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published on 6 August 2020 | reading time approx. 2 minutes
On 8 June 2020 Vietnam ratified the European Union - Vietnam Free Trade Agreement (EVFTA) and the European Union - Vietnam Investment Protection Agreement (EVIPA). The EVFTA entered into effect on 1 August 2020 and shall provide expansive preferential markets access for goods traded between Vietnam and the European Union. The negotiations for this had been concluded in December 2015, after almost three years and 14 rounds.
The EVFTA is a new-generation Free Trade Agreement between Vietnam and the EU. In June 2018, it was split into two separate agreements, i.e. one on trade and one on investment protection, after the European Court of Justice defined the limits of the Union's exclusive competence in its opinion of 16 May 2017 with regard to the EU-Singapore Free Trade Agreement. It should thus be noted that the EVIPA will only enter into force after all EU members have ratified the Agreement, which may take years.
While particularly the effect of the agreement on trade in goods with its tariff reductions has seen broad media coverage already, the liberalization in the services sector is not yet known to many entrepreneurs, although the practical impact is significant. We therefore shed a light to the respective Chapter 8 of the EVFTA, which offers new opportunities to EU investors as Vietnam further liberalized its services markets by offering access beyond their WTO commitments. This will allow EU entrepreneurs a strongly improved access to Vietnam's market either as cross-border business or by way of establishing a local service entity. The FTA defines such "establishment" as the setting up, including the acquisition, of a juridical person or creation of a branch or a representative office in the Union or in Vietnam, respectively, with a view to establishing or maintaining lasting economic links. With respect to such market access through establishment and operation of an enterprise, each party shall accord treatment no less favorable than that provided for under the terms, limitations and conditions agreed and specified in its respective Schedule of Specific Commitments, which we will look at below.
In those sectors where market access commitments are undertaken, there are now various restrictions on measures which a party shall not adopt or maintain either on the basis of a regional subdivision or on the basis of its entire territory, unless otherwise specified in its Schedule of Specific Commitments. It is therefore not permitted to impose limitations on the number of enterprises that may perform a specific economic activity, whether in the form of numerical quotas, monopolies, exclusive rights or the requirements of an economic needs test. Furthermore, limitations on the total number of operations, the total quantity of output or the total value of transactions or assets in the form of numerical quotas or the requirement of an economic needs test are not permitted.
Notably, limitations on the participation of foreign capital in terms of maximum percentage limit on foreign shareholding or the total value of individual or aggregate foreign investment are now similarly banned as measures which restrict or require specific types of legal entity or joint ventures. This will allow foreign investors to hold 100% of shares and hence fully control the company in Vietnam in sectors which previously required a joint venture with a local partner. Furthermore so called "Performance Requirements" are restricted, which includes among others requirements to (i) export a given level or percentage of goods or services, (ii) to achieve a given level or percentage of domestic content, (iii) purchase goods or services from natural persons or enterprises in one party's territory or (iv) transfer technology, a production process or other proprietary knowledge.
The liberalized sectors are set out in each party's Schedule of Specific Commitments included in the Appendices to the Agreement.
The EVFTA also contains clauses concerning National and Most-Favored-Nation Treatment, the latter however does not apply for certain sectors such as communication services, except for postal services and telecommunication services, recreational, cultural and sporting services as well as mining, including oil and gas. Here a more favorable treatment investors of a third country and their enterprises remains permitted. The EVFTA service chapter should further not be construed as obliging a party to extend to the investors of the other party the benefit of treatments granted under other bilateral, regional or multilateral agreements. Notably, the ASEAN Economic Community falls within such concept of a regional agreement, which means that European investors will not receive a treatment comparable to other AEC members. This, however, does so far not have a significant effect as service liberalization efforts among the AEC members currently appear rather reluctant.
The Specific Commitments beyond those under WTO would cover investments in many services sectors. Among others EU investors can stronger engage in the field of computer services, to which Vietnam fully committed beyond their WTO commitments which means that all future technologies in the computer sector are captured and the EU suppliers can have a wide choice in offering computer services in Vietnam. Most telecommunication services will further require joint ventures with local partners. But wholly foreign owned companies will be permitted to provide internet and/or value added services such as emails, online information and data processing.
Also the provision of cross border higher education services by EU suppliers is now possible based on Vietnam's new commitments. This will allow to provide such services from EU territory directly to consumers in Vietnam.
One of the most important sectors for EU investors are distribution services. The EVFTA allows improved market access for services between the parties. One important aspect in this regard is that Vietnam commits to phase out the Economic Needs Test (ENT) which has so far been applicable to secondary and subsequent retail establishments. The ENT requirement will be phased out five years after entry into force, i.e. from 2025. Before that, already no ENT will apply for outlets beyond the first one which are sized less than 500 sqm.
Furthermore Vietnam liberalized the cross border passengers and freight transportation and offered better conditions to EU investors in establishing their companies in Vietnam to provide maritime transport services. This includes liberalization of the maintenance and repair of vessels services as well as maritime agency services. EU investors may now also supply cross border container station and depot services, maritime cargo handling as well as container handling. They may further supply storage and warehouse services without limitations as well as dredging services in a joint venture with a local partner.
The EVFTA also provides further market access in various other services sectors such as air transport ground handling services and in-flight meal serving services, postal services and environmental services but also building cleaning services (including disinfecting and exterminating), packaging services, trade fair and exhibition services, rental/leasing without operators relating to machinery and equipment, nursing services, physiotherapists and paramedical personnel.
The EVFTA sets a good basis for sustainable growth, mutual benefits in several sectors and be helpful, in the current time of global pandemic and the future beyond, to balance trade relations between the EU and Vietnam. Foreign investors will face a range of new opportunities and may consider Vietnam as a very interesting business destination in the ASEAN region.
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