On December 2, 2015, the European Union and Vietnam finalized negotiations on a new trade deal or Free Trade Agreement (FTA). The deal is expected to enter into force in 2019.
In a Press Statement, the President of the European Commission Jean-Claude Juncker, the President of the European Council Donald Tusk and the former Prime Minister of Viet Nam Nguyễn Tấn Dũng declared, the EU-Vietnam Free Trade Agreement will contribute to strengthening our economies and societies through improved access to each other’s markets. It will also help trigger a new wave of high-quality investment in both directions, and support Vietnam’s transition towards a more competitive, smart and green economy. Vietnam is a market with significant potential. With its 93 million people, a growing purchasing power and a young and dynamic workforce, it offers increasing opportunities for the EU’s agricultural, industrial and services exports.
What does this historic deal mean for German companies interested in exporting to Vietnam? What are the implications of the FTA for German companies investigating the Vietnamese market (vs. China) for manufacturing purposes? Here are five takeaways:
1. Free Trade Benefits
As a general rule, free trade stabilizes investor expectations. It creates new opportunities for growth. Reductions in customs duties are typically an immediate and welcome benefit. When the FTA is ushered in, Vietnam will become even more attractive for German businesses as the FTA is aimed at achieving preferential treatment for goods and services and eliminating non-tariff barriers.
Some examples of advantages for German exporters from tariff elimination are:
- Nearly all German exports of machinery and appliances will be liberalized immediately;
- Approximately 50% of EU pharmaceutical exports will be duty-free at entry into force of the FTA (the remaining 50% after seven years);
- All German textile exports will be liberalized from the date of ratification;
- Car parts will be duty-free after seven years;
- 70% of EU chemicals exports will be duty-free from the start (the remaining after three, five and seven-year marks);
2. Cost-Competitive Vietnam
Given these benefits, should a German exporting firm move manufacturing to Vietnam?
Here are some salient facts about the Vietnamese economic environment:
- Vietnam is home to more than 90 million consumers
- a growing middle class
- a young, vital workforce
- one of ASEAN’s fastest growing countries with an average GDP growth rate of close to 6% between 2000 and 2014
- on the rise (Vietnam recently climbed two positions to become the EU’s second biggest trading partner in ASEAN after Singapore and ahead of Malaysia, with trade between the EU and Vietnam worth €38 billion (Guide to the EU-Vietnam Free Trade Agreement)
- Low minimum wage
- Vietnam is friendly and proactive towards foreign companies and investors
- Political stability
- Rich in natural resources
- Germans have the competitive advantages of a strong reputation for high-quality products in Vietnam.
On many fronts, it seems that Vietnam is edging out China as the most cost-competitive option for German companies.
3. Not a Perfect Picture Though
Of course, not everything is perfect. Before charging headlong into the emerging market of Vietnam, one must also consider some roadblocks. While there has been an improvement, cases of corruption exist (bribes, uneven enforcement of intellectual property rights). There is a tendency for favor to favor state-owned enterprises (stemming from Vietnam’s legacy of centrally planned government, according to Vo Tri Thanh in Vietnam’s Trade Liberalization and International Economic Integration: Evolution, Problems, and Challenges). There has furthermore been a lack of transparency in some rules and policy-making.
As well, no matter the destination, setting up a business can be difficult. It takes time and money to study a new market, learn the local business environment and develop relationships.
4. It’s All About Logistics
As supply chain managers know, logistics are often the factor that “make or break” the bottom line and productivity. “Will shipping your products to the Vietnamese market (or sourcing from Vietnam) be expensive or logistically complicated”? is one of the first questions to ask, after deciding whether there is a market for your products. Supply chain managers must consider the total cost of sourcing in Vietnam, including maritime transportation. Delivery lead times must be factored in, especially if a need for accelerated production arises. A firm could find itself in a difficult position of suddenly having to switch from maritime transportation to air transportation for an expedited shipping requirement. (“Most of Vietnam’s international trade is conducted through the Cai Mep cluster of terminals near the southern metropolis of Ho Chi Minh City,” according to the Journal of Commerce. “Government-owned companies have a controlling stake in five of the seven terminals in the cluster; CMIT is one of them and is operated by APM Terminals under a concession agreement.”
Firms need to be ready for changes in policies and constraints in the source country when it comes to exports, transportation cost fluctuations, disruptions in logistics (e.g., strikes in the transport or logistics industry, holidays), and potential contamination in a food supply chain. Today, in contrast with earlier days when companies produced goods in one jurisdiction and exported them to another, products and components, parts are frequently made in several locations. Complex production networks are replacing today’s traditional trade flows.
Freight forwarders like FreightHub that specialize in moving goods between Europe and Asia can save you trouble and expense. FreightHub can help you with rates, shipping solutions, modes of transportation, transit times to Vietnam, insurance, and customs in a single platform. Fond of Bags uses Freight Hub for real-time tracking for inbound shipments from Vietnam, transparency overall costs, and document management. Watch the video “Fond of Bags Goes Vietnam” on how they make it work.
5. ASEAN and the Future
The EU-Vietnam Free Trade Agreement will now place Germany and other EU countries on par with other countries and regions which have already completed FTAs with Vietnam, such as ASEAN, Australia, New Zealand, Chile, China, India, Japan, and South Korea, and the countries that comprise Trans-Pacific Partnership (TPP) (still tentative). The FTA will elevate Vietnam to the same level as South Korea and Singapore, two countries that have already negotiated FTAs with the EU.
According to the Guide to the EU-Vietnam Free Trade Agreement,
“the Vietnam agreement is the most ambitious and comprehensive FTA that the EU has ever concluded with a middle-income country. As such, it sets a new benchmark for Europe’s engagement with emerging economies”.
It is also a stepping stone towards the EU’s goal of securing an FTA with ASEAN as a whole.
The trade and investment relationship between Germany and Vietnam is set to deepen and be strengthened. The future for a stable export relationship is bright.
Countries holding free trade ties with one another over 25 years were estimated to have 15% less volatility in their exports than those that do not, whereas pairs of countries holding bilateral trade ties
over a comparable timeframe were estimated to have 25% less export volatility than sets of states with no diplomatic relations, according to Benjamin E. Bagozzi and Steven T. Landis in The Stabilizing Effects of International Politics on Bilateral Trade Flows.
CONCLUSION
In 2014, the then German ambassador to Vietnam, Jutta Frasch, noted the fact that the 15th Asia-Pacific Conference of German Business (APK) was being held in Ho Chi Minh City was a “clear sign of confidence in Vietnam” from the German business community, highlighting the deep “potential of Vietnam as a destination for manufacturing and investment.”
Explore what Forto has to offer today! See how the newest FTA may provide you with the steady framework for cost-competitive trade and investment relations that you require.
