Boosting trade ties

Millions of Europeans drink coffee every morning. And it is very likely that the coffee might have come from Vietnam. Statistically speaking, the powder for every fifth cup of coffee in Europe is exported from Vietnam, and it is surpassed only by Brazil, world's top producer of the commodity.

But economic ties between Vietnam and the European Union are not limited to coffee alone. According to the European Commission data, the EU is Vietnam's second largest trading partner, and the Southeast Asian nation has enjoyed a comfortable trade surplus for years. Over the past decade, bilateral commerce has increased from around five billion euros to more than 26 billion euros.

Building on this strong foundation, Vietnam's Prime Minister Nguyen Tan Dung now wants to expand relations further and promote a free trade agreement between his country and the EU. The premier is visiting Belgium, Germany and other EU countries from October 12 to 18 as part of his Europe tour. On his trip, Dung is also scheduled to attend the 10th Asia-Europe summit in Italy.

Gerhard Will, Asia analyst at the Berlin-based German Institute for International and Security Affairs, says Vietnam's ties with Germany play "a prominent role, and Hanoi is aware of Berlin's clout in Brussels."

Impact of free trade

The EU-Vietnam free trade agreement (EVFTA) aims to reduce tariffs and other trade barriers, in addition to providing legal certainty and protecting investment as well as intellectual property. Proponents of the deal claim that it will spur economic growth and create jobs for both parties.

But opponents of the agreement believe that although the pact could offer a boost to the Vietnam's footwear and textile industries, other sectors such as agriculture and industrial equipment manufacturing would come under increased pressure due to competition from the EU.

"The deal would be a major blow to Vietnam's economic development as the nation's manufacturing sector will be constricted to production of low value goods," concluded a recent study conducted by the Hanoi office of the Konrad Adenauer Foundation (KAS), a German political think tank.

The study's authors also fear a jump in rural poverty in the near term. They, however, expect it to decline in the long run, as the rural population could be absorbed by other economic sectors. "But the biggest benefit for Vietnam from the trade deal is the country's greater integration in global commerce," the KAS study underlines.

Hurdles

Legal issues are the main obstacle for the conclusion of the deal. The EU, for instance, has high consumer and environmental protection standards. The regulations mandate companies to meet these requirements and demonstrate the sustainability of their products.

Moreover, the EU calls for strict competition rules and stronger intellectual property laws. According to the KAS study, Hanoi has to reform its legal system before the free trade deal can become fully effective. Failing to introduce the necessary reforms would also mean a failure to meet the necessary EU requirements, the study pointed out.

State-owned enterprises in Vietnam, for instance, play a significant role in the nation's economy. Banks and other financial institutions in the country prefer to lend credit to these firms than to private companies, and the deal with the EU would put an end to such practices.

Asia analyst Will told DW that this in turn will loosen the Communist Party of Vietnam's (CPV) tight grip over the economy. "If the agreement comes into force, then one must come to terms with the fact that the economic foundation of the party is weakened," the expert stressed.

The EU Commission, for its part, wants to include human rights aspects in the agreement. "There are disagreements between Hanoi and Brussels over crucial issues," the KAS study noted. Even at the beginning of this year, the talks appeared to be heading for a failure.

Countering China

Everything, however, changed in the summer of 2014, when the territorial dispute between China and Vietnam escalated. "From being a difficult friend, Beijing overnight became an uncontrollable opponent," stated the KAS study. The close economic relations Vietnam enjoys with its big neighbor to the north, which continues to be Hanoi's number one trading partner, became an issue.

"Vietnamese leadership found out that they were relatively isolated during the country's standoff with China," Martin Grossheim, Southeast Asia analyst at the University of Passau, told DW, adding that in order to change this, Hanoi restarted the trade negotiations with the EU.

Grossheim says that Vietnam is expecting not only economic benefits from the deal, but also foreign policy dividends in the form of less dependence on China and more EU engagement in the region. "The EU remained restrained in its response to the recent standoff between the two Asian countries. But upon signing the pact, Brussels will be expected to take a stronger stance," the expert said. This view is shared by analyst Will. "It is part of a strategy to reduce the over-dependence on China," he pointed out.

Whether this political calculus of Vietnam will compel Hanoi to make the necessary concessions demanded by the EU is, however, unclear. "I doubt both parties will reach an agreement on all contentious issues by the end of the year," said Will.