EVFTA will create new gateway for market diversification

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EVFTA will create new gateway for market diversification

How can Vietnam reduce its reliance on certain trade partners and what role does the EU-Vietnam Free Trade Agreement (EVFTA) have to play?

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Global supply chains have experienced significant disruptions due to COVID-19.

Dangerous trade dependencies

Across the world, supply chains have been shaken by the loss of production and trade due to the COVID-19 pandemic.

In an open economy reliant upon extensive importing and exporting like Vietnam, the problems associated with these losses can escalate quickly, especially given the country’s important but arguably unsustainable links with its northern neighbour.

Official statistics show that closing the border between Vietnam and China would mean a 22-24 per cent reduction in total Vietnamese agricultural exports.

“Similarly, high and increasing trade surpluses with the United States can be unsustainable. A shift from the Trump administration could put Vietnam’s exports in a difficult situation, especially as local firms are not yet deep-rooted in the global value chains”, said RMIT University (Vietnam) Department of Management Head Dr Nguyen Quang Trung.

In recent years, Vietnam’s external trade has been characterised by consistent deficits with China, and continual surpluses with the United States.

“A balanced overall trade sheet would help stabilise the economy and boost its ability to resist external shocks like the COVID-19 pandemic,” Dr Trung said.

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Vietnam has consistently recorded a trade deficit with China and a trade surplus with the US (Source: General Statistics Office of Vietnam).

“It’s not clear when the current crisis will end, and when all the knock-on effects throughout the economy will work themselves out. So now there is an urgent imperative for the Vietnamese economy to quickly grasp the opportunities to diversify its markets and, by doing so, reducing the risks it faces.”

The EVFTA might prove to be of vital importance in this regard, along with other international treaties such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

According to RMIT International Business Program Manager Dr John Walsh, the EVFTA is the most stable agreement for Vietnam as it has stricter rules by which all partners must abide by.

“That means there is less scope for beggar-thy-neighbour policies for short-term gain which one country might pursue – either deliberately or not,” Dr Walsh said.

The new-generation FTAs will also give Vietnam the chance to improve its position on the global trade map, moving beyond low labour costs and abundant agricultural resources and on to technological transfers and skill sets of its young workforce.

Bold leadership

Vietnam became the second ASEAN country to sign an FTA with the EU. But “such boldness needs to be accompanied by swift, decisive and credible initiatives to enable the economy to be developed further”, according to Dr Trung.

Within seven years, trade with the EU will see the elimination of more than 99 per cent of tariffs on more than 99 per cent of products exported from Vietnam.

Dr Walsh said that the competitiveness of Vietnamese products, particularly textiles, footwear and agricultural products, will be enhanced by reforms in the energy sector to meet low carbon footprint standards.

Furthermore, as the Vietnamese economy and consumers become accustomed to EU imports in new sectors, Dr Walsh believes that the retail and distribution sectors will be strengthened to accept other products in these categories from around the world.

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RMIT Vietnam International Business Program Manager Dr John Walsh said that both Vietnamese customers and businesses can expect benefits from the EVFTA.

Vietnamese businesses will also benefit from low cost superior products from the EU and will be able to use them in their own production processes, thereby improving the productivity and profitability of Vietnamese exports.

“As competitiveness increases, more can be done to promote trade facilitation, though harmonisation of regulatory conditions, rules of origin, border customs administration and management, and the mutual recognition of appropriate standards and regulations,” Dr Trung commented.

Problems remain

However, Vietnam also faces the challenges of meeting the requirements of the new arrangements.

Several chapters in the EVFTA around labour protection, property rights protection, government procurement practices and other areas do not currently comply.

The private sector too will need to be prepared to meet the challenges of upgrading its supply chains and value chains to ensure all links meet with international best practices.

“In particular, there will need to be a focus on supporting small and medium-sized enterprises (SMEs). These companies tend to be quick moving and more likely to evolve to take advantage of new opportunities in the economy, yet they are also currently frail and under-resourced,” Dr Trung said.

SMEs account for around 98 per cent of the local enterprise population and the majority of them are micro-enterprises, so “a failure to connect these enterprises to the global value chains could imply an unsustainable economic development in the years to come,” he added.

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RMIT Vietnam Department of Management Head Dr Nguyen Quang Trung (pictured centre) emphasised the need to connect SMEs to global value chains.

New thinking is required

Dr Walsh believes new ways of thinking need to be introduced to make sure that benefits from FTAs are maximised and risks minimised.

“It is no longer feasible to think in terms of short-term fixes at the expense of the environment or of long-term planning. It is clear that clean, inclusive and productive industry is the only way forward for the Vietnamese economy,” he said.

Dr Trung stressed that the government will take a leading role in this process, but in serving rather than steering the economy.

“Modern governance is a must for all progressive governments nowadays. An effective and efficient government would depend on how the leadership builds a robust system and leverages the role of technology through digital transformation and e-government services,” he stated.

Dr Walsh said that “pandemics often usher drastic changes into economies, social relations and government operations, which will follow their own course if not directly managed.”

“It is time for Vietnam to embrace stronger diversification of trading partners and modernise the government even more, so that the country will become less dependent on one or two key markets for both imports and exports. The EVFTA is a necessity on that journey,” Dr Trung concluded.

Story: Ngoc Hoang

Business and management

06 May 2020

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