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Vietnam, EU Deal Close; An FTA No One is Talking About

While Vietnam has often been the center of attention during the much publicized Trans-Pacific Partnership (TPP) negotiations, the mainstream media has largely neglected the free trade agreement it has quietly been fashioning with the European Union (EU).

But now Vietnam and the EU seem poised to finalize the last details. The fifth round of the discussions concluded earlier this month in Hanoi and the European Parliament has already convened in Brussels to discuss its future passage.

The issues covered in the negotiations have included competition, the relationship between public and private enterprise, private property protections, sustainable development and the regulation of foreign investment. Mauro Petriccione, chief negotiator for the EU, lauded Vietnam for its openness to reform and considers this pending agreement a stepping stone for the EU into similar arrangements with other Asian nations.

Nevertheless, Vietnam has been saddled with some anxiety over the deal. Given the breadth of the market liberalization intended, and the competition that would ensue, many local firms worry about their future prospects. The agreement will eliminate tariffs on more than 90 percent of Vietnamese goods, also drastically reducing the high duties exporters currently pay. Maybe problematically, the average import tax is forecast to reduce by 10 percent to 20 percent, opening the gates to an influx of European products.

Nguyen Van Nam, former director of the Vietnamese Trade Research Institute, said, “Vietnamese firms may lose even at home since many EU industrial and service products have a competitive advantage. If Vietnamese firms do not improve their management and technologies and restructure production in the next one or two years, many of them, under pressure of cheap imports from the EU, will face bankruptcy.”

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Also, strict regulations governing certificates of origin might make it difficult for Vietnamese firms to fully take advantage of the tax deductions granted by the free trade agreement.  Especially regarding the footwear industry, Vietnamese business heavily depends upon outsourcing contracts. Since the EU insists the tax breaks only apply to materials sourced locally, these firms would be rendered ineligible. Footwear is a significant component of Vietnam’s export industry; the nation is now the number two manufacturer of shoes behind China.

The EU is Vietnam’s largest export market and second largest trading partner. Vietnam is the EU’s fifth largest trading partner, reaching $30 billion in bilateral trade in 2012. The EU has set its eyes upon Asian expansion, simultaneously exploring separate deals with Singapore, Malaysia and Thailand.

Vietnam has its own intentions for expansion into Western markets, as evidenced by its participation in the TPP negotiations. The textile and garment industries are central to Vietnam’s economy. Last year, its more than 4,000 companies earned in excess of $20 billion, accounting fora bout 15 percent of its GDP.