Expanding transparency in EU trade

Giorgio Aliberti, Ambassador and Head of Delegation of the European Union to Vietnam

Since August 2020, the EU has for the first time preferential access to a vibrant economy of almost 100 million people with the fastest-growing middle class in ASEAN and a young and dynamic workforce. As much as 48.5 per cent of the tariff lines or nearly 65 per cent of the EU exports to Vietnam have enjoyed zero tariffs since the trade deal entered into force.

In fact, the EU-Vietnam Free Trade Agreement (EVFTA) has put EU exporters and investors at least on a par with those from other countries and regions which have already concluded FTAs with Vietnam such as ASEAN, Australia, China, India, Japan, South Korea, and the members of the Comprehensive and Progressive Agreement on Trans-Pacific Partnership. For Vietnamese traders, the benefits after one year of implementing the FTA were even higher.

Market-wise, the EVFTA allows Vietnamese exporters to access more than 450 million European consumers whose disposable incomes top the world. Since the enforcement of the EVFTA, around 85.6 per cent of all tariff lines have been eliminated fully for Vietnamese commodities. This represents 70.3 per cent of Vietnam’s total exports to the EU. Such progressive elimination of import duties explains the 20 per cent year-on-year surge of Vietnam’s exports to the EU.

For services and investment, the agreement provides the best access to the Vietnamese market ever granted by Vietnam to a trade partner. Vietnam’s offer of service liberalisation in fact goes beyond its World Trade Organization commitments. Critical service sectors opened under the EVFTA include services in the field of computer services, postal services, social services, higher education, environmental services, distribution services, financial services, maritime transport, air transport, and telecommunications.

For instance, EU investors are allowed to transfer cross-border financial information and financial data processing as well as supply advisory intermediation and other auxiliary financial services. On insurance, cross border retrocession is now possible while EU investors can establish themselves in Vietnam to provide health insurance services and open branches to provide re-insurance. Another example of the deep commitments in services is in the maritime transport field. Vietnam liberalised cross-border passengers and freight transportation, and offered better conditions to EU investors in establishing their companies in Vietnam for the purpose of providing their services.

In telecommunications services, EU investors can establish their wholly-owned companies to provide internet and value-added services such as emails, online information, and data processing. Such market access openness is coupled with significant regulatory disciplines, which ensure the strengthening of independent regulatory authority and that EU investors will operate on an equal footing and receive fair treatment not less favourable than the local suppliers.

A package deal

The EVFTA and the Investment Protection Agreement (IPA) do not only create new opportunities for growth and development, but also promote sustainable development on both sides. They include strong commitments to protect people’s core rights at work and the environment. Both agreements are also relevant for promoting human rights values in Vietnam. We have witnessed positive changes in this field as Vietnam put in place a new Labour Code in January 2021.

The country has also acceded to some core international labour treaties such as the 1957 ILO Convention on Abolition of Forced Labour and the Convention on Right to Organise and Collective Bargaining. All these changes in the labour standards do not only translate into more jobs, more importantly, but they also help to create a better workplace and improved incomes for Vietnamese people.

The EVFTA and the IPA have been negotiated together as a package on investment and trade, and are complementary and interlinked. The FTA includes ambitious market access and liberalisation commitments on foreign direct investment. This will provide an important advantage to EU investors in accessing the Vietnamese market and vice-versa, as well as help level the playing field for their operations once established, under fair, predictable, and non-discriminatory conditions.

The IPA will protect the assets of EU investors in Vietnam and of Vietnamese investors in the EU. Together, these agreements create an investment-friendly environment between the EU and Vietnam that would be conducive to further growth. The IPA puts in place standards of investment protection, which are basic guarantees obliging governments to respect certain fundamental principles of treatment that a foreign investor can rely upon when making a decision to invest. These guarantees include non-discrimination; no expropriation without prompt and adequate compensation; possibility to transfer and repatriate funds relating to an investment; and a general guarantee of fair and equitable treatment and physical security. They also include a commitment that governments will respect their own written and legally binding contractual obligations towards an investor, as well as compensating for losses in certain circumstances linked to war or armed conflict.

The new architecture of EU international agreements, meaning separated into an FTA and an IPA, allows for a swift entry into force of the trade and investment liberalisation commitments under the FTA while the IPA will enter into force as soon as ratified by all 27 member states. Meanwhile, the protection guaranteed to EU investors under the 21 member states’ bilateral investment treaties will stay in place.

Transparent and fair

Importantly, the IPA is built on the EU core values, namely the UN Charter and the Universal Declaration of Human Rights; the sustainable development and transparency agreed in the EVFTA; the protection only for investments that are made in compliance with domestic legislation; and the promotion of responsible business conduct through instruments such as the Organisation for Economic Co-operation and Development Guidelines for Multinational Enterprises, the UN Global Compact, and the International Labour Organization Tripartite Declaration of sovereign rights.

The IPA offers a high level of investment protection while safeguarding the EU and Vietnam’s right to regulate and to pursue legitimate public policy objectives. Under the agreement, the host state could impose through regulation obligations for the investor, based on the level of protection of public interest that it considers appropriate. In turn, investors shall comply with all domestic laws of the country where they invest in order to benefit from investment protection. A new important element of the agreement is the modern and reformed investment protection framework, which includes the Investment Court System for the resolution of investment disputes, removing the contested parts of the old-style investor-state dispute settlement mechanism.

Contrary to the existing investment treaties in force between Vietnam and EU member states, all proceedings under the EU-Vietnam IPA will be fully transparent, hearings will be open to the public, and interested third parties, such as non-governmental civil society organisations, will be allowed to make submissions. This ensures that all human rights and sustainable development aspects will be effectively heard by the investment court.

Importantly, the IPA defines precisely when governments are in breach of the fair and equitable treatment obligation and removes the scope for discretionary interpretation. The investment agreement is also tight enough to prevent “faked investments”. It does not protect the so-called “shell” or “mailbox” companies. To qualify as an investor, companies have to run real business operations either in the EU or in Vietnam.

Precise and single understanding and execution of the EVFTA and IPA remain a challenge. Even though the texts of the agreements are quite clear, there have been divergences in interpreting the commitments. This requires more effort from Vietnam’s side to improve internal coordination, and possibly counterbalance the forces that run against the country’s endeavour of international economic integration.

At the top political level, this spirit of strong cooperation with the EU in executing the agreements is clear. Nonetheless, at the implementation level, not all state agencies seem to share the same level of understanding and commitment. The opportunities of the IPA are enormous. The current total investment stock from the EU in Vietnam, estimated at $22.2 billion, is far below the potential. The IPA is believed to usher in a new era of investments for Vietnam where the EU and non-EU investors will come to the country to reap the benefits of the EVFTA and the IPA.

The vision of Vietnam becoming a regional production hub for the entire ASEAN is not out of reach, but harnessing such opportunities depends a lot on the genuine wish of the governmental agencies that are held responsible for implementing the agreements, as well as the pro-activeness of the local companies in finding and working seriously with their European investment partners.