European Union and Vietnam sign trade deal amid coronavirus recovery

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Vietnam on Monday ratified a significant trade deal with the European Union, which is expected to boost the country’s manufacturing sector and exports, as it recovers from a dip caused by the coronavirus pandemic.

Lawmakers approved the agreement as they met in the National Assembly for the first time since the pandemic began. The deal was signed in Hanoi last June and was ratified by the European Parliament in February.

When it takes effect next month, the EU will lift 85 percent of its tariffs on Vietnamese goods, gradually cutting the rest over the next seven years. Vietnam will lift 49 percent of its import duties on EU exports and phase out the rest over 10 years.

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Vietnam economy on recovery from COVID-19

The implementation of the EU-Vietnam Free Trade Agreement “can’t come at a better time for Vietnam when it’s on the path of economic recovery after several months of closure due to COVID-19,” said economist Pham Chi Lan, former adviser to several of Vietnam’s prime ministers.

Vietnam prioritized public health and safety when the coronavirus started to peak in China. It closed the border with China in January and with the world in February while imposing a social shutdown that lasted until the end of April. The tough measures contained Vietnam’s outbreak to just over 300 cases with no deaths and no local infections have been reported for almost two months.

Still, its economy has dipped because of the illness and containment measures elsewhere, and the manufacturing sector has been hit by restrictions in the movements of goods and people.

The pandemic revealed shortcomings in its manufacturing sector. While Vietnam’s own factories were safe to open, they could not operate because they sourced their materials from China, particularly for major export products in textiles, footwear and electronics.

“COVID-19 has given Vietnam a hard lesson about being dependent on China,” Lan said. “It also showed other countries, including the EU, the negative impacts of relying too much on China in their product value chain and the EVFTA comes in the right time as all parties realize they need to pivot and restructure to diversify the supply chain.”

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Diversifying from Beijing amid China-US trade war

Following the trend of manufacturing shifting from China to other countries, accelerated first by the China-US trade war then COVID-19, the agreement is expected to raise Vietnam’s competitiveness in attracting investors.'

Vietnam is the EU’s second-largest trading partner in Southeast Asia, with the trade turnover reaching $56 billion last year, according to the national general statistics office.

With Singapore being the only other country in Southeast Asia holding a free-trade agreement with the EU, Vietnam will have an edge regionally.

“EVFTA will add to the positive momentum drawing manufacturing to Vietnam,” said Michael Sieburg, a partner of YCP Solidiance, a corporate strategy consulting firm focusing on Asia.

“Manufacturers looking to locate in the region and seeking a more competitive access to EU markets will be more inclined to shift manufacturing to Vietnam as a result of EVFTA,” Sieburg said.

Foreign direct investment in Vietnam reached over $38 billion in 2019, marking a 10-year high. With about two-thirds of it going into manufacturing, the agreement should help sustain the trend, Sieburg said.

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Lawmakers also ratified a second pact that protects investors. They had been negotiated since 2012 and give EU companies equal treatment with domestic bidders in competing for public contracts in Vietnam. They also commit Vietnam to standards for sustainable development, including improving its human rights record, protecting labor rights and upholding its pledges to deal with climate change under the Paris accord.

More than 30 years since carrying out economic reforms to integrate with the global economy, the country with a population of 95 million, is emerging to be one of the world’s next factories.

“Vietnam has to attract (investment) from countries with high technologies and upholding good corporate governance, gradually replacing the partnership with countries having outdated standards. The free trade agreement with EU will help Vietnam raise its skills and standard. It is a great opportunity for Vietnam to excel,” Lan said.

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