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Vietnam is poised to make gains as the Europe-China investment pact has stalled

Vietnam is poised to make trading gains into Europe in the very near future. We would expect to see European investors start to look for alternate trade and manufacturing sites as the China/USA tension continues and with the suspension of the China Europe investment agreement. Vietnam has been building strong diplomatic relations and trade ties and this will help Vietnam now capture new markets and investment.

What is in play today is the EU - Vietnam Investment Protection Agreement (EVIPA). This agreement has now been signed and is awaiting ratification by the parliaments of EU member states. Nguyen Van Thao, the Vietnamese Ambassador to Belgium and Luxembourg, was recently interviewed and as was reported in the People’s Army Newspaper Thao said that trade and technical barriers need to be removed. He further commented that it is essential for the Vietnamese side to push for early ratification of the EU - Vietnam Investment Protection Agreement (EVIPA) because trade and investment have a very close relationship.

Vietnam moved into a trade deficit of USD 1.7 billion in July of 2021, which was a reversal of a trade surplus of USD 2.78 billion from the same month a year earlier.

Exports grew 8.4 percent from a year earlier to USD 27.0 billion, however imports increased at a greater rate of 29.9 percent to USD 28.7 billion. So far in the first seven months of 2021 Vietnam has seen a trade deficit of USD 2.70 billion. Exports are up significantly at 25.5% to USD 185 billion while imports increased at a higher rate of 35.3% to USD 188.03 billion. * Asia is still by far the lead market for Vietnam accounting for almost half or 50% (134 Billion USD) of all exports followed by the Americas at 34% (90 Billion USD) with Europe in third place at 16$ (44 Billion USD). So as we see the EU China deal basically now off the table Vietnam could be set to benefit from an increase of investment from EU states.

As indicated by Thao this is positive when looked at in the context of 2020 when the EU’s Gross Domestic Product (GDP) declined by 6.2 percent, he said.

The EU's economy shrank 0.4 percent in the first quarter of this year, but two-way trade turnover still increased by 15 percent. Thus, Thao said, it affirmed the strong effect of the EVFTA. According to the ambassador, this positive outcome is a great indicator that products produced in Vietnam have met the high standards of the EU market. With Europe, and other markets, currently facing many supply chain difficulties, Vietnamese goods can now more readily enter this market, contributing to maintaining and diversifying supply chains in the context of global supply chain disruptions. Thao emphasized that there’s huge potential between Vietnam and the EU to tap.

Although this sounds great at present this may be more of an idea vs a reality. Investment from EU states have seen only a marginal increase from 2020 to 2021.

Foreign direct investment into Vietnam did increase some 3.8 % over 2020 to USD 10.5 billion in January-July 2021. This is contrasted by future FDI pledges, which indicate the size of future FDI investment, dropped 11.1 % in the year to $16.7 billion. The manufacturing and processing sector is set to receive the largest amount of investment (47.2 percent of total pledges) followed by gas water and electricity distribution (32.8 percent). Singapore was the top source of FDI pledges, followed by Japan and South Korea. **

Vietnam's economy is rapidly growing

Vietnam has been one of Asia's fastest growing economies over the past decade. In 2020 despite the coronavirus pandemic Vietnam saw economic growth. Vietnam was a beneficiary when the US-China trade war began in 2018. The trade war saw mainly American and Japanese firms moving their manufacturing operations to Vietnam and away from China. "Along the lines of trade war risk, the suspension of the CAI is likely to accelerate the foreign investors in China, particularly EU investors, to look for an alternative investment destination and Vietnam is one of the top investment destinations," said Tuan Le Anh, deputy CIO and head of research at Dragon Capital, an analytics firm.

Vietnam's gross domestic product increased by 6.61 percent year-over-year in the second quarter of 2021, this is ahead of earlier forecasts expecting growth of 4.65 percent growth in the previous period. This was the strongest growth rate since the fourth quarter of 2019, as the economy gradually returned to normal conditions, following the easing of lockdown measures to contain the spread of the coronavirus. The expansion here was driven mainly by agriculture, forestry and fisheries (4.11 percent); industry and construction (10.28 percent), and service sector (4.30 percent). Considering the first half of the year, the economy expanded by 5.64 percent from a year earlier. For 2021, the government is targeting economic growth at 6.5 percent. *

Europe lags behind in investment today

Investment in Vietnam out of the EU has a long way to go. Today with data from the end of 2019 the EU invested just over 6 Billion Euros in Vietnam which is about 10% of what the more than $60 billion cumulatively invested by South Korea and Japan. In the first half of 2021 Vietnam received $15.3 billion in foreign direct investments. Of that $5.64 billion (~37%) came from Singapore, with Japan 2nd at $2.44 billion (~ 16%) and South Korea in 3rd place at $2.05 billion (~ 13%). These are the three largest cumulative investors in Vietnam and made up over 66% f the total foreign direct investments so far this year.

Data from the Planning and Investment Ministry indicate that, as of May France, Germany and Luxembourg are currently ranked as the 16th, 17th and 18th largest investors in Vietnam, respectively. Switzerland and Belgium come in 20th and 22nd. Regardless of where it stands today looking forward it appears that Vietnam is ready and open to see increased European investment.

Europe can boost confidence in 2021

Vietnam has been busy and have signed various trade and investment treaties. These are providing investors with confidence and a safe business environment.

A recent free trade pact between the EU and Vietnam entered into force in 2020. In addition Hanoi has also been busy establishing several trade deals, from its participation in the Pacific-rim Comprehensive and Progressive Agreement for Trans-Pacific Partnership to the Asia-wide Regional Comprehensive Economic Partnership. There is of course, more work to be done.

What will we see going forward?

Can Vietnam benefit from the trade agreements and the US-China tensions? This will depend on how Vietnam will make itself more attractive to European investors. Vietnam is working on this in earnest, however, as would be expected there are still challenges. For businesses in Europe this translates into ratifying the EU-Vietnam Investment Protection Agreement (EVIPA). This was agreed to in parallel to the EU-Vietnam free trade pact. This bottle neck here is that under European law each member state must ratify the deal before it comes into force.

If the ratification moves quickly and the agreement enters into force early, Vietnam will be able to attract and benefit from more EU investments. If the agreement however stalls, which in current times with Covid as a detractor may happen then Vietnam will lose or see a delay in winning more European investments.

One other area that will take time to asses is the recently elected government. How the new government under Prime Minister Pham Minh Chinh, who was elected by the ruling Vietnamese Communist Party delegates in March, undertakes pro-business reforms is not yet fully understood so time will need to pass to further asses this.

* source: General Statistics Office of Vietnam

** source: Ministry of Planning and Investment, Vietnam

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