1. Brief Historic Overview/Lessons Learned from the Past
Since the mid 1990s, Vietnam is engaged in international trade. The US embargo on Vietnam was lifted in 1994 and Vietnam joined the Association of South East Asian Nations (ASEAN) and subscribed to the ASEAN Free Trade Area (AFTA), including the Common Effective Preferential Tariff (CEPF) arrangements, in July 1995. During the same year, Vietnam signed the Framework Agreement on Partnership and Cooperation with the EU. However, the most important steps towards international trade relations so far were taken with the Bilateral Trade Agreement (BTA) with the US signed in 1999 and Vietnam’s accession to the WTO in 2007.
To understand the trade negotiations between Vietnam and the EU concerning the Free Trade Agreement (FTA) and to develop a sound strategy, one has to have a look at the BTA and the WTO accession to avoid mistakes that have been made.
Consequently, the core points of the BTA and the WTO accession will be illustrated and the problems will be identified, before having a closer look at the negotiation process and the upcoming issues in relation to the FTA. The article will end with a final conclusion, providing some hypothetical advice for further negotiations addressed to Vietnamese negotiators.
a. BTA US – Vietnam
The US and Vietnam negotiated and concluded the BTA in 1999 and finally implemented it in 2001. It consists of over 100 pages of text, statistics and tables covering obligations on trade in goods, intellectual property rights, trade in services, development of investment relations, business facilitation and transparency. Clearly the Agreement covers a wide range of aspects and is complicated and comprehensive. Nevertheless, the Agreement was not only beneficial for the US in terms of concessions it was also an important step towards the WTO membership of Vietnam, although it did not cover all the WTO bilateral agreements with the US as the Vietnamese authorities anticipated. According to a study of Nguyen Quy Binh, the BTA was important to the Vietnamese for the following reasons: (1) It opened the US market for Vietnamese exports; (2) the BTA was a step towards the WTO accession; (3) it created more business opportunities; and (4) it signified that Vietnam’s commitment to international rules.
It is important to mention the fact that the US benefited a lot from the BTA partly because of the massive post-signing implementation effort they did (e.g. STAR program). One should keep this in mind when assessing the aftermath of the WTO accession.
From an economical point of view, the BTA was a huge success and very important for Vietnam. From 2001 to 2005, the bilateral trade between the US and Vietnam increased tremendously from USD 1.4 billion to over USD 7,6 billion. The imports of products from Vietnam into the US increased from around USD 1 billion to over USD 6.5 billion over this period. US Foreign direct investment (FDI) increased by an average of 27% from 2002 to 2004.
b. WTO Accession
On 11 January 2007 Vietnam joined the World Trade Organization (WTO), becoming its 150th member. The accession process began in 1995 and within the following 11 years, 14 different multilateral and more than 40 different bilateral negotiations have been held. Vietnam paid a relatively high entrance fee in terms of WTO Plus obligations and special commitments in comparison to the founding members of the WTO, since Vietnam joined as a developing country with no market economy. However, another remarkable reason for Vietnam’s high entrance fee is the fact, that Vietnam joined the WTO right after China, which had to deal with the same fees, but could offer greater economic power/potential.
Unfortunately Vietnam tries to chance the terms of accession through sluggish implementation. Such bad practice is common within the ASEAN community. Vietnamese authorities admit that they were naive to accept the terms of accession when joining, so now try to learn from other countries in the region on how to evade the obligations and enforcement. Another reason for this behavior might be that Vietnam was forced to make law changes prior to its WTO accession. Vietnam felt “hard done by” as a result of the pressure of the WTO members and dragged its feet even more implementing later.
On paper, Vietnam’s concessions for market access liberalization are outstanding compared to other countries in the region. This is illustrated by the analyses below, where we compared the WTO commitments of Vietnam with other countries in the region. The different colors represent the restrictions of market access in the relevant country. Green stands for weak and very few limitations and red for extensive limitations while yellow stands for moderate restriction. The typical indicators are e.g. the number of open sectors, Joint Ventures requirements, limits on foreign owned shares and permission requirements.
