Ample room for businesses to gain more from EU-Vietnam FTA

Three years since it entered into force, the EU-Vietnam Free Trade Agreement has brought certain benefits, but there is still plenty of room for Vietnamese businesses to gain from the deal, writes Dr Nguyen Thai Chuyen, lecturer in international business at RMIT University.

Effective from August 1, 2020, the EU-Vietnam Free Trade Agreement (EVFTA) is the fourth free trade agreement that the European Union has signed with an Asian country, after Japan, South Korea and Singapore.

The EVFTA commits to eliminating or reducing tariffs for most goods and services between Vietnam and the EU, creating vast opportunities for Vietnamese businesses to access the EU market and promote the export of goods. It also has clear regulations on the origin of goods to ensure transparent and fair trade.

Moreover, the agreement protects investors and creates a stable and safe investment environment for businesses. This can help build trust and attract investment from EU businesses into Vietnam. The EVFTA also opens up opportunities for Vietnam to access advanced technology and knowledge from the EU, creating favourable conditions for technology transfer and the modernization of manufacturing industries.

Notably, the agreement affects many other areas such as intellectual property protection, reduction of customs clearance procedures, environmental protection, government procurement, and dispute resolution. These promise to create comprehensive changes and improve the quality of business transactions and the business environment in Vietnam.

The share of Vietnamese goods in the EU

Despite many disruptions caused by Covid-19 in the first three years of the EVFTA, export turnover from Vietnam to the EU has experienced growth, with year-on-year increases of 14.2% in 2021 and 16.7% in 2022.

Many products have been quite successful in taking advantage of the benefits from the agreement. Items with annual export turnover of more than one billion US dollars to the EU market during the past three years include phones and components; computers; footwear; machinery; equipment and other spare parts; textiles and garments; coffee; iron and steel; and seafood.

Most of these products have experienced significant growth, especially iron and steel, with exports growing by over 844% in 2021 compared to 2020, and 634% in 2022 - also compared to 2020.

However, phones and components recorded a year-on-year decrease of 9.5% in 2021 and 15.7% in 2022, respectively. The main reasons are the lack of input materials due to China’s border closure under Covid-19 and the Russia-Ukraine conflict causing a global supply chain crisis.

Overall, Vietnamese enterprises have derived limited value and benefits from export activities because Vietnamese brands are not yet widely known in European countries. The share of Vietnamese goods in the EU’s imports is only around 2%, according to Trading Economics.

Some of Vietnam’s key export products have not performed as well as expected in this market. Vegetables, seafood and rice are a few examples. Despite good growth, these items currently represent only a very small part of the total value of the EU’s imports for such items.

Seafood products have also suffered for not having successfully removed the yellow card for Illegal, Unreported and Unregulated (IUU) Fishing from the European Commission. In addition, a number of commodities have not shown signs of growth after the agreement came into effect, such as paper, paper products, and cashew.

Vietnamese businesses face fundamental challenges

Vietnamese companies still encounter many difficulties in complying with the rules of origin under the EVFTA. For agricultural and forestry products, producers and traders must prove that the product is legal and does not violate regulations on deforestation. However, Vietnam does not yet have a formal system of origin from each farmer and each growing area in order to provide evidence to the EU market.

Moreover, for nearly six years now, Vietnamese seafood has been subject to the IUU yellow card issued by the European Commission because of illegal fishing practices, making seafood exports difficult. Fisheries enjoy the most preferential tariffs, but such benefit will not be fully utilized if the IUU yellow card still exists.

The EU is a demanding market with strict quality standards and safety requirements for industrial goods, as well as hygiene and quarantine standards for imported agricultural products and food. These pose another obstacle for Vietnamese enterprises because most of the raw materials for the production of goods in Vietnam are imported from China and other ASEAN countries, making it difficult to control quality standards.

On the other hand, the competitiveness of Vietnamese enterprises is still weak compared to other countries in the region and globally. Many Vietnamese exports to the EU do not have their own brands or are distributed through foreign brands. This hinders profit increases for Vietnamese businesses, and at the same time causes high risks in the transportation of products.

Many Vietnamese enterprises have yet to be proactive in exploring and taking advantage of the benefits from the EVFTA. According to a survey by the Vietnam Chamber of Commerce and Industry (VCCI) on the awareness of the EVFTA among businesses, nearly 94% of respondents had not heard of or knew about the EVFTA, but only circa 40% of them understood well or quite well how the commitments in the agreement affect their business. FDI enterprises had the highest rate of awareness at 43%.

In addition, businesses have not yet fully leveraged the advantages of this agreement to expand their reach to other member countries. Among the 27 member states of the EU, many Vietnamese businesses conduct the majority of their trade with five or six countries, while trading with other countries is still very limited.

How to make the most of the EVFTA?

Europe is a fastidious market with very strict product standards, so Vietnamese businesses wanting to access this market will need to make efforts to change and adapt, and take full advantage of support from the authorities and associations.

Businesses should actively acquire knowledge and improve their understanding of EU standards and regulations. They can seek support from the authorities, especially via government-led programs to raise business competitiveness.

Moreover, companies should focus on improving their management capacity, talent quality, technological innovation, and brand development, as well as devising long-term business strategies to meet the demand of the 500-million-strong EU market.

In addition, it is necessary to strengthen cooperation and links between enterprises, especially through associations. This will enable enterprises to share knowledge and techniques, and expand their distribution networks, thereby raising their competitiveness in the EU market.

For export businesses in particular, they will need to raise the quality of their products and services, while adopting the high safety and environmental protection standards required by the EU. They should also diversify their customer base and reduce the risk of depending on a single export market. It is important that they follow consumer trends and apply more creativity, while maintaining direct, continuous and fast-paced interactions with customers.