UKVFTA: a lever for Việt Nam-UK trade and investment cooperation

September 15, 2022 - 08:24
The UK-Việt Nam Free Trade Agreement (UKVFTA) is expected to help Việt Nam accelerate institutional reforms, improve the investment and trade environment towards modernity and transparency, as well as create convenience for businesses.
Ngô Chung Khanh, MoIT's deputy head of Multilateral Trade Policy Department. — VNS Photo

The UK-Việt Nam Free Trade Agreement (UKVFTA) is expected to help Việt Nam accelerate institutional reforms, improve the investment and trade environment towards modernity and transparency, as well as create convenience for businesses.

In particular, with deep commitments to open markets for goods and services, the UKVFTA will be a strong lever promoting bilateral trade and investment exchanges between Việt Nam and the UK.

Ngô Chung Khanh, deputy head of the Multilateral Trade Policy Department under the Ministry of Industry and Trade (MoIT) spoke with Việt Nam News reporter Vũ Hoa about the agreement after more than one year of implementation.

How do you assess the impact of the UKVFTA on Việt Nam - UK trade and investment cooperation now that the agreement has been in effect for more than a year?

The UKVFTA has had positive effects on Việt Nam - UK trade and investment cooperation.

After the first year of implementation of the agreement, two-way trade in goods between Việt Nam and the UK reached US$6.6 billion, an increase of 17.2 per cent compared to 2020 despite the difficulties caused by the COVID-19 pandemic and its consequences on human resources, disruptions in import and export supply chains and other economic and trade activities.

A pineapple processing line for export at An Giang Agriculture and Foods Import-Export Joint Stock Company in An Giang Province. Vietnamese vegetables and fruit exports saw strong growth in the UK market. — VNA/VNS Photo Vũ Sinh

Some Vietnamese products witnessed strong growth momentum such as vegetables and fruits (up 67 per cent); pepper (49 per cent); rattan, bamboo, sedge, carpet products (56.5 per cent); and ceramic and porcelain products (32.24 per cent).

This is a good sign as the agreement has been well utilised and UK consumers have initially accepted Vietnamese agricultural products as well as other traditional products.

In the first year the UKVFTA came into force, Việt Nam increased its imports of many products with high technology and intelligence content from the UK such as pharmaceuticals (35 per cent), automobiles (28.5 per cent), computers, electronic products and components (24.8 per cent) as well as materials for Việt Nam's export supply chain such as textiles, leather, shoes (24.6 per cent), which actively contribute to the economy’s development.

Regarding investment, in 2021, there were 48 newly granted direct investment projects from the UK into Việt Nam with newly registered capital of more than US$53 million, posting a 157 per cent year-on-year increase.

It helped maintain the UK's direct investment in Việt Nam at $4 billion, and bring the UK into the group of 12 countries with the largest direct investment capital in Việt Nam. The above results demonstrate the “new” positive impacts that new generation FTAs ​​such as the UKVFTA, EVFTA, and CPTPP have brought in the implementation process.

Could you give more details about the opportunities for Vietnamese businesses from the UKVFTA?

The UKVFTA brings five great opportunities for Vietnamese businesses.

Businesses will have access to the UK market with preferential and competitive conditions. Almost 100 per cent of Vietnamese goods exported to the UK will be exempt from import tax after six years.

Regulations and high standards for UK imports will create incentives for Vietnamese businesses to innovate technology, improve product quality and brands, as well as change management and business thinking.

The UKVFTA creates the impetus for Việt Nam's institutional reform, towards transparency of the business investment environment and facilitation of domestic administrative procedures.

The commitments in the UKVFTA help businesses access new sources of raw materials, and reduce dependence on traditional import markets, thereby increasing Việt Nam's participation in the regional and global supply chain.

Commitments to service and investment will promote the maintenance and increase of high-quality investment, helping Việt Nam participate more deeply in the supply chain. In addition, as the UK is a country with strengths and capabilities in pharmaceuticals, high-tech industries (renewable energy technology, wind power, solar power), and energy saving, Vietnamese enterprises have great opportunities to co-operate, attract investment and transfer technology from the UK.

When the UKVFTA comes into effect, which products of Việt Nam exported to the UK benefit immediately from the tax reduction? How have businesses taken advantage of this opportunity?

According to the UKVFTA, six years after the agreement goes into effect, the UK will eliminate import tax on 99.2 per cent of tariff lines.

The UKVFTA immediately removes 94 per cent of the total 547 tax lines on fruits and vegetables and their products, including many items that are strengths of Việt Nam, such as litchi, longan, rambutan, dragon fruit, pineapple, and melon. In 2021, vegetables and fruits exported to the UK reached $19.35 million and increased by nearly 67 per cent compared to 2020, ranked 4th in terms of growth rate.