Being the 150th member of the WTO, all eyes were on Vietnam at the time and the world acknowledged Vietnam’s extensive WTO commitments together with its market access liberalization.
Unfortunately, Vietnam did not meet expectations, since they tried to evade the implementation of the otherwise very promising WTO commitments. Initially foreign investors expected Vietnam to implement such commitments and thus liberalize its market, but soon realized that there were still protectionist thoughts within Vietnam. Naturally, investors were reluctant to funnel money into the Vietnamese economy. Hence, the Vietnamese authorities almost killed the goose that lays golden eggs called FDI, when they refrained from market liberalization, because they thought their domestic market was a self sustaining gold mine.
c. WTO Agreement on Government Procurement
The Agreement on Government Procurement (GPA) is a multilateral agreement within the WTO legal system. A WTO Member will not automatically become a member of the GPA when joining the WTO. Vietnam did not sign the agreement yet. The concept of the agreement is based on transparency, openness and non-discrimination as is the whole WTO system. By signing the GPA a country accredits its commitment to an open and transparent procurement market. This attracts foreign direct investment and avoids the constraining effects of protectionism. It also opens up a whole new market for foreign companies and guarantees a fair procurement procedure. That way Vietnam can get rid of the influence of corrupt Chinese companies and prevent accidents like the collapse of the Can Tho bridge, with death tolls of about 59 persons and 140 injured.
Vietnamese authorities are aware of the importance of the agreement. The MPI even held a conference in 2011 in Hanoi dealing with exactly this topic. Vietnam should consider signing this agreement as soon as possible since it would appease the minds of foreign investors. Apart from that, a smooth negotiation in this regard and a fast signing would be a good signal to the EU, showing that Vietnam is willing to adhere to international trading rules. Hence, signing the GPA would enlarge Vietnam’s international credibility. It is also very likely that the EU diplomats will demand that Vietnam signs the GPA as a condition to conclude the FTA.
Finally Vietnam would benefit from the GPA in various ways hence the Agreement should be signed as soon as possible.
2. Relations Between Vietnam and EU
Vietnam is the EU’s fifth largest trading partner within the ASEAN and the 35th out of the EU’s total trade. The ASEAN countries together are the 3rd largest trading partner of the EU. In 2010 the EU was Vietnam’s 3rd largest trading partner, only after China and the US. The EU is Vietnam’s biggest source of development assistance in grants, a large export market and one of its biggest sources of committed foreign direct investment. In 2011, the EU’s exports (goods) to Vietnam amounted to 5.2 billion USD and the EU’s imports to 12.8 billion USD. Important to mention is that the EU exports are dominated by high tech products (including electrical machinery and equipment, aircraft, vehicles, pharmaceutical products and iron and steel). In 2010 the EU and Vietnam concluded a Partnership & Cooperation Agreement, which was meant to be the first step towards a Free Trade Agreement and to enhance the political and economic relationship.
a. Negotiations Between Vietnam and EU
On 26 June 2012 the EU Trade Commissioner, Karel De Gucht, and the Vietnamese Minister of Industry and Trade, Vu Huy Hoang, officially launched negotiations for a Free Trade Agreement (FTA) between the EU and Vietnam.”I’m delighted to announce the opening of trade negotiations with Vietnam. The potential for both sides is enormous and the first negotiating round should take place just after the summer break”, said EU Trade Commissioner De Gucht.
The scoping process was concluded in February 2012 after a period of almost 2 years. In this preliminary phase (scoping) an agreement was reached for swift negotiations (2 to 3 years) for an ambitious FTA, liberalizing a major part (90%) of trade within 7 years. The first actual meeting is scheduled for 8. October 2012. However no analyses or preparations have been made until now, so at this point there will be no substantiated negotiations. The first meeting is likely to be considered a warm up phase. Consequently, the substance of the FTA will be discussed next year. Nevertheless, the negotiations are expected to conclude in 2014.
b. The FTA – Topics and Subjects
The aim of the FTA is to boost bilateral trade and resolve trade issues between the two parties. The EU will reduce its import tariffs and seek certain concession from Vietnam. Negotiations will cover trade related subjects such as goods, rule of origin, customs, trade facilitation, trade remedies, technical barriers to trade, sanitary and phyto-sanitary standards, services, investment, intellectual property, public procurement, competition, sustainable development. At least the negotiators hope to deal with these points.
