Traditionally, companies in Europe or in the US outsource and manufacture their products in either China or Taiwan. But for Modmo, a bike-tech company, the design, development, and manufacturing are all done in Vietnam.
What attracted their founder, Jack O’Sullivan, to come to Vietnam was the country’s Free Trade Agreement with Europe. While Jack was on an Asian sourcing trip, the EU-Vietnam Free Trade Agreement was in discussion. Immediately after the EVFTA was ratified, the Dubliner decided to go all in on Vietnam.
Vietnam hasn’t shied from participating and looking at free trade agreements in the region and beyond to fuel its growth. Modmo is not the only company that outsources its manufacturing in Vietnam, and Jack is not the only one who’s here for the same reasons.
The fact that China and Taiwan have pretty hefty tariffs for importing into Europe, thanks to the free trade agreement, Vietnam can expect more businesses to come.
‘Most ambitious deal’
The key to Vietnam’s continuous economic growth has been the country’s capacity to consistently grow its exports. This has been driven by the growth in the overall imports from Europe and the US, and the substantial gains in market share in Europe and in the US over the previous decade.
Signed on June 30, 2019 and took effect on August 1, 2020, the EU-Vietnam Free Trade Agreement (EVFTA) is a new generation FTA between Vietnam and 28 European Union member states.
At its core, the EVFTA, aims to liberalize both tariff and non-tariff barriers for key imports on both sides over a period of 10 years.
The EVFTA, described by Brussels as its most ambitious deal with a developing country, is a comprehensive and high-quality agreement that ensures balanced benefits for both Vietnam and the European Union, with consideration for the differences in development levels between the two sides.
Upon entering into force, the EVFTA is expected to be a huge boost to Vietnam's exports, helping to diversify markets and exports, particularly agricultural and aquatic products as well as Vietnamese products with competitive advantages.
In addition, according to the European Commission, the agreements will provide opportunities to increase trade and support jobs and growth on both sides, through eliminating 99% of all tariffs, reducing regulatory barriers and overlapping red tape, ensuring the protection of geographical indications, opening up services and public procurement markets, and making sure the agreed rules are enforceable.
Industry and Trade Minister Tran Tuan Anh described the EVFTA as a lever for growth, bringing the possibility of becoming more involved in a market with a gross domestic product (GDP) of US$18 trillion.
Presently, EU investors are active in 18 economic sectors and in 52 out of the 63 provinces in Vietnam. And the investment has been the most prominent in manufacturing, electricity, and real estate.
In 2020, the Ministry of Planning and Investment said that the FTA is expected to help increase Vietnam’s GDP by 4.6% and its exports to the EU by 42.7% by 2025. On the other hand, the European Commission has forecast the EU’s GDP to increase by US$29.5 billion by 2035.
One of the key highlights of the EVFTA is it allows remanufactured goods to be imported and will open up trade for high-value products such as medical devices and car parts to serve the after-sales market. Previously, before the deal, remanufactured goods were considered ‘used’ by Vietnam and typically not allowed for import.
Additionally, Vietnam will accept ‘Made in EU’ products for non-agricultural items for the first time reflecting the integration of the EU market. With the exception of pharmaceuticals which are subject to national approvals, this will allow manufacturers to use the EU’s broader internal market.
Moreover, analysts say the deal came at the right time after the coronavirus pandemic revealed shortcomings in Vietnam's manufacturing sector — and particularly highlighted issues with its dependence on China in its supply chain.
During the peak of the pandemic, despite how the country managed to contain the coronavirus early on with strict border closures and social distancing measures, Vietnam still faced severe economic impacts from lockdowns at home and abroad.
In May 2020, the World Bank said that the EVFTA could help lift hundreds of thousands of people out of poverty in Vietnam and boost the country's GDP by 2.4% by 2030.
Vietnam is one of the world's fastest-growing economies and the EU's second-largest trading partner in Southeast Asia. Singapore is the only other Southeast Asian country to sign a free trade agreement with the EU.
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Vietnam’s other trade partners
When it comes to talks about free trade agreements, the term “reduced tariffs'' automatically follows. But FTAs don’t just reduce or eliminate tariffs, they also help address behind-the-border barriers that may impede the flow of goods and services.
Not only that, the agreements encourage investment, improve the rules affecting issues such as intellectual property, e-commerce, and government procurement.
Vietnam has effectively used its participation in international free trade agreements as an instrument to ensure increased economic power and financial security. Currently, there are 12 FTAs that Vietnamese exporters can take advantage of including agreements with major markets such as Japan, Canada and South Korea.
“Over the past few years, Vietnam has been active in signing bilateral trade agreements with countries throughout the world and because of its membership in the Association of Southeast Asian Nations (ASEAN), the country has become a party to several FTAs that the regional trade bloc has signed,” reads the Vietnam Briefing report from Dezan Shira and Associates.
Additionally, the recent trade agreements such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), UK-Vietnam FTA (UKVFTA) in effect, and the upcoming Regional Comprehensive Economic Partnership (RCEP) – are indicators that Vietnam is prioritizing international trade integration trade partners outside ASEAN.
The free trade agreements enable Vietnam’s economic development to continue to shift away from exporting low-tech manufacturing products and primary goods to more complex high-tech goods like electronics, machinery, vehicles, medical devices…and even e-bikes.