Institutional tweaks to open up EU investment

Institutional tweaks to open up EU investment, photo Shutterstock

Spaniards Laura Fontan and Diego Cortizas set up Chula Fashion after visiting Hanoi in 2005. The company’s products reflect Vietnam’s cultural traditions, while incorporating Laura and Diego’s European heritage.

Diego designs the clothes, which are then hand-made in their factory in Hanoi. The brand is clearly identifiable on the Vietnamese market, and promotes socially responsible labour policies and sustainable fashion production.

Employing 68 people, Chula is firmly rooted in Vietnam with stores in Hanoi, the central ancient city of Hoi An, and Ho Chi Minh City, but has recently also opened a store in Bangkok and in Madrid capital city of Spain.

Last week, good news made its way to Chula Fashion when the Vietnamese National Assembly (NA) adopted the EU-Vietnam Free Trade Agreement (EVFTA) and the EU-Vietnam Investment Protection Agreement (EVIPA). The new rules of origin in the trade deal will make it easier for Chula to export to the EU.

The EVFTA will remove Vietnamese tariffs of 7.5 per cent on EU textiles as soon as it takes effect, expected in August. This will enable Chula to use high-end European cotton and linen in addition to the textiles it sources from Asia.

“We’re passionate about corporate social responsibility – for example, three-quarters of our workforce have a physical disability,” Fontan said. “The EVFTA would make it easier for us to expand into European markets. With the agreement in place, we’ll be able to start thinking about using more European fabric in the clothes we make, as well as opening more stores over there.”

A big boon

With 94.62 per cent of NA members in favour, the EVFTA was adopted by the Vietnamese legislature which also did the same for the EVIPA, with 95.45 per cent of NA deputies in favour.

“It has been quite a historic moment in my life and for the EU Delegation to Vietnam,” Giorgio Aliberti, Ambassador of the delegation, told VIR. “It is a big success for Vietnam and the EU, reflecting huge efforts from both sides over the past 10 years. The EVFTA is a strong creator of trade and investment opportunities for both the EU member states and Vietnam.”

Wolfram Grünkorn, managing lawyer from German-invested law firm Grunkorn & Partner Law Co., Ltd., said that the firm has been supporting many German businesses and financiers to enter Vietnam, and the EVFTA will act as a big impetus for Vietnam to lure more European investment.

“Directly after the date of enforcement of the EVFTA, the investment opportunities in Vietnam will be scrutinised by many European companies,” Grünkorn said. “The development of the world economy is now interwoven with uncertainties. The US-China trade war is far from over, COVID-19 is exerting immense but unclear effects on supply chains and economic development. In this context, the EVFTA stands for stable and reliable economic co-operation.”

Sweden’s glove-making Hestra said the EVFTA will give EU glove-makers like it a helping hand.

“With the EVFTA in place, we would look to invest in a new factory in Vietnam with 200-400 employees, alongside our current factory. This would not only be a good opportunity for our company but would also create more job opportunities for the local community,” said Hestra’s director Svante Magnusson.

Hestra, which exports its gloves to over 30 countries worldwide, will benefit from the removal of EU tariffs on gloves of up to 9 per cent. This will make it easier for Hestra to export its products to the EU.

The EVFTA will eliminate over 99 per cent of tariffs, with the EU removing duties on thousands of items sourced from Vietnam. Meanwhile, Vietnam will liberalise 65 per cent of import duties on EU exports to the country, with the remainder of duties being gradually eliminated over a 10-year period. The EVFTA will benefit EU businesses exporting and investing in Vietnam.

According to the German Industry and Commerce Vietnam (AHK), the elimination of bilateral tariffs and export taxes, together with the reduction of non-tariff barriers affecting the cross-border exchange of goods and services, are expected to boost bilateral trade considerably and to create new opportunities emerge to access markets across a range of sectors, covering goods, services, and investment for German companies in Vietnam. This is particularly true in the automobile, green energy, electronics, IT, food processing, and healthcare sectors.