3. “Same Same But Different”
Having in mind the above painted picture, two questions arise: 1) Will the FTA have the same boosting effects on the Vietnamese economy as the BTA did; and 2) will there be the same problems concerning the implementation of the FTA as those mentioned in relation to the WTO accession.
a. Will the FTA Have the Same Boosting Effects as the BTA?
The BTA and the WTO accession already had a boosting effect on the Vietnamese economy and thus it is improbable that the FTA will have the same boosting effect. However, this does not mean that there will be no boosting effect at all. It is hard to predict the effect of the agreement since the economy in Europe has its own problems at the moment. Nevertheless, a good FTA could definitely attract investment from Europe and trigger trade with the EU, but Vietnam’s hopes should not be too high. It is not possible to compare the effect the BTA had with the one the FTA might have, since the BTA was the most important trade Agreement after Vietnam opened its market. Hence it is not surprising, that the BTA had an enormous boosting effect.
The situation at the moment on the other hand is completely different since Vietnam already opened its market and joined the WTO. Thus, the opportunity to grow is not as big as it was more than 10 years ago.
However, the EU is still interested in accessing the Vietnamese market and thus, it is very keen to negotiate special market access terms, as well as rules similar to the BTA’s commitments. Due to the fact, that the EU wants to be a trading partner of Vietnam on a similar level as the US, it is very likely that the boosting effect of a mutually beneficial agreement will take effect. However, making a reliable prediction, even before the negotiation process has become substantiated, is almost impossible.
b. Will the FTA Face the Same Implementation-Problems?
The same problems concerning a reliable prediction arise when asking if there will be the same implementation problems. Hence, it is more reasonable to point out to the Vietnamese Government, that if the same problems occur, the boosting effect will be inhibited. The economic potential of a FTA between Vietnam and the EU will vanish the same way expectations will vanish that Vietnam is fully committed to international trading rules.
This would be the worst thing that could happen, since it would not only slow down the potential boosting effect of the FTA, it would also affect international trade relations with other nations since Vietnam will lose credibility.
The Vietnamese authorities should keep the consequences of bad practice in mind, when negotiating the agreement. A protectionist aftermath, similar to the one after the WTO accession would be very harmful for the Vietnamese economy. Thus, once again, the Government would kill the golden egg laying goose, called FDI and international trade.
4. A Mutual Beneficial Agreement?
One of the core questions when it comes to FTA negotiations between Vietnam and the EU is who needs whom?
a. Does Europe need Vietnam?
The first alternative of this question would be: Does Europe need Vietnam. From a European prospective one could argue: no, the EU does not need Vietnam. Despite the problems within the EU its economy is strong and powerful, with trade relations to all parts of the world. There is no urgent need to engage trade relations with a non-market or transitional market economy like Vietnam.
However, this perception is too short sighted and a biased one. In 2015, there will be a FTA between the EU and ASEAN with a full liberalization of services. Hence, the member states of the EU will have full access to all ASEAN markets. As a developing country, Vietnam will be granted a grace period and must therefore open its markets only until 2023. Consequently, Vietnam will benefit from the open markets (free trade zone) without being obliged to open up their own markets until the end of the grace period in 2023. In December 2009, EU Member States gave the green light for the European Commission to pursue negotiations towards Free Trade Agreements with individual ASEAN countries. Negotiations with Singapore and Malaysia began in March 2010 and October 2010 respectively. Vietnam will thus be the third partner of the EU in the ASEAN region with whom the EU has started negotiations on a free trade agreement.
While pursuing a bilateral approach, the EU is not losing sight of the ultimate goal of achieving an agreement with ASEAN as a whole, one of the most dynamic regions in the world.
