The European Commissioner for Trade Cecilia Malmstrom and the Vietnamese Trade Minister Tran Tuan Anh signed the European Union.-Vietnam Free Trade Agreement (EVFTA) on Sunday 30 June 2019. The agreement creates new opportunities to further boost commercial ties between the (still) 28 member states of the European Union (EU) and one of Southeast Asia's biggest manufacturing economies.
The EVFTA looks to foster an open and fair partnership with a focus on rules-based trade liberalisation and long-term economic integration.
The EVFTA is a new generation agreement and the most ambitious free trade deal between the EU and an emerging economy to date as it covers not only trade-related issues but also those in investment, governance, protection of workers’ rights and benefits as well as the environment. The deal is the EU's second free trade agreement in Southeast Asia, being a stepping stone to a future region-to-region agreement with the entire Association of Southeast Asian Nations (ASEAN).
The agreement is beneficial to EU exporters and investors as it brings them into the same category as other regions or countries that have already signed FTAs with Vietnam. These include ASEAN, Australia, New Zealand, Chile, China, India, Japan, and South Korea, and the countries that make up the Comprehensive and Progressive Agreement on Trans-Pacific Partnership (CPTPP). At the same time, Vietnam benefits as it joins the select ranks of South Korea, Japan and Singapore, the only Asian nations that have signed free trade agreements with the EU.
In light of the ratification procedure, Vietnam and the EU have agreed to divide the EVFTA into two parts: the free trade agreement and the Investment Protection Agreement (EVIPA). Currently, the agreements are nonbinding under international law until the successful completion of the ratification process.
The EVFTA requires ratification by the European Parliament before it can enter into force. The EVIPA, meanwhile, must be additionally ratified by the Parliament of each EU member country and is therefore expected to take longer to implement. Both the EVFTA and EVIPA will be presented to the National Assembly in Vietnam for ratification which will either be in November 2019 or in May 2020.
Under the EVFTA, the EU and Vietnam have agreed to a formal state-to-state dispute resolution mechanism which improves on the existing WTO settlement system. The new dispute settlement procedure will be much faster, use recognised and agreed upon arbitrators, and increase transparency as, subject to specific confidentiality rules, panel hearings will be open to the public. In addition, an elaborated mediation mechanism is available on an ad hoc basis whereby the EVFTA clarifies the scope, procedural rules, and effect of the mediation.
The EVFTA will eliminate 99.7% of the import duties over a period of up to 8 years. Some duties will be eliminated on the day the EVFTA enters into force, others gradually over a period from 3 to 8 years. For other products, so-called sensitive products, a quota with no or reduced import duties will apply, but once the quota has been reached the full import duty will apply to these. Vietnam will liberalise 65% of its import duties over a period of up to 15 years; will remove almost all its export duties, and will not increase a few that will exceptionally remain in force as per the so-called standstill-clause.
4.2 Rules of Origin
Products will benefit from the tariff preferences provided that they are originating from Vietnam. This is the case if the materials of the product are wholly obtained in Vietnam, or products produced in Vietnam incorporating materials not wholly obtained there, provided that these materials have undergone sufficient working or processing within Vietnam.
This is based on for example the percentage of the final product not originating in Vietnam, or the change of tariff classification or weight. Important to note is that material sourced from countries that already have a free-trade agreement with the EU, such as South Korea, will not impact the origin.
4.3 Specific Sectors and Industries
Some of the products from the EU that will profit of the EVFTA are cars and motorcycles, pharmaceutical products and wine and spiritis. Improving market access for European cars to Vietnam was one of the critical interests for the EU during the negotiation process. The EVFTA facilitates access to European pharmaceuticals and will impact not only the tariffs, but also the protection of patent and test data; and companies with European capital will be allowed to import and sell medicines to distributors and wholesalers within the country.
For wines and spirits – in addition to the gradual tariff elimination – no discriminatory quantitative and qualitative vertical or horizontal restrictions on licensing will be imposed; and existing licenses for spirits will be renewed on the same terms.
In 2017, Vietnam received a ‘yellow card’ warning from the EU about seafood exports. This warning is related to addressing illegal, unreported and unregulated fishing.
The Ministry of Agriculture and Rural Development has looked to tackle this issue, because if the yellow is not turned into green but red it will result in a ban for Vietnam to export fish and seafood to Europe. In order to lift this ban a unanimous decision by all EU memberstates is required. A ban would be disastrous for the sector considering the numbers exported to the EU.
The EVFTA also includes a chapter on non-tariff barriers such as technical barriers to trade (TBTs) and sanitary and phytysanitary (SPS).
TBTs are the widely divergent measures used to protect consumers, preserve natural resources, or regulate markets. However, they can also be used or perceived as such to protect domestic industries.
This chapter is intended to ensure that technical regulations, standards, and conformity assessment procedures related to labelling, packaging, and certifications are non-discriminatory and do not create unnecessary obstacles to trade. It aims to harmonise product standards either to the international level or to the (higher) level of the respective trading partner. It is expected that this will place a larger burden on Vietnam.
6.2 Sanitary and Phytosanitary Measures
Implementation of SPS will ensure traded food meets the relevant SPS in the importing countries, improving the administrative procedure, service industry and food and safety quality relating to imports/exports. Each party will accept the SPS measures of the other party as equivalent if they can objectively demonstrate that they achieve the same level of protection. The EU will be considered as a single entity and Vietnam will not define different values for each Member State which has been the case previously. It is an important step forward to accelerate the approval of EU export applications and to avoid discriminatory treatment. Other important points are that companies can request to be prelisted, and in case of a disease certain areas can be blocked from exporting while the rest of the country can continue (regionalisation).
