Europe, Vietnam reach towards major trade deal

After nearly seven years of negotiations, the European Union and Vietnam appear closer than ever to cinching a major free trade deal, known as the Europe-Vietnam Free Trade Agreement (EVFTA).

The long-sought deal promises to boost Vietnam’s economic growth by as much as 8% by 2025, driven by an expected sure of technology hardware and textile exports to lucrative European markets. European investors, meanwhile, are expected to be lured into Vietnam’s liberalizing and growing banking and insurance sectors.

Hopes for a final deal were raised in October after the European Commission accepted the EVFTA’s terms, including the elimination on 99% of all customs now imposed on bilateral trade. But Europe’s perennial concerns about Vietnam’s poor rights record, including a new clampdown on dissent that has seen many activists jailed to long prison terms on anti-state charges, could still delay the deal.

When Vietnamese Prime Minister Nguyen Xuan Phuc attended last month’s World Economic Forum in Switzerland, reports emerged that the European Council, which must also accept the deal before it is voted in the European Parliament, had postponed the motion over “technical reasons”, according to a British member of the European Parliament (MEP).

Sources in Hanoi say that Europe’s political institutions are now driving a harder bargain than previously on rights and democracy issues. Since negotiations started, talks have persistently snagged on Vietnam’s dismal human rights record, arguably one of the worst in Asia.

Under the terms of the agreed trade deal, Vietnam’s ruling Communist Party has acceded to certain liberalizing reforms, namely in regard to labor rights and environmental policies. But sources say that’s likely not enough liberalization to finalize the deal.

By dangling an already concluded trade deal before Vietnamese politicians, EU negotiators apparently believe they can pressure Hanoi to improve human rights and liberties in areas beyond the EVFTA’s provisions.

This could include pressure for a mass release of political prisoners, currently estimated at more than 100, according to Amnesty International, a rights group. European negotiators could also press for more religious and online freedoms, the latter a particular concern since an intrusive new cybersecurity law came into effect on January 1.

If the European Parliament fails to vote on the EVFTA before April, when the body goes into recess ahead of elections the following month, ratification could be delayed until later this year, if at all. The Council must accept the EVFTA before it goes to a vote in Parliament.

With one of Asia’s fastest growing economies, Vietnam has recently gone on a free trade deal spree.

In January, it formally entered into the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), an 11-member free-trade bloc, and is also party to the proposed Regional Comprehensive Economic Partnership (RCEP), an Asia-wide trade-promoting bloc led by China.

The EVFTA is arguably just, if not more, important to Vietnam than the CPTPP and RCEP combined. The EU is one of Vietnam’s largest export markets and among its leading investors. Vietnam is the EU’s second largest trading partner, after Singapore, with bilateral trade worth about US$54 billion in goods and over US$4 billion in services in 2017.

A Trade Sustainability Impact assessment conducted by the EU several years ago found that the EVFTA could increase Vietnam’s gross domestic product (GDP) by as much as 15% after the deal’s adoption, though the current percentage is expected to be slightly lower.

Vietnam’s Communist Party’s political legitimacy rests largely on its ability to deliver fast economic growth, which in recent years has hovered around 7%. Years of consistently rapid growth have transformed the once backward nation into one of Asia’s fastest rising, export-geared economic powerhouses.

At the same time, the US-China trade war has raised concerns in Vietnam about rising protectionism in lucrative Western markets. That makes a final deal on the EVFTA all the more urgent for Hanoi.

To be sure, there are reasons beyond rights and democracy for the deal’s delay. Negotiations stalled in 2017 when a similar free trade agreement between the EU and Singapore stuttered over the question of jurisdiction in disputes, which also had implications for a deal with Vietnam.

The European Court of Justice ruled at the time that issues involving investor-state disputes were not covered in the EU’s shared decision-making powers with individual European member states, meaning that the EU couldn’t ratify a free trade agreement without the acceptance of all member states.

As such, the trade deal with Vietnam was effectively split into two. The EVFTA involves only terms and issues that the EU has exclusive say over.

A separate EU-Vietnam Investment Protection Agreement (EVIPA), however, involves trade regulations that concern individual European member states, all of which must vote on the agreement.

Because of the split, it is likely that the two deals will be ratified at different times, with the EVIPA expected to take much longer to finalize. But the most important trade-promoting provisions and regulations for Vietnam are contained in the EVFTA.

In mid-October, the European Commission finally agreed to both the EVFTA and EVIPA, and sent them to the European Council for its consent. But progress has been slow, and while the EVFTA was expected to be agreed by the Council last month, it could now be postponed until after European elections.

Analysts are split on whether a delay will be good or bad for Vietnam. According to polling projections, the rise of populist parties across Europe is likely to see more populist MEPs elected in Brussels, as well as a more solid populist voting bloc in the European Parliament.

On one hand, populist MEPs are unlikely to put the same emphasis on Vietnam’s poor human rights record. On the other, since many of them espouse protectionist policies, populist MEPs may oppose a trade deal that allows even more cheap Vietnamese-produced goods into European markets.

The EU has recently shown a protectionist streak by re-imposing tariffs on Cambodian and Myanmar-produced rice, which European politicians argued was hurting Spanish and Italian producers.

Action is slow at the EU even at the best of times and if voting on the EVFTA is delayed until after May, it will certainly frustrate eager Vietnamese politicians and businesses.

In anticipation of the EVFTA, Hanoi has already laid out a timetable for ratifying International Labor Organization (ILO) conventions it has not yet signed.

A reformed Labor Code, which is being altered so as to conform to the ILO’s Fundamental Principles and Rights at Work, is expected to be in place by October, while Hanoi is also adapting its laws to mirror the ILO’s core convention’s on collective bargaining, forced labor and freedom of association. Vietnam’s full ratification of these labor rights reforms is expected by 2023.

Moreover, the EVFTA’s chapter on trade and sustainable development sets out tangible changes that the Vietnamese government must meet for environmental protection, a major issue that has become politicized in Vietnam’s authoritarian context.

EU Trade Commissioner Cecilia Malmström, a primary player in the negotiations, stressed last year that Vietnam has shown “clear commitments to respect human rights and to comply with [ILO] conventions.”

But not all of her Council and Parliament colleagues are convinced. In September, a group of 27 European parliamentarians wrote in an open letter that Hanoi must make even more improvements on human rights if they are to accept the trade deal.

They called specifically for a repeal of the most egregious part of Vietnam’s penal code, which makes any criticism of the Communist Party a criminal offense punishable by lengthy jail terms. European parliamentarians have also called for the end of Vietnam’s death penalty.

The deal’s champions have argued that Vietnam is in the process of making many important, and practical, reforms to meet the EVFTA’s criteria. Skeptics, however, say that Hanoi is clearly only willing to move so far on improving political and human rights.

But Vietnam’s domestic situation could be overlooked if the EVFTA is seen to advance the EU’s wider ambition to reach a free trade deal with the ten-member Association of Southeast Asian Nations bloc. Combined, the region boasts a GDP of US$2.4 trillion, of which Vietnam contributes only US$223 billion.

The EU’s Trade Commissioner Malmström let on in October that she thinks the EVFTA will “pave the way” for such a larger deal, though she added that it “is not immediately around the corner, but it is definitely a goal that we have.”