EVFTA: Opportunities and solutions for Vietnamese enterprises

Nội dung text: EVFTA: Opportunities and solutions for Vietnamese enterprises

1. EVFTA: OPPORTUNITIES AND SOLUTIONS FOR VIETNAMESE ENTERPRISES Assoc. Prof. Ngo Thi Tuyet Mai1 Abstract: The Vietnam – European Union Free Trade Agreement (EVFTA) officially took effect on August 1st, 2020. Along with the Comprehensive and Progressive Agreement for Trans–Pacific Partnership (CPTPP), EVFTA is a new generation of free trade agreement with high standards and a wide range of commitments. The EVFTA implementation is expected to open more export opportunities for Vietnamese businesses, thereby boosting the country's economic growth. The paper applies the theory of international economic integration to demonstrate the capability of Vietnamese enterprises to take advantage of opportunities from EVFTA to promote exports to the EU in the upcoming time. 1. CURRENT SITUATION OF VIETNAM'S MERCHANDISE EXPORTS TO THE EU OVER THE PAST TIME The EU has always been one of the top three trading partners with Vietnam (after China and the United States) and is currently Vietnam's second most important export market (after the United States). In the period 2001–2018, the total export turnover of goods from Vietnam to the EU increased continuously, from more than 4 billion USD in 2001 to 41.86 billion USD in 2018. By 2019, export turnover of goods Vietnam's export to the EU decreased by 0.81% compared to 2018 but still reached 41.54 billion USD (Figure 1). Figure 1: Vietnam–EU: Stable trade relationship Source: The World Bank, 2020 Over the past years, Vietnam has always maintained a trade balance surplus with the EU. In the period 2001–2018, exports from Vietnam to the EU reached an average annual rate of 16%, higher than the average annual growth rate of imports from the EU to Vietnam of 14%. Vietnam has maintained a trade surplus with the EU for many years, helping Vietnam to offset trade deficit with other trading partners such as Korea, ASEAN countries and especially with China, which tends to increase over the years (Figure 2). 1 School of Trade and International Economics, National Economics University. 163
2. Figure 2: Vietnam’s trade balance with European Union Source: The World Bank, 2020 Vietnam exports goods to the EU are very diversified, but mainly labor–intensive goods, including processed and assembled goods, with low added value. The main products exported from Vietnam to the EU include electronics and electrical equipment, leather, footwear, apparel, machinery, coffee, furniture, seafood, etc. Main products imported from the EU are capital–intensive, high–tech goods, including electronics and electrical equipment, machinery, and pharmaceuticals, etc. Structure of Vietnam's exports by commodity shown in Figure 3. Figure 3: Sectoral trade relationship between Vietnam and EU Note: E&E= electronics and electrical equipment Source: The World Bank, 2020 Vietnam exports to the EU focus mainly on traditional markets such as the Netherlands, Germany, UK, France, Italy, Austria, Spain, Belgium, Poland and Sweden. These countries account for nearly 70% of the total export turnover of Vietnam to the EU market. The markets with export value of over 1 billion USD in 2019 are the Netherlands (6.88 billion USD), Germany (6.56 billion USD), the UK (5.76 billion USD), France (3.76 billion USD), Italy (USD 3.44 billion), Austria (USD 3.27 billion), Spain (USD 2.72 billion), Belgium (USD 2.55 billion), Poland (USD 1.50 billion) and Sweden (1.18 billion USD) (Europe – America Market Department, Ministry of Industry and Trade, 2020). 2. IMPLEMENTING EVFTA: OPPORTUNITIES AND CHALLENGES FOR VIETNAMESE ENTERPRISES The elimination of the majority of tariff barriers in EVFTA opens up great opportunities for Vietnamese businesses to access the EU market and develop export markets. Immediately after the 164
3. Agreement comes into effect, the EU will abolish import tax on 85.6% of tariff lines (equivalent to 70.3% of Vietnam's export turnover to the EU). After 7 years from the effective date of the Agreement, the EU will eliminate import duties on 99.2% of tariff lines (equivalent to 99.7% of Vietnam's total exports). For the remaining 0.3% of import turnover of Vietnam, the EU gives Vietnam a tariff rate quota with the rate within the quota of 0%. This is an opportunity for Vietnamese enterprises to improve their competitiveness against competitors from China and ASEAN countries due to the 10– 20% import tax difference. At the same time, it helps Vietnamese enterprises to compete equally on goods prices with countries such as Cambodia, Myanmar, Banladesh, etc. because the EU currently does not impose tariffs and quotas on imported goods of these countries. However, in order to take advantage of the preferential tariffs from EVFTA, Vietnamese enterprises must grasp the tariff reduction schedule in the Agreement and the exported goods must meet the rules of origin (both in terms of source), minimum domestic origin or raw material sourced outside EVFTA), and overcomes very strict EU technical barriers. A recent survey by VCCI–USAID (2019) shows that more than 60% of