EU – Vietnam Free Trade Agreement: Vietnam’s Competitive Gains

EU – Vietnam Free Trade Agreement: Vietnam’s Competitive Gains

On February 12th, 2020, the European Parliament ratified the EU-Vietnam Free Trade Agreement (EUVFTA) and the EU-Vietnam Investor Protection Agreement (EUVIPA). It is expected that the agreement will be ratified by the Vietnam government by May 2020 and will consequently enter into force. The agreement, which includes significant commitments on tariff reductions, investor protection, and trade facilitation will have a tremendous impact on exporting firms, foreign investors, and consumers in Vietnam. 

Vietnamese exporting firms 

Given the recent slowdown in trade growth in major economies, Vietnam remains an outlier. The country’s import-export turnover crossed USD 500 billion in 2019. This comes at the heels of the country’s trade diversion benefits that arose from the escalations in trade tensions between the US and China in June 2019.  At the time, the country’s GDP expanded by 6.71% (quarter on quarter, Q2 2019) heralded by 9.14% growth in the manufacturing exports.  To many, this trade diversion was a welcome gain, unexpected in many ways. However, for Vietnamese policymakers, the gains were not unprecedented. When quizzed about the export outperformance in 2019, Minister for Trade and Industry Tran Tuan Anh pointed toward the national development strategy for sustainable import and export which was adopted in 2011. The strategy sets a goal of 10% export growth by 2020. Since 2011, the strategy has driven in major reforms in state-owned enterprise divestment and the creation of a credit-friendly business environment. 

The EUVFTA and EUVIPA come within this context. It is one among many steps taken by the Vietnamese government to expand Vietnam’s production and export capacities.  FTAs have been a tool of choice too. Currently, there are 12 FTAs that Vietnamese exporters can take advantage of including agreements with major markets such as Japan, Canada and South Korea. In each FTA case, export growth has been in double digits. 

As the data above shows, the major exporting sectors include heavy and light manufacturing with the former now accounting for nearly 50% of goods leaving Vietnam’s shores. Further, between 2015 – 18 the EU’s share of Vietnam’s exports has averaged 18.3% and has shown growth in absolute terms. For Vietnamese exporters, the EUVFTA is a gateway into an 18 trillion USD market. The Vietnamese government believes that the move will enable exports to the EU to increase by 42.7% by 2025. 71% of customs duties will be eliminated for Vietnam’s exporters including in key industries such as textiles, electronics, footwear and agriculture. Some such as textiles and footwear have a 7-year timeline for phasing out duties. Given the labour intensity of these sectors, the FTA could also have a net positive effect on national income in Vietnam. 

EU FDI in Vietnam

For EU foreign investors, the move signals a positive development in Vietnam’s business environment. FDI in Vietnam amounts to 38.2 billion USD. A bulk of this investment has been in manufacturing (64.6% of invested capital) given Vietnam’s ability to offer cost arbitrage. The EU has been an active foreign direct investor in Vietnam. EU investors account for 50.1% of total FDI projects and 50.6% of pledged capital. This FDI has targeted sectors such as heavy manufacturing with 180 projects valued at 4.2 billion and oil and gas exploration with 19 projects worth 2.5 billion USD. 

The agreement has two major implications for EU FDI in Vietnam. The first is the EU- Vietnam Investment Protection Agreement (EUVIPA). The agreement provides for an investor-state dispute settlement provision aimed at protecting, among others, EU investors from expropriation and lack of fair and equal treatment. Members of the investment tribunal and appeal tribunal will include nominees from EU, Vietnam and a third party. Nominations are limited to individuals who are independent and not affiliated with any state entity. The agreement also states that domestic courts cannot question the enforceability of the dispute resolution process, which gives investors an added edge of certainty. 

Second, a large portion of FDI in Vietnam has export interests. The data below shows more than 70% of Vietnam’s exports are linked to FDI.  EU investors will thus also benefit from export capacity expansion as a consequence of lower import duties in the EU. More importantly, the agreements call upon Vietnam to adopt international standards which further increases the prospects for FDI linked exports which are subject to stringent standards audits in jurisdictions such as the EU. 


The agreement also has important implications for firms importing from the EU particularly in sectors such as agriculture, pharmaceuticals and automobiles.

As the figure shows, fuels and raw materials followed by machinery have featured prominently on the Vietnamese import bill. Given that these are intermediate goods and are used for production, the EUVFTA could have a positive impact on production costs for domestic manufacturing. In addition, the agreement includes substantial reductions on duties on imports as shown below. 

Goods duty (highest) duty under EUVFTA
Pharmaceuticals 8% 0%
Machinery 35% 0%
Cars 78% 0%
Wine 50% 0%

For the pharmaceuticals industry, for example, the agreements are welcome developments. The provisions allow foreign firms to establish companies to import and distribute duty-free products that have been authorized for sale in

In conclusion, over the past year, Vietnam has benefitted from trade diversion due to the US-China trade war. However, its gains must be placed in the context of cumulative changes in regulations within the economy. The EUVFTA and EUVIPA provide additional sources of gains for the Vietnamese economies. Vietnamese exporters have certainty over preferential access to the 18 trillion USD European market. Further, since several FDI investors have exporting interests, FDI investors could also stand to benefit particularly in heavy manufacturing. The move is also beneficial for Vietnamese importers which could show up in lower production costs for local firms. Viewed cohesively, this move makes Vietnam’s expansion of market shares in the EU a realistic probability over the medium to long term. 

Categories: Asia Pacific, Europe

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