EUROPEAN PARLIAMENT APPROVES EU-VIETNAM TRADE AND INVESTMENT AGREEMENTS

On 12 February 2020, the European Parliament ("EP") gave its consent to the EU-Vietnam Free Trade Agreement ("EU-Vietnam FTA") and the Investment Protection Agreement ("EU-Vietnam IPA"). The consent from the EP paves the way for approval of the two agreements by the EU Council of Ministers next month.

In brief, the EU-Vietnam FTA focuses on reducing restrictions on trade in goods and services between the EU and Vietnam. The EU-Vietnam IPA, in turn, establishes specific protections for investors and creates, inter alia, a dispute resolution system that allows private parties to bring actions against measures that impact their investments.

Vietnam is a significant trading partner of the EU, with a population of 95 million. It is expected that the EU-Vietnam FTA will enter into force by the middle of 2020. However, the EU-Vietnam IPA will also need to be ratified by Member States and so its full entry into force will depend on their approval. This process is likely to take a number of years.

Further information on the EU-Vietnam FTA and the EU-Vietnam IPA is below.  The full texts of both agreements can be accessed here.

1.) EU-Vietnam FTA in more detail

Central to the EU-Vietnam FTA is the elimination of customs duties on nearly all products traded between the EU and Vietnam. On day one, 65% of EU products will enter Vietnam duty-free and 71% of Vietnam products will enter the EU duty-free. The EU will remove most of the remaining duties it imposes on Vietnamese products within seven years and Vietnam will do the same within ten years.  As illustrated by the table below, in many cases, duties will be reduced significantly.

The EU-Vietnam FTA also addresses trade in services – but the liberalisation is generally much more limited than for goods. In particular, like in the WTO, there is no opportunity for "free" trade in services without restrictions. This said, from the EU perspective, a key benefit of the agreement is that Vietnam has agreed to reduce restrictions on services trade for EU companies to a greater extent than it has done for any other trade partner. EU services benefitting from increased access include the following: computer services, financial services, telecommunications, social services, distribution services, courier services, logistic services, air and maritime transport, and environmental services. In accordance with other trade agreements, the EU has not significantly widened its services offering (in particular, because the EU market is relatively open). However, via the FTA, it commits to retain its current level of openness (therefore providing Vietnam a benefit as compared to WTO rules).

Other aspects of the FTA include the following:

• Non-tariff barriers – Trade in goods is hindered not only by at the border measures, including customs duties, but also by differences in regulation. The FTA contains provisions to reduce behind the border barriers to trade in respect of technical regulations, sanitary and phytosanitary measures and others. For example, as a result of the agreement, Vietnam will accept on its market EU parts and equipment certified in the EU as complying with the UN Regulations.
• Public procurement – The FTA provides EU companies with access to procurement markets in Vietnam, which is not available to them today. Rules to make procurement more transparent and enforceable by traders are also included.
• Intellectual Property Rights – The FTA includes comprehensive provisions covering copyright, trademarks, industrial designs, patents and plant varieties. Among other things, the EU pharmaceutical sector will benefit from improved protection of intellectual property rights. Extension of patent protection, up to a limit of two years, will be possible where the effective patent life has been reduced due to unreasonable delays in the process of marketing approval.
• Geographical Indications – The EU-Vietnam FTA extends protection to 169 European foods and drinks. Thus, for example, the rules require that the use of geographical indications such as Champagne, Prosciutto di Parma, Rioja wine and Irish whiskey be reserved for imports from the EU regions from which they originate.
• Environmental protection and labour conditions – In line with other FTAs recently concluded by the EU, the EU-Vietnam FTA includes a chapter on trade and sustainable development – incorporating obligations related to environmental protection, labour policy and climate change. The agreement provides for the establishment of specialised committees on trade and sustainable development to facilitate and monitor the effective implementation thereof – and envisions a number of channels for the involvement of civil society. The terms of environmental and labour protections will not be enforceable through the generally applicable dispute settlement mechanisms established by the agreements. In lieu, the chapters establish the possibility for external review of issues by independent panels of experts (but who will not have the power to issue binding decisions).
• State-owned enterprises: In line with recent trade agreements concluded by the EU, the FTA contains a chapter with rules on state-owned enterprises which, inter alia, require such enterprises to act in a non-discriminatory manner in accordance with commercial considerations. In the case of Vietnam, the provisions are especially significant since state-owned enterprises have traditionally been a central feature of the Vietnamese economy.
• Dispute settlement – The FTA is largely underpinned by state-to-state dispute settlement, involving consultations, optional mediation and ultimately the possibility for binding adjudication by an arbitration panel. The mechanism is modelled on the WTO, but there is no possibility for an appeal. Further, unlike in the WTO, private parties will be able to make interested party submissions in proceedings.