businesses think that the ability to meet the requirement of product origin certification in EVFTA is difficult and very difficult; 60% and 42% of enterprises think that the ability to meet environmental requirements and improve working conditions under EVFTA is difficult, and very difficult (VCCI–USAID, 2018). In addition, only a few firms know about the free trade agreements, including EVFTA (Figure 4). Figure 4: Knowledge Regarding Vietnam’s International Commitements Respondents to PCI Domestic Enterprise Survey Source: VCCI – USAID, 2018 EVFTA facilitates the restructuring of import and export markets of Vietnamese enterprises, and at the same time contributes to improving Vietnam's international trade balance. Currently, Vietnam's import and export markets are mainly Asian countries (accounting for 50% of export turnover and 80% of import turnover). EVFTA is considered as the Agreement with the highest tariff reduction that the EU has for Vietnam among the FTAs that Vietnam has signed. This stimulates Vietnamese enterprises 165
4. to shift their export markets from other less favorable markets to the EU to take advantage of the incentives from EVFTA. Moreover, the import–export structure between Vietnam and the EU is more complementary than direct competition, so the implementation of EVFTA will motivate Vietnamese businesses to continue penetrating the traditional market, at the same time exploiting new markets with great potential in the EU for Vietnamese exports. However, to get those opportunities, Vietnamese enterprises must improve product quality to meet the mandatory, high, and stringent requirements on environment, working conditions, hygiene, labeling and plant and animal quarantine (SPS), especially for agricultural products, etc. of the EU. More than 50% of Vietnamese enterprises are facing difficulties when investing in new technology and training human resources to improve product quality (VCCI–USAID, 2018). Joining EVFTA, Vietnamese businesses have the opportunity to participate in the regional and global value chains. According to the World Bank (2020) report, global value chains tend to be less dependent on some global manufacturing hubs such as China, paving the way for Vietnam to fill up gaps in the chain. The trade war between China and the United States is prompting multinational corporations to shift their investment capital from China to countries with potential investment environments like Vietnam. However, considering Vietnam's trade relations with the EU over the past time, it has not really played an important role in supporting Vietnam to join the global value chain. Vietnam's linkage with global value chains mainly through backward global value chain participation, slightly increased from 36.1% in 2005 to 44.5% in 2015, while links forward global value chain participation decreased (from 14.5% to 11.1%) in the same period (Figure 5). Figure 5: Vietnam’s value added as share of exports to the EU compared to the world Source: The World Bank, 2020 When implementing EVFTA, direct investment flows from the EU to Vietnam as a resulf of EVFTA are expected to increase, providing opportunities for capital cooperation, technology transfer and modern management methods, contributing to increase labor productivity and be more efficient for Vietnamese businesses. However, the Covid–19 pandemic is having a strong impact on the global value chain, causing supply chain failures (labor supply, raw material sources, international freight transportation, etc.). Meanwhile, Many Vietnamese enterprises depend heavily on importing raw materials from abroad. The implementation of EVFTA creates a driving force for Vietnam to improve the legal and institutional system, and improve the business environment, creating favorable conditions for Vietnamese exporters. Many provisions of EVFTA in areas such as environment, public procurement, 166
5. intellectual property, investment, labor standards, legal matters, rules of origin and non–tariff measures (measuring hygiene and phytosanitary and technical barriers to trade) will put pressure on Vietnam to reform its legal and institutional system in the direction of approaching international standards, promoting better business environment towards openness, transparency, fairness, and supports the establishment of modern institutions. In particular, the adjustment and amendment of legal regulations in the field of intellectual property to suit EVFTA will also contribute to helping businesses enjoy higher protection and create more investment incentives for businesses to perform research and activity creation and aim at innovating technology and improving the quality of Vietnamese export products. At present, the system of administrative procedures in Vietnam is still very complicated. Compared with other countries in the region (using data from Trade Portals established with World Bank support in other countries), the number of legal documents stipulating non tariff barriers (1,056 documents), the number of implementing procedures (398 producers), and the number of forms (397 forms) required in Viet Nam are much higher than in comparator countries (Figure 6). This is the main reason for high trade costs, limited trade facilitation and unwelcome business environment in Vietnam compared to other countries in the region. Figure 6: Non tariff measures: Vietnam compared to selected countries Source: The World Bank (2018) 3. CONCLUSIONS AND RECOMMENDATIONS FOR GOVERNMENT AND BUSINESS As shown above, EVFTA will create many opportunities for Vietnamese enterprises to boost exports and contribute to the country's economic growth. However, in order to take advantage of these opportunities, the Vietnamese government needs to have more active support for businesses with policies solutions and specific actions along with the efforts of the businesses themselves. 