Trade and economic cooperation have improved Vietnam-EU relations more than two years after the EU-Vietnam Free Trade Agreement went into operation. A significant number of European businesses have expanded their business to Vietnam as a result of the country’s recent outstanding economic performance.
This article will look further into the trade relations between Vietnam and Europe and highlight key reasons that transformed Vietnam into a prospective country for foreign companies to expand their business.
1. Overview of the trade between VN & Europe
Vietnam ranks as the EU’s fifteenth-largest economic partner and the largest ASEAN trading partner according to ASEAN trade figures for 2020, with increasing trade activities.
The EU provides Vietnam with a number of essential goods, including medicines, cars, airplanes, and electrical equipment. The Vietnamese, on the other hand, export a broad variety of goods to the EU, including textiles, footwear, electronics, and telephones. The export value of Vietnam to the EU saw a stable increase over the past decade (2011-2021).
This stems from the positive growth of Vietnam’s economy, as the country has recorded a fast growth rate of 8.02% in the past decade (2011-2022). According to the EuroCharm interview, over 500 companies are shifting operations from China to Vietnam. More than half of them were satisfied with the attention policymakers pay to business needs when setting relevant policies. Positive feedback from European companies is earned since the relations between the EU and Vietnam had a positive effect on the growth of their businesses, their financial health through tariff reductions, and the strength of their supply chains.
Vietnam and the EU have strengthened the relationship with the free-trade agreements:
- According to the most recent statistics from the Ministry and Trade, the EU is one of the top foreign investors in Vietnam, with a trade turnover of USD 76.3 billion (2022). Manufacturing and industrial processing make up the majority of the EU’s investments.
- 2020 saw the ratification of a free trade agreement between the EU and Vietnam that also included an investor protection agreement (EVIPA). Bilateral commerce increased from €20.8 billion in 2012, the year negotiations for the EU-Vietnam Free Trade Agreement started, to €49 billion in 2021. (EVFTA).
These agreements also make it simpler for European businesses to access Vietnamese governmental procurements. These include initiatives using public-private partnerships, which are popular with local governments. Maximum foreign investment in commercial banks rose from 30% to 49% under the EVIPA.
Regarding the project numbers, with 104 new projects given investment certificates, the total registered investment capital of the EU in Vietnam in the first eight months of 2022 alone increased by 69.6% to USD 2.2 billion. The highlight projects are:
- In December, Denmark’s Lego announced it would build a $1 billion (€935 million) factory near the southern business hub Ho Chi Minh City, one of the most significant European investment projects in Vietnam to date.
- Large EU corporations such as Shell Group (Netherlands), Total Elf Fina (France-Belgium), Daimler Chrysler (Germany), Siemens, and Alcatel Comvik (Sweden) are operating effectively in Vietnam.
- German automotive supplier Brose, which has 11 factories in China, is currently deciding between Thailand and Vietnam for a new production location.
Future investment in Vietnam could benefit from the Vietnamese government’s emphasis on high-tech industries, clean energy, and other businesses that complement the EU’s investment policy.
2. Vietnam’s most advantages in encouraging the EU companies to expand business to Vietnam
Vietnam has distinct advantages that make it an attractive location for EU companies.
- Strategic location: Vietnam’s location in Southeast Asia makes it a gateway to the ASEAN market of over 650 million people. With a well-connected network of airports, seaports, and highways, Vietnam is well-positioned to serve as a regional logistics hub.
- Favorable business environment: The Vietnamese government has been actively improving its business environment by implementing policies to attract foreign investment, streamline administrative procedures, and reduce bureaucracy. This has made it easier for companies to do business in Vietnam.
- Competitive labor costs: Vietnam has a large and young workforce, with a median age of 31.7 years old. Wages in Vietnam are lower than in many other Asian countries, making it an attractive destination for labor-intensive industries.
- Growing middle class: Vietnam’s middle class is rapidly growing, with rising incomes and increased consumption. This presents a significant opportunity for companies in sectors such as retail, consumer goods, and services.
- Abundant natural resources: Vietnam has abundant natural resources, including agricultural land, minerals, and energy resources. This presents opportunities for companies in sectors such as agriculture, mining, and renewable energy.
Overall, Vietnam’s strategic location, favorable business environment, competitive labor costs, growing middle class, and abundant natural resources make it an attractive destination for EU companies looking to expand their business to Southeast Asia.
3. EU Investments in Vietnam Continue to Surge
A. Top EU countries and companies investing in Vietnam
FDI from the EU is expected to increase substantially. In the first 8 months of 2022 alone, the total registered investment capital of the EU in Vietnam reached USD 2.2 billion, up 69.6% compared to the same period last year, with 104 new projects granted investment certificates.
The Vietnamese government has stated that EU investment primarily focuses on high-tech industries and services, such as post and telecommunications, finance, office leasing, retail, green energy, supporting industry, food processing, high-tech agriculture, and pharmaceuticals.
As of March 2023, the Netherlands ranked first among the EU members investing in Vietnam, with 421 projects worth 13.89 billion USD. Furthermore, in the first three months of 2022, Denmark was the largest investor among 35 countries and territories with newly licensed investment projects in Vietnam, with USD 1.32 billion, accounting for 41.1% of the total newly registered capital.
The reason why Denmark surpassed countries with traditional investments in Vietnam such as Singapore, Japan, and South Korea is that in Q1 2022, the Lego Group (Denmark) was officially granted an investment registration certificate for a USD 1 billion project. The investment registration is expected to initiate a new era of foreign investment in Vietnam, as well as paving the way for European companies to invest in Vietnam.
Furthermore, large EU corporations such as Shell Group (Netherlands), Total Elf Fina (France-Belgium), Daimler Chrysler (Germany), Siemens, Alcatel Comvik (Sweden), are operating effectively in Vietnam.
The Vietnamese government’s focus on high-tech industries, green energy, and other sectors that align with the EU’s investment strategy bodes well for future investment in Vietnam.
B. EVFTA continues to boost the Vietnam-EU partnership with expanded export markets and investment opportunities
The implementation of the EVFTA in August 2020 has brought about great chances for businesses from both sides to expand their partnership.
The agreement eliminates over 99% of tariffs in both directions and allows for an increase in export of Vietnamese products such as textiles, footwear, agricultural products, and seafood. As a result, both sides are poised to benefit from expanded export markets and investment promotion opportunities.
EVFTA agreement also aims to protect investors and ensure fair treatment. Some European companies might even consider using Vietnam as an alternative manufacturing hub to China. The Q4 2022 Business Climate Index by the European Chamber of Commerce in Vietnam (EuroCham) reported that 41% of respondents stated their company was shifting operations from China to Vietnam, up from 13% in Q3 2022.
4. Final thoughts
In conclusion, the EU-Vietnam trade relationship has been strengthened by the implementation of the EVFTA, which has opened up new opportunities for both sides. Vietnam’s strategic location, low labor costs, and government’s efforts to attract foreign investments make it an attractive destination for EU companies to expand their business to Southeast Asia.
As we have seen, the EU’s investment in Vietnam has continued to surge, with many large corporations operating effectively in the country. If you are looking to invest in Vietnam or expand your business to Southeast Asia, our team at Source of Asia is here to provide on-the-ground expertise and support for your market growth strategy.