Despite this upcoming FTA, the EU needs a foothold in ASEAN prior to the signing of the FTA between ASEAN and the EU in 2015. Thus, the fact that the EU needs a foothold in ASEAN is a reason why the EU needs Vietnam and this shows why the above made statement is too short sighted.
b. Does Vietnam Need Europe?
Although the EU needs Vietnam, it is obvious that Vietnam needs the EU even more.
The first reason is, the EU is one of the largest investors in Vietnam with an investment volume around 1.8 billion US. This represents more than 12% of the total committed FDI in 2011. These figures indicate that the EU is very important for Vietnam in terms of investment and it is very likely that the trade relations and investment opportunities between the two parties will extend after the FTA is signed. However, this will only be the case if the commitments are mutually beneficial and will be implemented properly.
The second reason why Vietnam needs the EU is, because Vietnam approaches the so called “middle income trap”. Vietnam’s advantage in international trade is cheap labor, but in the course of becoming an industrialized country, living in Vietnam is becoming more expensive and thus the labor costs increase. This kills Vietnam’s advantage of cheap labor. Vietnam has to compete with countries like Cambodia and Burma and they do not only have cheap labor, they are also granted “everything but arms” status (EBA). The status is granted to leased-developed countries (LDCs) by the EU, with the effect that all imports into the EU from these countries are duty and quota free. Those benefits are not granted to Vietnam. Thus, it is very hard to compete with these countries without having a special trade agreement with the EU. The FTA would level the playing field with the LDCs.
The third reason is the reform of the generalized system of preference (GSP). The GSP is a formal system of exemptions from general WTO commitments and obligations. In the course of the reform, the maximum average annual income per capita will be fixed at USD 4000 per year to obtain GSP. When a country exceeds this average income, it will be excluded from the GSP. This will happen to Thailand. Vietnam is approaching this level, but it has not reached it yet. The consequence of Thailand being excluded from the GSP and Vietnam still being part of the GSP is not beneficial as it might seem at a first glance. More precisely, the exclusion of Thailand will have negative effects on Vietnam in terms of graduation. Graduation is the temporary exclusion from the GSP when a country monopolizes in a preferable import sector. When Thailand is permanently excluded from the GSP, the chance for Vietnam to be graduated becomes higher, since both countries produce and export the same goods. The consequence would be that Vietnam has to compete with other countries which are benefiting from the GSP without benefiting itself. This is a hard task and thus Vietnam needs another “joker” – a “joker” called FTA. This would protect Vietnam’s market access on a permanent contractual basis.
This study clarifies that Vietnam needs the FTA and the EU to compete with other countries in its region. It also indicates that Vietnam made mistakes in the aftermath of its WTO accession not implementing all its WTO commitments. This almost killed all the accession benefits. Furthermore, it was elaborated that the BTA had a boosting effect on the trade relations of the US and Vietnam and that a boosting effect after the FTA can be expected. However, this effect will not be as significant as the one of the BTA since Vietnam is already a member of the WTO.
In summary one can say that Vietnam has to draw its lessons from the former trade negotiations (BTA and WTO accession).
The FTA is a big chance for Vietnam to attract more FDI and to engage trade, with the consequence that the whole country will benefit. Therefore Vietnam needs to have a sound strategy when starting to enter into negotiation with the EU. It must furthermore avoid making the same mistakes again.
If we had to draft a sound strategy for Vietnam’s diplomats, we would advise them to:
- Not miss the chance to gain FDI again;
- Use the publicity and attention to attract investors;
- Preserve the present market and secure the access to this sector (e.g. textile);
- Adapt to new challenges – the textile market is not granted for ever;
- Do not solely rely on the advantage of cheap labor;
- Try to give the EU what they ask for to access their market – Vietnam needs the EU;
- Sign the GPA as soon as possible;
- Stick to your promises – implement what you have signed; and finally
- Do not kill the egg laying goose called FDI by using protectionist measures as you did in the aftermath of your WTO accession!