The UKVFTA completely eliminates tariffs for pepper. In 2021, pepper exports to the UK reached $21.16 million and increased by 49 per cent compared to 2020.

The tax rate on rubber will be zero per cent as soon as the UKVFTA comes into effect or continue to be eliminated according to the 5-year roadmap. In 2021, rubber exports to the UK reached $4.53 million and increased by 67 per cent compared to 2020.

With the UKVFTA, the import tax on most raw shrimp (fresh, frozen, chilled) imported into the UK will be reduced from the basic tax rate of 10-20 per cent to 0 per cent as soon as the agreement comes into effect. The aquatic products which have the earliest advantages are shrimp and tra catfish. In 2021, seafood exports to the UK reached $316 million.

With the UKVFTA, many wood and wooden products will enjoy a tax rate of zero per cent within 5 years (the current rate for wood materials is 2-10 per cent). Vietnamese furniture is also considered to be quite competitive in this market. In 2021, wood and wooden products exported to the UK reached $267 million.

What challenges do you see exporters from Việt Nam facing and how do they overcome them?

Some challenges for Vietnamese businesses when accessing the UK market include as high requirements on technology, food hygiene and safety as well as regulations on sustainable development.

When exporting to the UK, Vietnamese enterprises may face high standards of technical requirements, food hygiene and safety, which require careful preparation of business plans and products and brands development methodically. In addition, businesses also need to pay attention to some regulations on sustainable development such as labour and the environment because the UK is a country that pays attention to these issues.

Vietnamese businesses will have to compete fairly with businesses of the UK as well as those of other countries, especially the former British colonies. For UK businesses, competitive pressure comes from understanding the UK's consumer habits as well as a professional and methodical business organisation. Meanwhile, competitive pressure from other countries, including former UK colonies, is their longer access to the UK market, deeper cultural connections and even the ability to coordinate efficiently with their business systems in the UK.

The risk of supply chain disruptions and a sharp increase in freight rates due to high gasoline prices also caused unfavourable conditions to the activities of Vietnamese import and export enterprises.

Goods of enterprises exporting from Việt Nam may face difficulties due to high prices of raw materials and fuel. For example, our wood export enterprises said that currently, wood export orders are decreasing due to many challenges and difficulties when major markets such as the UK, the US, and the EU see high inflation which negatively affects the production and business of wood enterprises, resulting to difficulties in capital and labour costs.

Many of our textile, garment and footwear enterprises have been facing some difficulties in the supply of raw materials and accessories due to interruptions, making it difficult for businesses to sign new contracts or expand production.

What should Vietnamese businesses do to take advantage of incentives from the UKVFTA?

To make better use of this agreement, Vietnamese enterprises should note the following points.

First, businesses need to clearly understand the commitments of the UKVFTA, which requires businesses to raise awareness, proactively equip themselves with the knowledge to take advantage of opportunities, and promote production and business activities with UK partners.

Second, businesses, especially exporters, need to know very well the UK's legal regulations on technical standards, food hygiene and safety, and sustainable development in order to effectively access the market.

Third, local firms need constantly improve product quality to meet consumers' needs. This involves capturing the needs and tastes of consumers, in order to create products that match the needs and psychology of the targeted customer group.

Fourth, businesses need to focus on improving their internal strength through association, co-operation or participation in business associations to get useful support. At the same time, enterprises also need to actively develop specific development plans, strategies and activities to seize opportunities as well as cope with challenges.

How do you assess the role of the UKVFTA in promoting institutional reform in Việt Nam?

The UKVFTA has set requirements for the Government in completing the legal document system to effectively implement the agreement, reform, simplify business investment conditions, and approach international standards and practices.

Since the agreement was put into force, Việt Nam has actively and proactively strived to fully implement the commitments, creating favourable conditions for the business community in particular and the economy in general to make effective use of this agreement.

In the work of building current legal documents to ensure compliance with the agreement’s provisions, the Government and relevant ministries have revised and issued new legal documents. These documents are at the level of Decrees, Decisions of the Prime Minister, Circulars in the fields related to tariffs, agriculture, origin of goods and trade remedies.

In addition, relevant ministries and sectors have also continuously reviewed the system of legal documents to ensure compatibility with the agreement's commitments, as well as make timely adjustments to facilitate the implementation.

The Government, ministries and agencies have made efforts in improving and simplifying investment and business procedures in recent years, creating conditions for both local and foreign businesses in general as well as motivation for the implementation of preferential commitments in FTAs, including the UKVFTA in particular. With such efforts, Việt Nam has gradually improved the business investment environment in a favourable direction, creating momentum for the implementation of FTAs, including the UKVFTA, with the highest efficiency. — VNS