The EVFTA includes improvements for intellectual property rights (IPR) to the benefit of IPR owners and consumers alike, with Vietnam committing to implement a level of protection that surpasses the standards of the World Trade Organization. Due to the new standards, EU innovations, artworks, and brands will be better protected against unlawful reproductions. Noteworthy changes are related to the adoption of the following treaties:
- The World Intellectual Property Organisation (WIPO) Copyright Treaty and the WIPO Performances and Phonogram Treaty about creative works on the Internet or other digital networks;
- The Hague Agreement Concerning the International Registration of Industrial Designs and to extend the term of protection for designs to 15 years; and
- Vietnam shall protect plant varieties rights, under the International Convention for the Protection of New Varieties of Plants.
7.2 Geographical Indications
The legal protections provided by Geographic Indication (GI) labelling will assist European and Vietnamese businesses in their expansion to foreign markets, certifying their original and authentic products. A GI right enables those who have the right to use the indication to prevent its use by a third party whose product does not conform to the applicable standards. GIs recognised for Vietnam: Moc Chau tea, Buon Ma Thuot coffee, grilled chopped cuttlefish from Ha Long , clam from Quang Ninh; and for the EU: French Champagne, Greek Feta, Itaian Parmigiano Reggiano cheese, Spanish Rioja wine, French Roquefort cheese and Scottish Whisky.
Under the agreement, EU companies will be able to bid for public procurement contracts under the same conditions as Vietnamese Companies for a selective number of entities, such as but not limited to ministries at central level, 34 public hospitals, and 2 major universities. To date, non-Vietnamese firms have been unable to engage in bidding activities for government-funded projects as Vietnam had not made its government procurement subject to the Government Procurement Agreement within the framework of the World Trade Organization. Vietnam has undertaken to do so in the EVFTA for the first time. Improvements are mainly expected in the healthcare and life sciences sectors, as Vietnam’s public procurement in these sectors takes up 67% of the total market value.
The government procurement provisions should, over time, improve access to high-quality goods and services from EU suppliers. Vietnamese suppliers will have access to the EU’s USD500 billion public procurement market.
The EVFTA ensures a fair business environment for European and Vietnamese companies as both have agreed to a section on antitrust and mergers, obligating both to maintain competition laws. Critical introductions under the agreement are that companies operating in Vietnam should respect the same competition principles as in Europe, and authorities are to apply the laws in a transparent and non-discriminatory manner with procedural fairness being valued.
Financial aid and support in the form of subsidies are available for public policy objectives with rules limiting their potential adverse effects. The EVFTA goes beyond the existing WTO rules, and notifies or will make public subsidies to not only subsidies to goods but also subsidies to services. Furthermore, companies can make the government aware of the subsidies causing any negative effects on their business. The agreement states that regardless of amount or duration, Unlimited guarantees are not allowed and subsidies to ailing companies are not possible without a viable restructuring plan.
9.2 State-owned enterprises
State-owned enterprises (SOEs), designated monopolies (public and private) and enterprises granted exclusive rights or privileges are regulated under the agreement. The provisions are prominent due to SOEs contributing around 40% of Vietnam’s economy.
The agreement makes SOEs and private enterprises equal when participating in commercial transactions (sales and purchases with a profit-making objective) making it nondiscriminatory. On a case-by-case basis, under the agreement, information can be requested on corporate structures and finances of a company.
The EVIPA will contribute positively to building a transparent legal and investment environment. Vietnam will attract increased investment from Europe as the agreement guarantees that EU investors will enjoy the most favourable treatment available. Per the agreement, European Investors can rely upon:
- no expropriation without prompt and adequate compensation;
- possibility of transferring and repatriating capital gained through investment;
- a general guarantee of fair and equitable treatment and physical security;
- a commitment that governments will respect their own written and legally binding;
- contractual obligations towards an investor; and
- a commitment to compensate for losses in certain circumstances linked to war or armed conflict.
The EVIPA also includes a modernised framework for investment dispute resolution that aims to protect investors and safeguards a state’s right to self-regulate. The Investment Tribunal System will be a fully independent permanent tribunal system in which disputes regarding investment protection provisions included in the IPA can be submitted. Decisions of the Tribunal can be appealed to a permanent Appeal Tribunal charged with ensuring legal correctness accuracy and certainty as to the interpretation of the agreement. Further, through the prohibition of multiple and parallel claims and enhanced disclosure requirements mandatory for investors, the EVIPA protects both the EU and Vietnam against potential abuses of the system.
Part of the EVFTA is dedicated to sustainability, and reflects the vision of the EU to develop trade and investment in a sustainable way.
Vietnam and the EU have committed to implement the Paris climate agreement effectively. Both parties have also committed to respect and implement the principles of the International Labour Organisation (ILO) concerning fundamental workers' rights in an effective way. To achieve this, Vietnam has recently ratified the ILO Convention on collective bargaining and has informed the EU of its intention to ratify the two outstanding fundamental ILO conventions by 2023 at the latest. The current revision of the labour code is taking this into consideration. Finally, the EVFTA is set improve human rights in Vietnam.
Mark Oakley / Managing Partner
Katie O’Connell / Associate
This legal update is not an advice and should not be treated as such.
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