Free Trade

Progress clear on Vietnam’s trade path

After more than two decades of robust growth, Vietnam has again shown exceptionally strong economic development in the past year. In the last 10 years, the volume of trade with the European Union has increased 2.3 times, and the EU is now Vietnam’s third-largest trading partner.

Meanwhile, the EU-Vietnam Free Trade Agreement (EVFTA) is the most ambitious and comprehensive agreement the EU has ever concluded with a middle-income country, and it elevates Vietnam to the level of industrialised nations such as Japan, South Korea, or Singapore. The EVFTA can be seen as proof of trust of the European Union in emerging Vietnam. Hand in hand with the positively developing trade also goes the EU’s foreign direct investment (FDI) in Vietnam.

Compared to other Asia-Pacific countries, Vietnam is particularly committed to free markets. Unlike some other countries, the Vietnamese government has internalised the importance of market mechanisms and the rule of law in economic matters. Of course, this poses special challenges for the Vietnamese economy, as EU standards are high.

Apart from trade, this naturally also applies to the activities of European investors and thus represents one of the greatest challenges for this middle-income country. On the other hand, Vietnam can emerge stronger from this struggle. Like no other agreement, the EVFTA contributes significantly to the interconnection of two economic regions and also has strong peacekeeping effects.

It is expected that by 2025, the agreement will result in additional exports of about $16.2 billion per year to the EU. Imports to Vietnam are estimated at $8.97 billion over the same period. In 2022, EU was the fifth-largest investor in Vietnam. According to the Ministry of Planning and Investment, accumulated to August 2022, 25 EU countries have invested in Vietnam with over 2,380 projects. The total registered capital reached $27.6 billion, accounting for 6.42 percent of total registered capital in Vietnam.

Meanwhile, EU investors are present in 54 out of 63 localities in the country, concentrating mainly in large economic centres and localities with favourable infrastructure conditions such as Ho Chi Minh City, Hanoi, Ba Ria-Vung Tau, Quang Ninh, and Dong Nai.

In line with the general trend of FDI in Vietnam, EU enterprises’ investment is also mainly focused on the processing and manufacturing industry. EU enterprises have invested in 18 out of 21 economic sectors in Vietnam. Important areas of interest and investment are the processing and manufacturing industry, electricity production as well as distribution and real estate business.

Besides that, EU businesses tend to be more interested in service industries (such as logistics, post and telecommunications, finance, office leasing, and retail), or clean energy, supporting industries, food processing products, agriculture, high technology, and pharmaceuticals. According to the European Chamber of Commerce in Vietnam (EuroCham), EU enterprises have special strengths and a competitive advantage in green and sustainable growth, which can prove to be very valuable for Vietnam’s ambitions for stronger environment protection.

However, there is room for improvement. According to data from Eurostat and the General Statistics Office, the proportion of investment in Vietnam only ranges from 2-5 percent of the total amount of FDI that the EU allocates in the world.

The EU-Vietnam Investment Protection Agreement (EVIPA) can in a sense be described as the “little brother” of the EVFTA, even if this description does not do justice to the great importance of this agreement for the protection of European (and of course Vietnamese) investments.

The EVIPA sets more precise standards for the protection of foreign investments, including regulations on non-discrimination, a commitment to free and equal treatment, permission for investors to repatriate/transfer investment-related funds, prompt and adequate compensation in case of expropriation, and a guarantee regarding contractual and legal obligations.

Another important point of the EVIPA is that a dispute resolution mechanism can be implemented, which is a great step forward, given the sometimes limited trust in local jurisprudence in the past. It is to be hoped that the EVIPA will be ratified by the European Union as soon as possible so that foreign investment by EU countries in Vietnam can develop further.

But where there is light, there is also shadow: a major problem for both trade and direct investment from the EU in Vietnam certainly also lies in the global political situation. First of all, the conflict in Ukraine and the associated disruption of economic relations between various countries in the world is a major issue.

Secondly, there is currently a weakening of the economic dynamics in the EU, partly due to the energy crisis, which is mainly affecting the largest economy in Europe, i.e. Germany. In addition, companies and consumers in the EU are facing problems due to inflation. The latter is not only due to the pandemic but also to a loose monetary and fiscal policy, high inflation, and interest rate hikes. The global minimum tax set to be enacted in the next year or so is also a challenge to Vietnam’s attraction.

However, it is worth being optimistic, as both the EU and Vietnam have proven remarkable resilience in times of crisis. For Vietnam, FDI from the EU is particularly important against the background of diversifying its own economic partners from abroad. In this way, one-sided dependence on other countries can be minimised. Especially against the background of the emerging trade conflict between the US and China, it is important for Vietnam to include economically neutral partners such as the EU countries in its considerations.

The conditions for direct investment by the EU in Vietnam are excellent. According to a recent study by the Heritage Foundation, there is no country of comparable size that has gained more economic freedom since 1995 than Vietnam.

In its Index of Economic Freedom 2023, Vietnam’s economic freedom is rated at 61.8 points. This means that Vietnam is now ranked 72nd in the index, which is 1.2 points better than last year. Vietnam is ranked 14th out of 39 countries in the Asia-Pacific region, and its overall score is above the global and regional average.

There are thus many things that make European investors optimistic, without trivialising the problems that actually exist. Through cooperation with the European Union, both on the FDI side and on the trade partner side, Vietnam will succeed in developing further here. The country will be able to improve its position as an economic partner through strong EU partners who make clear demands on Vietnam, especially regarding improving administrative processes, transparency, compliance, and human capital.

In addition to the Vietnam Chamber of Commerce and Industry and the provinces, important partners are Vietnamese entrepreneurs who are potential partners for European investors and trading partners. Vietnam still needs to raise awareness and competence in this area. On the EU side, the decisive partners in Vietnam are primarily EuroCham, but also the national chambers of commerce and business associations of the European countries.

In addition, it is important to increase Vietnam’s standing in Europe as an FDI location. This remains a challenge not only for European institutions, including the chambers of commerce and business organisations, but also for Vietnam, which must position itself much more clearly in Europe as an FDI destination as it is in direct competition with other attractive countries in the region such as Thailand and Malaysia.