HSBC estimates a 0.3 percentage point gain for Vietnam’s real GDP from EVFTA

As the European Union and Vietnam are seeking to ratify a negotiated free trade agreement (FTA) by the end of this year, it is expected that duties on over 99 per cent of products will be eliminated together with reduction in non-tarriff barriers and improvement in investment access or protection.

Although the full benefits may not be immediately realised, HSBC economists expected Vietnam to gain up to 0.3 percentage point, with the lowest of 0.1 percentage point on average, to Vietnam’s real GDP growth each year based solely on its trade impacts. 

Once fully implemented, the EVFTA’s relatively high standards should also help accelerate Vietnam’s economic reforms and global integration.

“We expect Vietnam’s textiles and footwear sectors to benefit most from the agreement. Vietnam’s exports of textiles and footwear to the EU totalled nearly $9 billion in 2018. Meanwhile, EU weighted average tariffs on these products are currently as high as 9 per cent,” noted HSBC economists Noelan Arbis and Yun Liu in the ‘Vietnam at a glance’ report.

“These tariffs would be removed in three years or directly upon entry into force of the EVFTA for less sensitive products. Meanwhile, EU tariffs on more sensitive textile and footwear products would be removed after five to seven years.”

Nevertheless, the strict rules-of-origin for textiles imports into the EU could dampen the trade benefits for Vietnam, given that the majority of primary materials for its textiles are imported from elsewhere. 

The agreement, for instance, requires the fabric from which garments are made to be woven in Vietnam, the EU, or Korea (which has FTAs with both Vietnam and the EU). This emphasises the need for Vietnam to fully develop its own textile manufacturing industry to take full advantage of the agreement’s benefits.

The European Commission estimates that Vietnam’s exports to the EU would grow by around 18 per cent as a result of the agreement, while the EU’s exports to Vietnam are slated to increase by around 29 per cent. 

According to HSBC’s estimates based on 2017 trade numbers, this would still result to a wider trade surplus for Vietnam with the EU.

“Moreover, if ratified, the EVFTA’s high standards and comprehensive approach should help accelerate Vietnam’s economic reforms and global integration. Increased EU FDI to Vietnam as a result of the agreement could also lift Vietnam’s growth further than our estimate, considering that the EU’s FDI to Vietnam has averaged just less than $800 million between 2010 and 2017,” wrote the report.

The EU parliament is known to have provisionally scheduled discussions for May 28 as part of an attempt to speed up the ratification of the agreement. The EU now stands as Vietnam’s second-largest export market, and this agreement aims to continue to build on those ties.

Certain drawbacks, however, also pop up on the horizon as the EVFTA provides a long transition phase for certain sensitive products, which could go all the way up to 10 years. This means that the full benefit of the agreement cannot be fully and immediately realised and could even be diluted depending on the future development of industries in Vietnam or the EU. 

Nevertheless, the EVFTA should help speed up the pace of structural reforms in Vietnam, especially as it pertains to non-tariff barriers, services trade, and intellectual property protection measures.