2.) The EU-Vietnam IPA in more detail

The EU-Vietnam IPA establishes substantive protections for investors (e.g. on fair and equitable treatment, on non-discrimination, and on expropriation). It also enables investors of one of the state parties to bring proceedings against the government of the other state party in the event of an alleged infringement of these substantive standards ("investor-state dispute settlement").

The IPA provides for investor-state dispute settlement claims to be resolved through an "Investment Tribunal System" composed of permanent first instance and appeal tribunals. These permanent tribunals (of nine and six members respectively) will be formed of nationals of Vietnam, EU Member States and third party states who fulfil certain expertise requirements and are subject to a code of conduct regarding their independence and impartiality. The members will be appointed publicly for a fixed term and will be paid a retainer and additional fees when hearing disputes under the treaty. The EU has recently agreed similar, although not identical, investor-state dispute settlement provisions with other countries – namely Canada, Singapore and Mexico. The EU’s approach is intended to address concerns around investor-state dispute settlement, including its transparency and the consistency of the case-law. As with these other treaties, the EU-Vietnam IPA confirms both parties’ commitment to the creation of multilateral dispute settlement mechanisms (such as those currently being discussed by UNCITRAL’s Working Group III) and acknowledges that the provisions of the IPA may be amended subsequently if such multilateral proposals progress.

The IPA contains many of the innovative measures introduced by the EU in other recent treaties, including commitments to transparency, the ability of the state parties’ Joint Committee to propose binding interpretations of the IPA to a tribunal hearing any dispute under it, and the ability of a tribunal to determine that a claim has no legal merit or is unfounded as a matter of law. We also see further development of the EU’s position on certain issues; for example, on Third Party funding and security for costs.

Notably, upon entry into force, the IPA will replace 21 bilateral investment treaties ("BITs") currently applicable between EU Member States and Vietnam. The EU-Vietnam IPA contains reformed investment protection rules that are not present in existing BITs, including guarantees of best available treatment.

As noted, in order to fully enter into force, the EU-Vietnam IPA must be ratified not only by the EU but also by the Member States individually (and also Vietnam). There is a clause in the IPA that allows for provisional application of matters within EU exclusive competence. In practice, if provisionally applied, this would mean that key substantive investment protections would be applicable. However, there would be no mechanism of investor-state dispute settlement.  Nevertheless, the EU-Vietnam IPA does contain provisions on state-to-state dispute settlement which could apply on a provisional basis (assuming that Vietnam would agree to provisional application).

3.) Broader significance of the EU-Vietnam FTA and EU-Vietnam IPA

Beyond the direct impacts on trade and investment, the EU-Vietnam FTA and EU-Vietnam IPA are viewed as important because they further the EU's broader objective to secure a trade relationship with countries which are a part of ASEAN, i.e. the Association of Southeast Asian Nations (which comprise Indonesia, Malaysia, Philippines, Singapore, Thailand, Brunei, Laos, Myanmar, Cambodia and Vietnam).  In 2007, the EU and ASEAN opened negotiations for a trade agreement but these ultimately broke down.  In lieu, the EU has focused on seeking trade agreements with individual ASEAN countries, in the hopes of eventually achieving an EU-ASEAN trade framework.  In 2018, the EU concluded an FTA and IPA with Singapore, its largest trading partner in the region.[1] The next significant step is likely the conclusion of trade agreement with Indonesia, while negotiations with Thailand, Malaysia and the Philippines are currently on hold.

4.) Impact of Brexit

The United Kingdom ("UK") ceased to be an EU Member State at 23h00 London time on 31 January 2020. Until at least 31 December 2020, the UK must continue to apply EU law. This means that the UK will apply the EU-Vietnam FTA to the extent that it enters into force during the transition period (similarly, it would apply the EU-Vietnam IPA if it provisionally enters into force during the same period). The EU has similarly written to partner countries to the effect that they continue to apply international agreements to the UK during the transition period. In many instances, there may be no strict legal obligation for them to do so, but it is expected that many countries will in practice. By contrast, the UK will have no vote when the EU Council of Ministers decides whether to conclude the EU-Vietnam FTA and EU-Vietnam IPA (the latter for aspects within the EU competence). The implications for the UK-Vietnam Bilateral Investment Treaty are as yet unclear. Investors in Vietnam potentially affected by these changes may wish to seek specific legal advice.

For more information, please contact Andrew Cannon, Partner, Lode Van Den Hende, Partner, Eric White, Consultant, Jennifer Paterson, Senior Associate, or your usual Herbert Smith Freehills contact.

[1]        The EU-Singapore FTA entered into force on 21 November 2019. The IPA will enter into force after it has been ratified by all EU Member States according to their own national procedures.