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EU and Vietnam Reach Agreement in Principle on FTA

Friday, August 21, 2015
Sandler, Travis & Rosenberg Trade Report

The European Union and Vietnam have announced that after nearly three years of “intense” negotiations on a bilateral free trade agreement they have agreed on all issues of substance and reached a mutually beneficial and balanced package. The European Commission said this is the “most ambitious and comprehensive” FTA the EU has ever concluded with a developing country, and EU Trade Commissioner Cecilia Malmström added that it “sets a new, better and modern model” for FTAs between the EU and developing countries.

For the EU, this is the second FTA with a member of the Association of South East Asian Nations and could help relaunch talks on an FTA between the two blocs. Negotiations stalled after seven rounds over disagreements on human rights and other issues, but since then the environment has improved. The EU has negotiated a number of partnership and cooperation agreements with individual ASEAN members and Myanmar has rejoined the world economy after a series of economic and political reforms. Brussels may also be eager to return to the table given that negotiations toward the Regional Comprehensive Economic Partnership, an FTA between ASEAN and India, China, Japan, Korea, Australia and New Zealand, could be completed this year.

Vietnam, meanwhile, expects that the FTA will enable it to lower its dependence on trade with China by further increasing commerce with the EU, which grew 9 percent in 2014 to €28.2 billion. Vietnam exported €22.1 billion worth of products to the EU, led by telephone sets, electronic products, footwear, textiles and clothing, coffee, rice, seafood and furniture. EU exports to Vietnam totaled $6.2 billion and were dominated by high-tech products such as electrical machinery and equipment, aircraft, vehicles and pharmaceutical products. Total bilateral trade in services amounted to €2.9 billion in 2013, with a slight surplus for the EU.

The FTA is not expected to take effect until late 2017 or early 2018. Negotiating teams must now work to settle some remaining technical issues and finalize the legal text, which could be completed by the end of the year. The FTA will then need to be approved by the Council and the European Parliament.

Tariffs. Nearly all tariffs on two-way trade in goods will be eliminated. Vietnam will liberalize 65 percent of import duties on EU products when the FTA takes effect and the rest over a 10-year period. EU duties on Vietnamese goods will be eliminated over seven years. The European Commission said called this “a far-reaching, fully symmetrical tariff elimination that has never before been achieved with a developing country, but with adequate transition periods to allow Vietnam to adapt.”

EU tariffs on some sensitive agricultural products – rice, sweet corn, garlic, mushrooms, sugar and high-sugar-containing products, manioc starch, surimi and canned tuna – will not be fully liberalized but will be subject to tariff-rate quotas.

Vietnam will also remove almost all its export duties in its trade with the EU and has agreed not to increase a few that will remain in force.

Non-tariff barriers. The FTA contains a chapter on sanitary and phytosanitary measures that is specifically aimed at facilitating trade in plant and animal products. The two sides agreed on principles such as regionalization and the recognition of the EU as a single entity that will facilitate access to the Vietnamese market for EU companies producing a large variety of products, including electrical appliances, information technology goods, and food and drinks.

The FTA will contain a specific annex with provisions to address NTBs in the automotive sector, including the recognition of the EU vehicle whole certificate of conformity five years after the agreement enters into force.

For the first time in an FTA, Vietnam accepted the “Made in EU” origin marking for non-agricultural goods (with the exception of pharmaceuticals). This is a significant win for EU producers that often use materials originating in a variety of EU member states. Member state-specific origin markings will continue to be accepted as well.

Services. Vietnam has committed to substantially improve access for EU companies to a broad range of services sectors, including business, environmental, postal and courier, banking, insurance and maritime transport services. Vietnam has also accepted a set of regulatory disciplines in key sectors such as financial services, telecommunications, maritime transport and postal services. Moreover, the agreement will contain a clause allowing the best results of FTAs being negotiated at the moment to be incorporated in the EU-Vietnam FTA.

Investment. Vietnam has committed to open up to investments in manufacturing in a number of key sectors, including food products and beverages, fertilizers and nitrogen composites, tires and tubes, gloves and plastic products, ceramics and construction materials. Provisions on investment protection and dispute settlement are still being negotiated in light of the new EU approach on investment dispute settlement.

State-owned Enterprises. The agreement includes disciplines on SOEs and rules on transparency and consultations on domestic subsidies that represent the “the most ambitious disciplines that Vietnam has ever agreed to.”

Pharmaceuticals. The EU pharmaceutical sector will benefit from improved data protection and the possibility to extend patents up to two years if there are delays in the marketing authorization. There is a specific annex setting forth other provisions facilitating trade in these products, which account for about nine percent of total EU exports to Vietnam. Vietnam has also taken commitments concerning procurement of pharmaceutical products and allowed foreign-invested companies to import and sell medicines to distributors and wholesalers within the country.

Government Procurement. The FTA includes disciplines in line with rules under the World Trade Organization Government Procurement Agreement that will yield a degree of transparency comparable to EU FTAs with developed countries and more advanced developing countries.

Geographical Indications. Geographical indications for 169 food and drink products (e.g., Champagne, Parmigiano Reggiano cheese and Scotch whisky) will be reserved in Vietnam for products imported from the specific European regions that they traditionally come from. Vietnamese GIs (Mộc Châu tea or Buôn Ma Thuột coffee) will also be recognized in the EU, and new GIs may be added in the future.

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