FTA could be a curse in disguise

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Workers at a garment company in Vietnam. Textiles and garments are among Vietnam's exports to the EU, along with footwear and woodwork products.

Vietnamese exporters are keenly interested in the free trade agreement (FTA) being negotiated with the EU, but the FTA is unlikely to be of much benefit because of non-tariff barriers and the slow pace of policy change in Vietnam that could hinder investment from Europe.

Nguyen Van Nam, former director of the Trade Research Institute, said: "With big tariff cuts, the FTA will open up more opportunities for Vietnam to boost exports.

"But it will not be easy for our firms to take full advantage because of their low capacity to meet the EU's strict quality requirements."

The FTA will eliminate tariffs on 90 percent of Vietnamese goods. The EU now imposes an average import tax of 4.1 percent. The FTA would cut the rate by 10-20 percentage points on the remaining 10 percent, Nam said.

 "All firms can see benefits from tariff reduction under the future FTA. However, there are concerns about technical barriers, such as criteria on product quality, food safety, environmental protection, labor employment and intellectual property protection, that EU could impose to limit imports from developing countries," he said.

"Thus, if we do not meet the requirements, Vietnam will not be able to increase exports to the market despite the tax reduction," he said.

"Moreover, it is very difficult for local firms, with their current limited financial capacity and poor production technology, to overcome the barriers."

For example, materials for Vietnam's garment production are mainly imported from China, Taiwan and South Korea. Thus, local producers will not be able meet the requirement of EU that garment exports should use materials of Vietnamese origin, he said.

This is the big issue for most of the local firms that export products to the EU, as they are still heavily dependent on material imports. Vietnam's main exports to the EU are farm produce, textiles and garments, footwear and woodwork products.

Economist Pham Chi Lan said, "There is a gap between Vietnam and EU in terms of scientific and technological development, as well as in management capacity. Thus local firms will always find it difficult to meet the EU's strict requirements."

Five years after WTO accession, Vietnam is yet to learn well how to take full advantage of international trade cooperation agreements, she said.

"In fact, some of the opportunities have become challenges," she added.

Vu Tien Loc, chairman of the Vietnam Chamber of Commerce and Industry, said local firms could face increased risks of anti-dumping lawsuits, which they have little experience in dealing with, if they boost exports to the EU.

Economist Nguyen Minh Phong said Vietnam can reduce or eliminate this risk only when it is officially recognized a market economy by the world.

However, Vietnam now meets only one or two of the five conditions set by the EU for a market economy. To meet all of them, Vietnam needs to implement more basic renovations to ensure market transparency and fair competition, Phong said.

Then, the EU economy is itself facing many challenges due to rising bad debts. The situation may be worse than previously forecast, according to a recent Ernst & Young report. Thus, it will not be easy to boost exports to the EU market in the future, Phong said.

Even after signing the FTA, Vietnamese products will still face fierce competition with those from other countries. Besides Vietnam, the EU is having FTA negotiations with other ASEAN countries, including Singapore, Malaysia and Thailand.

Competing globally has always been a weak point of Vietnamese exporters due to unsupportive policies, Nam said, without elaborating.

Vietnam is also hoping that the FTA will help it attract more investment from the EU, slowing a decline in FDI inflows that began in 2008.

According to the Foreign Investment Agency, pledged FDI fell by more than 50 percent year-on-year to a mere US$630 million in the first two months of this year amidst the global economic slowdown and the government's measures to tackle inflation shackling growth.

Vietnam's economy expanded 5.03 percent last year.

Ambassador Franz Jessen, head of the European Union delegation to Vietnam, said Vietnamese authorities are very concerned about the decrease in foreign direct investment. The FTA can be used to reverse that trend, because if proceedings are seen as progressing quite rapidly, companies will adjust, he said.

"European companies are obliged to operate under very strict guidelines on corruption and adhere to very stringent norms, and what I have been saying here is that if we want to stimulate investment into Vietnam, one of the ways to do it is to ensure the business environment is transparent and clear," Jessen said.

However, Vietnam is yet to do this. Nam said Vietnam's current business environment is not very good, given the slow pace of administrative reforms and no significant reduction in corruption.

The FTA may also negatively affect the Vietnamese economy as its state budget collection would decrease because of lower tariffs imposed on goods imported from the EU, VCCI's Loc said.

Furthermore, the lower tariffs would make EU's products cheaper in Vietnam, making it more difficult for local firms to sell their products just in the domestic market. Many firms will have to narrow or even shut down production and business because they cannot compete, said Loc.

Economist Nam painted a silver lining, saying: "The agreements could create pressure to force us to renovate the economy under market mechanisms. Thus, signing more free trade agreements can help Vietnam take its renovation process deeper, benefiting local enterprises in the long run."

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