3.1. From the government perspective First, the government should continue to provide updated information on regulations and industry forecasts under the impact of free trade agreements in various forms for government agencies and business managers, especially updates on new generation FTAs such as EVFTA. Thereby, the government can help businesses accurately assess information, seize opportunities and improve production processes, improve product quality to easily access the EU market. Second, the government needs to have investment policies as well as offer stronger incentives to attract domestic and foreign investment in supporting industry development to meet the product origin 167
6. requirement stated in the EVFTA. The government should set priority and focus on developing key supporting industries such as textiles, footwear, automobile assembly, electrical and electronic equipment Third, the government needs to further facilitate and support enterprises, especially in terms of capital and connect Vietnamese enterprises to participate in the production chain of multinational corporations and global business partners through the deployment of many activities in the upstream and downstream trade. Fourth, the government needs to provide timely information and forecasts about technology markets, export markets, especially the large, potential and high demand markets for imported goods like the EU. In addition, there is a need to strengthen the close and effective coordination of trade promotion activities between government management agencies and other agencies and organizations that act as a bridge between businesses and the EU market such as the European Business Association in Vietnam (EuroCham), EU–ASEAN Business Council, German Trade and Investment Promotion Agency, French Trade Promotion Agency, etc. Finally, the government needs to continue improving the legal system, and policy mechanisms associated with the full implementation of international commitments in general, commitments in EVFTA in particular according to the roadmap. In the process of reviewing, amending and supplementing the system of legal documents and policies, the government should ensure consistency, transparency, equality and increasingly creating more favorable conditions for Vietnamese businesses to improve competitiveness of exported goods on the EU market. 3.2. From Vietnamese enterprises’ perspective First, in order to effectively take advantage of EVFTA's incentives, they need to actively explore the content of EVFTA, especially the commitments related to the reduction of tariffs and rules of origin. Specifically, businesses need to actively source raw materials and auxiliary materials (they can divert imported raw materials and auxiliary materials to domestic raw materials or auxiliary sources from Korea or EU member countries to meet the Agreement's rules of origin). Second, in order for their goods to overcome technical barriers and enter the EU market, businesses need to actively invest in advanced technology in production, and adjust production processes, management processes towards meeting the EU regulatory standards and procedures. Third, in the process of production and export, businesses need to focus on implementing food hygiene and safety requirement, attaching importance to social responsibility, and transparency of information on labor and production environment as specified in the EVFTA. Thus, it can be seen that the EVFTA implementation will bring many opportunities for Vietnamese enterprises to improve their competitiveness in the EU market in the upcoming time. The problem is that the government and Vietnamese enterprises need to understand and identify the opportunities as well as challenges in order to synchronously and effectively implement the solutions proposed above. 168
7. REFERENCES 1. Delegation of the European Union to Vietnam (2019), Guide to the EU–Vietnam trade and investment agreements. 2. The World Bank (2018). Taking Stock: An Update on Vietnam’s Recent Economic Developments, –REVISED–Taking– Stock–December–2018–English.pdf. 3. The World Bank (2020), Vietnam: Deepening International Integration and Implementing the EVFTA. 4. VCCI–USAID (2018), The Vietnam Provincial Competitiveness Index PCI 2018. 5. Vụ Thị trường châu Âu – châu Mỹ, Bộ Công Thương (2020), Quan hệ song phương Việt Nam – EU, n/default.aspx?page=news&do=detail&id=fe64a293–2b69–4c37–b1e0– cdd062451769. 169