EU Trade Deal — VietEcon

SOURCE: VIETNAMESE CUSTOMS, EU, VIETECON.COM CALCULATIONS

The EU finally passed the EU-Vietnam free trade agreement (FTA) out of committee. Yesterday, the trade committee approved the FTA and a separate investor protection agreement. It now has to go through the full European parliament. Debate will start there on February 11, and I don’t know how long it will take.

There is some criticism of the deal, mostly around human rights, and labor and environmental issues. Human Rights Watch asked MEPs to force reforms through, specifically to penal legislation and to release political prisoners. But that hasn’t happened.

I am not expert on the EU Parliament, but now that it has passed through committee, it seems unlikely that there will be changes to the legislation. Within the bill, there are some requirements that Vietnam make legislative changes:

“there are legally-binding rules on climate, labour and human rights. The agreement commits Vietnam to apply the Paris Agreement. Vietnam scheduled the ratification of two remaining bills on the abolition of forced labour and on freedom of association by 2020 and 2023, respectively. If there are human rights breaches, the trade deal can be suspended.”

But we know from past trade deals, very little is done after the agreement is signed and it is extremely hard to enforce even the trade-related parts of FTAs, so trying to reach into the country and change legislation on human rights or political prisoners is difficult.

As an aside, I remember when Obama visited Egypt, and there was a spate of political prisoner releases, presumably because the US Ambassador said something like: “it sure would be annoying for Obama to have to talk about these prisoners of conscience when visiting your country. It would look bad for him and for you.” Whatever she said, it worked, and Egypt released

Signing the agreement should give a big boost to both sides. To give a sense of the size, total trade in goods and services is over EUR50bn, and the trade deficit was EUR27bn in 2018. It looks like through November, the deficit was down, but we will have to see the full year figures. The EU sees the FTA as a way to reduce that deficit more over time. Specifically, Vietnamese tariffs on 65% of all European goods will fall to zero when ratified. The rest will be eliminated over a 7-year period. This is especially important for motorcycles (75% current tariff) and cars (78%). Wines and spirits’ tariffs will fall over 7 years, down from 48-50% currently.

These will be major changes and will very likely help boost exports. Look at what happened with Australian wine exports to China as tariffs fell (chart up to the right). It’s not a perfect parallel, because wine consumption was already trending up, but it can’t have hurt. .

Generally, we are going to see faster exports to Vietnam from the EU, and also growing exports to the EU from Vietnam. Textiles and telephones are what’s sent to the EU, and these will no longer have tariffs (textiles are currently at 8%, as far as I can tell [quick aside: reading the duty schedule is impossible! There are so many codes and so many types of goods.]). These should fall as long as the textiles are mostly made in Vietnam or with parts from other free trade partners with the EU (like S. Korea).

My forecast is that the trade deficit will likely fall over time, as Vietnam grows up the income curve and buys more high-end products from the EU. But in the very short term, the cut in tariffs on Vietnamese goods will goose exports to the EU.

Of course, free trade with Britain will only last for a few months (if this is passed) before it needs to be renegotiated. Just another example of Brexit genius. It only took 7 years to negotiate this agreement, so a UK-Vietnam agreement should happen quickly!