The Free Trade Agreement (FTA) between the EU and Vietnam offers businesses in Asia a significant competitive advantage – but only if they can reap its full benefits.
The European Union-Vietnam Free Trade Agreement (EVFTA) came into force on 1 August 2020. It is the second FTA between the EU and an ASEAN (Association of South-East Asian Nations) member country after Singapore (November 2019). In Asia, the EU also has FTAs with South Korea and Japan.
The EVFTA is a new generation agreement as it covers not only issues related to trade but also those regarding investment, governance, protection of workers’ rights and benefits as well as the environment. Most experts consider the EVFTA as a stepping stone to a future region-to-region agreement with ASEAN.
Benefits of EVFTA
From 1 August 2020, the day EVFTA came into force, EU customs duties on 85.6% of tariff lines – accounting for about 70.3% of Vietnam’s export volume – have been eliminated. In addition, the EU has committed to removing 99.2% of tariff lines accounting for 99.7% of Vietnam’s export volume to the EU within seven years.
Similarly, Vietnam has eliminated customs duties on 48.5% of tariff lines, equivalent to 64.5% of EU export volume to Vietnam from 1 August. Vietnam is committed to abolishing import duties on 98.3% of tariff lines – equivalent to 99.8% of import volume from the EU – within the next decade.
The EVFTA offers substantial benefits to enterprises in Vietnam in particular and the ASEAN region in general. Currently, while the EU is one of the largest markets for its exports, Vietnam’s share of EU imports in percentage terms is quite small – about just 1%. The EVFTA gives Vietnam-based businesses an excellent price advantage as 9% of tariff lines will be eventually eliminated. The main sectors expected to benefit from the deal are:
- Footwear and aquaculture products
- Electronic equipment and components
Enterprises in Vietnam will also be able to import high-tech machinery from EU to enhance productivity and quality.
Another significant aspect of the agreement is the commitments provided by the Vietnamese government in areas such as institutional and legal frameworks, investor protection, labour policies, business environment and infrastructure. Such initiatives are expected to lead to greater transparency and ease of doing business in Vietnam. All this could result in the development of regional supply chains centred on Vietnam with an eye on the EU markets. This would lead to the country playing a greater role in global supply chains.
But the key to reaping the benefits of the EVFTA – especially for exporters of manufactured goods – lies in meeting the stringent norms on the Rules of Origin (ROO) as enshrined in the agreement. This is often not easy.
Reaping the full rewards of an FTA
How can businesses best take advantage of the EVFTA? The three critical elements to benefitting from an FTA are Planning, Control and Execution. While this is true for any business decision, the process is far more complicated when it comes to dealing with issues relating to global trade, designing of supply chains and navigating the rules and regulations governing FTAs.
Companies using manual processes find it extremely difficult to accurately conduct the various tasks involved, including analyzing trends, scenario planning, supplier management and final execution. Not surprisingly, a recent Thomson Reuters survey found that over two-thirds of responding companies do not make effective use of FTAs because they find compliance too complicated. These companies were paying millions of dollars extra in tariffs.
Automation is the key
Realizing this, some of the world’s largest companies are automating the entire process by turning to Global Trade Management (GTM) software systems.
These systems are powered by repositories of content governing various rules and regulations governing each FTA and help businesses identify opportunities to qualify their goods under FTA-specific ROO and reduce supply chain costs. GTM software further reduces risks in complying with FTA guidelines by streamlining trade compliance workflow, eliminating manual work and ensuring adherence to the latest regulatory changes.
It can integrate highly complex bill of material structures before quickly analyzing them against the Rules of Origin of multiple agreements at the same time on a cloud-enabled system. Further, it can automatically self-certify error-free declarations, thereby mitigating potential penalties while building the audit trail for future preferential claims.
The Return on Investment (RoI) in GTM software comes in three forms. First, of course, is that these systems ensure that companies can fully reap the benefits of FTAs. They pay lesser duties, thereby gaining a significant advantage against competitors who are still dependent on manual processes. The second form of RoI is in terms of more efficient utilization of human resources. A smart GTM solution can increase the number of operations handled by every team member by 10-15%. Finally, there are the advantages that accrue in terms of auditing and greater efficiencies with suppliers and brokers.
The EVFTA is an excellent opportunity for enterprises in Asia to access the EU market for their products. But to do this, they need to get their trade management processes right.
Find out more about how Free Trade Management software can help you fully optimise FTAs.