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As Investors Move from China, Vietnam Adds EU Trade Pact to Arsenal

Vietnamese Trade Minister Tran Tuan Anh speaks during an online ASEAN ministerial meeting in Hanoi, Vietnam, Thursday, June 4, 2020. ASEAN's economic ministers and their Chinese, South Korean and Japanese counterparts hold the special online meeting…

Volvo from Sweden, Adidas from Germany, and Zara from Spain are all European companies that have increased their investment in Vietnam in recent years. Analysts expect that trend to deepen when the Vietnam-European Union trade deal approved earlier this month by Vietnam’s National Assembly takes effect this summer, particularly as companies seek to reduce their reliance on neighboring China.

Vietnam is one of only a handful of nations forecast to see economic growth this year amid the COVID-19 outbreak. Much of that growth will result from foreign investment, including investment facilitated by the EU-Vietnam Free Trade Agreement, or EVFTA. Governments from both sides have called it a “next-generation” deal because it not only decreases tariffs, but also contains language to hold companies to labor, environmental, and social standards.

Sheng Lu, an associate professor in the Department of Fashion and Apparel Studies at the University of Delaware, said the deal will benefit textile and garment makers in the Southeast Asian nation as tariffs come down.

“EVFTA will provide a level playing field for Vietnam, which is expected to see a continuous robust growth of its apparel exports to the EU and gain additional market shares in the years to come,” Lu said in an analysis of the agreement. “Meanwhile, not eligible for any EU preferential duty benefit, apparel exports from China are likely to face intensified competition in the EU market after the implementation of EVFTA.”

Investment has been seeping out of China because the COVID-19 pandemic, as well as the U.S.-China trade war, has shown companies the dangers of pinning their supply chains on a single nation. When officials and consultants in Vietnam pitch it as the new destination for that investment, the EU trade agreement is one of the benefits they tout.

Le Van Hanh, who advises companies interested in the Vietnam market through her work with the Vietnam office of AHK, German Chambers of Commerce Abroad, said the trade deal will eliminate 70 percent of tariffs between the two sides immediately, and 99 percent of tariffs in 10 years.

“That sounds very great, right?” she said on the AHK podcast. “And furthermore, there are also commitments in services, public procurement, nontariff barriers, export duties, and a good regulatory package.”

She described two German companies she has helped to relocate from China to Vietnam, including a textile manufacturer hit hard by new 25 percent U.S. tariffs. Moving to Vietnam was useful not just because of the tariffs, but also because many of the manufacturer’s suppliers were also moving there, she said.

Her colleague, Bjorn Koslowski, said it is easier for European companies to move from China to Vietnam because both nations have a number of things in common, including Confucian values, an industrious work ethic, a drive for monetary success, and a drive to learn.

“Many companies that invest here or do business with the Vietnamese, they are also convinced by the HR [human resource] quality,” he said. “Vietnam is very culturally similar to China and many companies have already worked with China.”

Direct European investment in China peaked in 2012 and has been declining since, according to data compiled by Rhodium Group, a research firm, whereas investment into Vietnam has continued to rise. For instance, direct investment from Europe rose 27 percent from 2018 to 2019, according to Vietnam’s Planning and Investment Ministry.

Some in China dismiss predictions that it will lose from Vietnam’s trade deal with the EU. Xu Liping, director of the Center for Southeast Asian Studies of the Chinese Academy of Social Sciences, said Vietnam doesn’t have the scale to overtake China and the trade deal won’t suffice for EU companies to “decouple” from China.

“Both the ‘takeover’ and ‘decoupling’ theories have been escalating in recent years, with China always passively involved,” Xu wrote in the Global Times, a newspaper of the Chinese Communist Party, but he termed both theories “wishful thinking.”