The EU-Vietnam Free Trade Agreement (EVFTA) and the Investment Protection Agreement (IPA) are the most ambitious agreements in terms of market access, rules and values that the EU has ever signed with a developing country like Vietnam.
Since August 2020, the EU has for the first time enjoyed preferential access to a vibrant economy of nearly 100 million people, with the fastest-growing middle class in ASEAN and a young and energetic workforce. Up to 48.5% of tariff lines or nearly 65% of EU exports to Vietnam have enjoyed a 0% tax rate since the trade agreement took effect.
The EVFTA has placed EU exporters and investors at least on par with other countries and regions that have signed FTAs with Vietnam such as ASEAN, Australia, New Zealand, Chile, China, India, Japan, Korea and 11 member countries of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).
For Vietnamese traders, the benefits after one year of implementation of this agreement are even higher. In terms of markets, the EVFTA allows Vietnamese exporters to access more than 450 million European consumers.
Since the EVFTA took effect, about 85.6% of the total tariff lines have been eliminated for Vietnamese goods. This figure accounts for 70.3% of Vietnam’s total export turnover to the EU. The gradual elimination of import taxes explains the 20% growth over the same period last year for Vietnam’s exports to the EU.
For the services and investment sectors, the agreement provides the best market access opportunity Vietnam has ever offered to a trading partner. The level of liberalization of the service sector offered by Vietnam has actually exceeded its commitments in the World Trade Organization (WTO).
Important service industries opened under the EVFTA include services in the areas of business administration, computer services, postal services, social services, higher education, environmental services, distribution, financial services, shipping, air transport and telecommunications.
For example, EU investors are allowed to transfer financial information and process financial data across borders, as well as to provide advisory intermediary services and other supplementary financial services.
Regarding insurance, it is now possible to cede reinsurance across borders. EU investors can also set up their branches in Vietnam to provide health insurance services and reinsurance services.
Another example of deep commitments is in the shipping sector. Vietnam has liberalized the transport of passengers and goods across borders, and created better conditions for EU investors to set up companies in Vietnam to provide services.
In the field of telecommunications services, EU investors can set up wholly foreign-owned companies to provide Internet services and value-added services such as email, online information and data processing.
Such market access, coupled with important regulatory requirements, helps to ensure that the role of an independent regulator is strengthened, and that EU investors operate on an equal foundation receive equal treatment compared to domestic suppliers.
Friendly investment environment
The EVFTA and IPA not only create new opportunities for growth and development, but also promote sustainable development for both sides. These agreements include strong commitments to protect people’s core rights in the workplace and in the living environment. We have seen positive changes in this area when Vietnam enacted a new Labor Code in January 2021.
Vietnam has also joined a number of core international labor conventions such as the International Labor Organization’s Convention on the Abolition of Forced Labor 1957 and the Convention on the Right to Organize and Collective Bargaining. All these changes in labor standards not only create more jobs, but more importantly help create a better working environment and improve income for Vietnamese people.
The FTA and IPA were negotiated together as a package of commitments on investment and trade. They complement each other. The FTA includes ambitious commitments to market opening and liberalization of foreign direct investment.
This will give EU investors an important advantage in accessing the Vietnamese market and vice versa, as well as help create a level playing field for their activities in fair, predictable and non-discriminatory conditions.
The IPA will protect the assets of EU investors in Vietnam and of Vietnamese investors in the EU. Together these agreements create a friendly investment environment between the EU and Vietnam.
The IPA sets standards for investment protection, which are fundamental guarantees that governments must respect some basic principles of treatment that foreign investors can rely on when making investment decisions.
These guarantees include: non-discrimination; right of possession allowed only with prompt and satisfactory compensation; ability to transfer and repatriate funds associated with an investment portfolio; guarantee of fair and equal treatment and material security;
It also includes commitment that governments will honor their written and legally binding contractual obligations to investors, and compensate for damage in certain cases related to war or armed conflict.
The new structure of EU international agreements, in particular the separation into FTA and IPA, allows trade and investment liberalization commitments under the FTA to come into force rapidly, while the IPA will come into force immediately after ratification by all 27 member states.
Meanwhile, protection for EU investors under bilateral investment agreements of 21 member states will still be maintained. As of January 2022, the IPA has been ratified by the Czech Republic, Denmark, Estonia, Greece, Croatia, Latvia, Lithuania, Hungary, Romania and Sweden.
It is important that the IPA is built on the core values of the EU: the United Nations Charter and the Universal Declaration of Human Rights, sustainable development and transparency agreed in the EVFTA; and protection only for investments made in accordance with domestic law, including obligations related to environmental and labor protection as well as respect for human rights;
And, promotion of responsible business behavior through the tools such as the Organization for Economic Cooperation and Development’s Guidelines for Multinational Enterprises, the United Nations Global Compact and the Tripartite Declaration of the International Labor Organization for Sovereign Rights aims to regulate and protect the interests of citizens.
The IPA offers a high level of investment protection while protecting the EU and Vietnam’s right to regulate and pursue legitimate public policy objectives.
Under the agreement, the host country can impose regulatory obligations on investors, based on the level of public interest protection it deems appropriate. For their part, investors must comply with all domestic laws of the country where they invest in order to benefit from investment protection.
An important new element of the agreement is the inclusion of a modern and reformed investment protection framework, including the Investment Court System (ICS) for the settlement of investment disputes, eliminating controversial parts of the old-style investor-state dispute settlement (ISDS) mechanism.
Vietnam needs to exert more effort
In contrast to the investment treaties in force between Vietnam and EU member states, all procedures under EVIPA will be completely transparent, and hearings will be open to the public and interested third parties. For example, non-governmental civil society organizations will be allowed to submit comments. This ensures that all aspects of human rights and sustainable development are effectively adjudicated by the Investment Court.
Crucially, the IPA pinpoints when governments are in breach of their fair and equal treatment obligations and eliminates the scope of arbitrary interpretation. Investment agreements are also tight enough to prevent “fake investments”. The agreement does not protect so-called “shell” or “ghost” companies. To be eligible to become an investor, companies must run actual business operations in the EU or in Vietnam.
Accurate and unique understanding and enforcement of EVFTA and IPA remains a challenge. Although the text of the agreements is quite clear, there are differences in the interpretation of the commitments. This requires Vietnam to make more efforts to improve internal coordination, and possibly to deal with forces that are resisting the country’s international economic integration efforts.
At the highest political level, this strong spirit of cooperation with the EU in the implementation of the agreements is evident. However, it seems that not all public agencies have the same level of understanding and commitment.
The opportunity in the IPA is huge. The EU’s total current investment in Vietnam is estimated at 22.2 billion USD, far below the potential. The IPA is expected to usher in a new investment era for Vietnam, in which EU and non-EU investors will come to Vietnam to reap the benefits of EVFTA and IPA.
The vision for Vietnam to become a regional manufacturing hub for the whole of ASEAN is not out of reach, but exploiting those opportunities is highly dependent on the real desire of the government agencies that are responsible for implementing these agreements, as well as the initiative of domestic enterprises in seeking and working seriously with European investment partners.
The effective implementation of new-generation free trade agreements (FTAs) can considered as the driving force behind fulfilling the export target of over US$356 billion set for this year.
Vietnam is seeking further approval of the EU-Vietnam Investment Protection Agreement by member states of the EU, as the deal will protect the benefits of investors of both sides when performing in their respective territories.