its trade agreements, and provides for an institutional framework and mechanisms to be
established in order to monitor and review the application of the agreement and its effects on
both parties, as well as settle disputes. However, the FTA is likely to have a very limited impact on
the environment as Vietnam’s growth will inherently be detrimental to CO2 emissions and other
polluting issues. These environmental issues are best addressed with environmental rather than
trade policies. The EU could support Vietnam in its efforts to mitigate externalities generated by
its rapid economic transformation, but incorporating such provisions in a trade agreement would
have very limited benefits and could be used as a means to introduce protectionist measures by
the EU. Experience of using trade policies to target environmental goals, such as border taxes for
carbon intensive goods, are often poorly targeted and distortionary, and in a bilateral case, they
merely encourage trade diversion.

The FTA also seems to have a limited, albeit positive impact on reducing poverty levels in Vietnam.
Vietnam’s achievements in poverty alleviation have been extolled by the development community.
This performance is forecast to continue, although it is expected that 51.9 thousand people escape
poverty with implementation of the FTA.

CONCLUSION
The analysis undertaken suggests that the EU-Vietnam FTA will be very beneficial for the
Vietnamese economy in general. There are some concerns about an increased trade deficit, a loss
of tariff revenue and the cost of moving resources from declining sectors, but these concerns are
manageable and outweighed by the potential gains. The monitoring of the implementation of
commitments by both parties will be necessary to ensure that the agreement will be applied in a
transparent and non-distortionary manner and that the full benefits are fulfilled.

ABBREVIATIONS
ASEAN Association of Southeast Asian GTAP Global Trade Analysis Project
Nations
CGE Computable General NTMs Non-Tariff Measures
Equilibrium
EU European Union RoO Rules of Origin
FDI Foreign Direct Investment SOEs State-owned enterprises
FTA Free Trade Agreement SPS Sanitary and Phytosanitary
Measures
GATS General Agreement on Trade in TBT Technical Barriers to Trade
Services
GDP Gross Domestic Product WTO World Trade Organisation

6
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