Once the FTA is implemented, Vietnam will not only benefit from a reduction in tariffs for its exports, but could also grow its FDI inflows from the EU, helping to develop its manufacturing sector.

HSBC: Vietnam’s Manufacturing, Investment Benefit the Most from EVFTA
Photo: Reuters
Today, HBSC released the latest report titled “Vietnam at a Glance”, in this report, HSBC gives out many prediction on Vietnam-EU trade after EVFTA. Near the finishing line: The EU-Vietnam FTA (EVFTA) is expected to be approved by Vietnam’s National Assembly this month, just in time to boost bilateral trade with the EU, which has been severely impacted by COVID-19. The EU was Vietnam’s second largest export market in 2019, however, Vietnam’s exports fell sharply in the first four months of 2020, primarily driven by falling phone shipments. 
Once the FTA is implemented, Vietnam will not only benefit from a reduction in tariffs for its exports, but could also grow its FDI inflows from the EU, helping to develop its manufacturing sector. But this isn’t the end: There are still key issues that are worth considering even after the deal enters into force. 
For example, the impact of the strict rules of origin on Vietnam’s textile industries is key. If Vietnam wants to fully reap the benefits of the EVFTA, it needs to develop its domestic garment industry, which could take years. Meanwhile, Vietnam also needs to think about how to advance bilateral trade discussions with the UK after Brexit.
External headwinds linger: Many countries started to lift lockdown restrictions in May, however, global demand remains sluggish. As a country highly exposed to external demand, Vietnam’s pain is felt most in manufacturing. Exports continued a double-digit contraction in May, driven by a marked fall in textile and footwear shipments. HSBC expects to see a 2.9% y-o-y decline in 2Q GDP. Meanwhile, inflation continued to ease, offering more room for the SBV to cut interest rates. HSBC expects the SBV to deliver another 50bp cut in 3Q, lowering the refinancing rate to 4.0%.
As HSBC outlined in our previous op-ed piece, despite short-term pain from COVID-19, HSBC sees three green shoots that Vietnam can leverage to support its post-pandemic recovery (The light at the end of the tunnel for Vietnam: Latest op-ed published by NDH, 19 May 2020). These are: new trade opportunities, foreign direct investment, and domestic demand.
The eye-catching EU-Vietnam Free Trade Agreement (EVFTA) is much closer to the finishing line after years of delays and negotiations. The deal was signed by both parties on 30 June 2019, and approved by the European Parliament on 12 February 2020. The EVFTA was submitted to Vietnam’s National Assembly in late May for approval, and it is expected to be passed in early June.
Once fully implemented, the FTA could boost Vietnam’s exports to the EU by 18% annually by 2035 and EU’s exports to Vietnam by 29% (source: European Commission, 2019). Given a subdued global trading environment, the EVFTA will come just in time to promote Vietnam’s trade with the EU and help diversify Vietnam’s exports. This note serves as an update to our analysis on the topic last year (Vietnam at a glance: Gains from EV-FTA, 2 May 2019), and HSBC takes this opportunity to understand how COVID-19 has impacted EU-Vietnam trade so far and identify remaining challenges. 
For easy comparison purpose, we have also included the UK in the EU trade data for 2020, despite the former ceasing its EU membership. Before diving into 2020, let us take a step back and look at how the trade relationship evolved in 2019.
In 2019, Vietnam’s exports to the EU totalled over USD41bn, making it Vietnam’s second largest export destination (16% share), just after the US. In the EU, the Netherlands, Germany and the UK are the top three export markets for Vietnam’s products, together accounting for close to half its total EU imports. 
Looking closely at the item breakdown, 60% of Vietnam’s exports are concentrated in two major items: electronic goods (cUSD17bn) and textiles & footwear (USD9bn) (Chart 3). In particular, the EU is Vietnam’s number 1 market for phone exports (27% share). This is in line with Samsung’s dominant position in the EU market, and Vietnam is Samsung’s major assembly hub for its smartphones.
However, the EU is not a major exporter to Vietnam. EU’s exports to Vietnam are mainly concentrated in machinery and transport equipment (48% share), agriculture products (13%) and pharmaceuticals (10%). Vietnam’s total imports from the EU totalled USD15bn in 2019 (6% share), largely lagging behind mainland China and South Korea, which together accounted for 50% of Vietnam’s total imports (Chart 4). This has therefore led to a rapid widening of the trade surplus between Vietnam and the EU over the years.
What’s the impact of COVID-19 on bilateral trade? Although regional economies have seen a consistent decline in exports, Vietnam’s exports remained surprisingly resilient in the first four months of 2020, even rising 2% y-o-y. 
This was primarily driven by exports to China and the US, growing 23% y-o-y and 13%, respectively. However, Vietnam’s trade position with the EU was reversed. On the one hand, Vietnam’s exports to the EU were hit the hardest. The EU imported 10% y-o-y less than the same period last year, largely driven by a sharp contraction of 24% y-o-y in phone shipments. 
On the other hand, Vietnam’s imports from the EU grew 10% y-o-y, supported by a 20% y-o-y increase in pharmaceutical products. This reflects demand for different products (necessities vs non-durable goods) during a global pandemic.
It’s evident that the trade from both blocks is complementary: Vietnam has an advantage in labour-intensive goods while the EU is able to supply more capital-intensive and high-tech products. 
Once approved by Vietnam’s National Assembly, the EVFTA should come just in time to help revitalize Vietnam’s exports to the EU. According to the European Commission’s schedule, 65% of duties on EU exports to Vietnam will disappear when the FTA is in effect, with the remainder scheduled to be phased out gradually over up to 10 years. 
Meanwhile, 71% of duties on Vietnam’s exports to the EU will disappear once the FTA comes into force, with the remainder to be phased out over seven years. Eventually, the FTA aims to eliminate 99% of customs duties.