Vietnam ratified the EU Vietnam Free Trade Agreement (EVFTA) on June 8 that will take effect beginning July 1. The agreement is expected to energize the Asian country’s manufacturing sector and export potential.

 

Under the EVFTA, the EU will lift 85pc of its tariffs on Vietnamese goods, with a plan to gradually cut tariffs on the remaining goods within the next seven years. Vietnam, on its part, will lift 49pc of its duties on imports from the EU and will phase out the rest by 2030. 

 

The deal was signed in Hanoi in June 2019 and was ratified by the European Parliament in February 2020. The EVFTA could increase Vietnam’s GDP by around 2.18-3.25pc per year in the first five years, 4.57-5.30pc in the subsequent five years, and 7.07-7.72pc in the third five-year cycle. Vietnam’s export turnover to the EU could expand by 42.7pc by 2025 and 44.37pc by 2030 compared to a no-deal scenario.

 

The EVFTA agreement is tied to a second pact that includes investor protections. It also gives EU companies equal treatment with domestic bidders in competing for public contracts in Vietnam. Vietnam also pledged to work on human rights, labor rights and climate change as part of the agreement.

 

The timing is crucial as both Vietnam and EU establish paths for economic recovery after several months of closures due to COVID-19. Vietnam closed the border with China in January and began imposing social distancing policies in February that lasts into April. 

 

Vietnam is re-evaluating shortcomings in its manufacturing supply chains since output was constrained when factories reopened due to delays in materials from China. The country is also encouraging manufacturing companies to develop diversified relationships to minimize risks from one source. Vietnam’s key exports are textiles, footwear, and electronics.

 

Along with diversifying raw materials and components sourcing, Vietnam is actively seeking to attract new regional investments as well as factories that are seeking a new home out of China. Additionally, the EVFTA could help Vietnam raise its labor skills, work standards, advance its corporate governance infrastructures, and attract advanced technologies. 

 

Vietnam produced nearly 17mn of crude steel in 2019. Prior to COVID-19, the country was slated to grow by 6-8pc in 2020 and import about 5mn mt of steel scrap during the year. COVID-19 has greatly affected that forecast and a slight decline in crude steel production from 2019 levels is expected in 2020.

 

Vietnam is the EU’s second-largest trading partner in Southeast Asia with two-way trading at $56bn in 2019. Singapore is the only other country in the region that has a free-trade agreement with the EU.

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