“The EVFTA is extremely important for the German economy, because Vietnam is Germany’s second-biggest trading partner in the ASEAN region. More than 4,000 German companies have already been exporting to Vietnam, thereof 69 per cent are small- and medium-sized enterprises,” said AHK’s chief representative Marko Walde.

The EU is one of the most important sources of foreign funding for Vietnam. Currently, investors from 23 EU member states have registered over $24 billion into nearly 2,200 projects in Vietnam.

The EVFTA is expected to be a major driver of Vietnamese exports, and help Vietnam to diversify its markets and exports, especially its key staples such as agro-forestry-fishery products, electronics, footwear, and garments and textiles which are the country’s competitive advantages. Currently Vietnam’s exports rely on its traditional markets like China, the US, Japan, and South Korea.

Last year, Vietnam’s largest export markets included the US ($60.7 billion), the EU ($41.7 billion), China ($41.5 billion), the ASEAN ($25.3 billion), Japan ($20.3 billion), and South Korea ($19.8 billion).

According to a study by Vietnam’s Ministry of Planning and Investment, the EVFTA will help Vietnam’s exports to the EU climb by an additional 2.18-3.25 per cent in the first five years of entry into force, and an additional 4.57-5.3 per cent in the next five years.

The EVFTA will also help boost Vietnam’s export turnover from the EU by 42.7 per cent in 2025, and 44.37 per cent in 2030. It will also help raise Vietnam’s import turnover from the EU by 33.06 per cent in 2025 and 36.7 per cent in 2030.

According to the European Parliament, Vietnam, a fast-growing and competitive economy whose bilateral trade with the EU has quintupled over the past 10 years, is equally keen on the EVFTA, which could potentially bring €15 billion ($16.53 billion) a year of additional exports to the EU by 2035.

Need for further reforms

A senior expert from the EU Delegation to Vietnam told VIR that though the EVFTA is a big boon for Vietnam, it will still be a hard nut to crack.

“To benefit from the EVFTA, Vietnam needs to boost its institutional reforms,” he noted. “Investors from the EU actually don’t really need tax slashes in Vietnam, but a more business-friendly climate.”

According to the expert, though Vietnam is now considered the best investment spot in Southeast Asia, European investors and businesses need a more transparent, predictable, and stable investment and business climate which Vietnam is now trying to create.

“They often consider many factors before making final investment decisions. Now in Vietnam, paper-based procedures remain, making it a waste of time and money for those wishing to conduct business and investment in the country,” he said. “Investors also need an international-standard mechanism in granting licences.”

For example, one significant issue, which unfortunately was not tackled by the existing Law on Investment and the current Law on Enterprises, is the requirement to undergo a double approval process for establishing a foreign-invested enterprise (FIE) in Vietnam.

The current requirement to obtain both an investment registration certificate (IRC) and an enterprise registration certificate (ERC) makes the FIE establishment procedure not only slower, but also more complicated and ultimately uncertain.

“This double requirement also negatively affects the merger and acquisition (M&A) market, since M&A transactions targeting private companies often necessitate amendments to the ERC and/or IRC held by the target company or its investors,” said an EuroCham Whitebook 2019 on trade and investment issues of European businesses in Vietnam. “It goes without saying that requiring one single certificate should be more than sufficient for establishing any FIE, and is considered standard practice in most jurisdictions around the world.”

EuroCham suggested that ultimately, the key conceptual and structural change which would need to occur in order to streamline foreign investment processes and stimulate the M&A market would be to abolish the concept of registered investment projects in connection with the establishment of FIEs. Foreign investors should be able to establish subsidiaries and joint ventures in Vietnam, without needing to formulate and obtain approval of registered investment projects.

Abolition of the requirement to register foreign investment projects would make redundant the concept of and requirement for IRCs.

It is clear that much remains to be carried out for Vietnam to attract more investments like those by Chula or Hestra.

“We believe that there may be more interest from EU investors into Vietnam, but such interest being translated into real investments would depend on how Vietnam changes its policies under international standards,” the EU expert told VIR.