Client Alerts

Client Alert: A new era of trade and investment between the EU and Vietnam

Volterra Fietta Client Alert
31 July 2020

The EU-Vietnam Free Trade Agreement and the EU-Vietnam Investment Protection Agreement will usher in a new wave of trade between the EU and Vietnam and foster new opportunities for foreign investment.  They also oblige prudent EU investors in Vietnam (or vice versa) to review their current investment protection with a view to planning for significant changes.

The EU-Vietnam Free Trade Agreement and the EU-Vietnam Investment Protection Agreement, which the EU and Vietnam have negotiated since 2012, were signed in Hanoi on 30 June 2019.  The EU-Vietnam Free Trade Agreement, which requires ratification only by the EU and Vietnam, will enter into force on 1 August 2020.

The EU-Vietnam Investment Protection Agreement also requires ratification by the EU Member States and has not yet entered into force.  This is expected to take some time, though the Agreement does provide for provisional application if the parties so agree.  Given that it will, upon entry into force, replace over 20 bilateral investment treaties between EU Member States and Vietnam, the EU-Vietnam Investment Protection Agreement will significantly change the type and level of legal protection afforded to foreign investors, in relation both to substance and to procedure.

EU or Vietnamese parties which either already trade or invest in the other economy, or are considering doing so, will naturally wish to consider the implications of the entry into force of these two agreements, as well as the termination of the replaced bilateral investment treaties.

 

Background

The EU-Vietnam Free Trade Agreement (“EVFTA”) and the EU-Vietnam Investment Protection Agreement (“EVIPA”, together with the EVFTA “the Agreements”) hold much economic promise.  According to the previous EU Commissioner for Trade, the Agreements are “the most ambitious and comprehensive ones that the EU has ever concluded with a middle-income country”.  The current EU Trade Commissioner has noted they have “a huge economic potential”.

The EU and Vietnam already enjoy strong and increasing trading relations.  The Delegation of the EU to Vietnam reports that “[t]he EU is Vietnam’s second-largest export market and the number one destination for many of Vietnam’s key exports.”  As also noted by the EU Delegation, Vietnam’s imports of commodities from Europe have been on the rise for the past 10 years, increasing by as much as 11% in 2018.

The Agreements reflects the EU’s strategic pivot towards strengthening trade relations with South-East Asian States.  The EVFTA is the second free trade agreement between the EU and a South-East Asian State, after Singapore.  The EU Trade Commissioner described an early version of EVFTA as a “stepping stone” for an agreement with the Association of Southeast Asian Nations.

 

Significant changes to trade and investment law

The EVFTA is a comprehensive trade agreement.  It eliminates, either immediately over time, over 99% of customs duties on exports between the EU and Vietnam.  It also reduces non-tariff barriers (including technical regulations, sanitary and phytosanitary measures), provides EU and Vietnamese companies with access to the other economy’s government contracts, improves access to service markets and promotes sustainable development.   In addition, it strengthens protection for intellectual property rights and European food and beverage geographical indications.

The EVFTA also includes commitments by the EU and Vietnam on labour and the environment.  On labour, it includes the commitment (i) to implement each of the four core labour standards of the International Labour Organization (the “ILO”) –  i.e., freedom of association and right to collective bargaining; forced or compulsory labour; child labour; and non-discrimination in respect of employment and occupation; (ii) to implement all the ratified ILO Conventions (not only the fundamental ones), as well as (iii) to progress towards ratification of non-ratified fundamental ILO Conventions.  On the environment, the EVFTA includes commitments to the effective implementation by each Party of all the ratified Multilateral Environmental Agreements, including, among others, the UN Convention on Biological Diversity, the UN Convention on International Trade in Endangered Species and the UN Framework Convention on Climate Change.

The EVIPA provides substantive protections for investors including national treatment, most-favoured-nation treatment, fair and equitable treatment, full protection and security, protection against expropriation and freedom of transfers.  Many of these protections are subject to detailed definitions and limitations, which are not present in the bilateral investment treaties (“BITs”) currently in place between Vietnam and EU Member States.

 

Important changes to dispute settlement

The EVFTA dispute mechanism addresses disputes between Vietnam and the EU with respect to the interpretation or application of the EVFTA, including with respect to measures adversely affecting trade between the Parties.  Should obligatory consultations fail to resolve any dispute, either Party may submit the dispute to an arbitral tribunal.  The tribunal shall proceed to establish an interim and a final report, with which the Parties are obliged to comply.  A mediation procedure is also available.

The EVIPA offers an investor from either the EU or Vietnam possessing an investment in the other Party the opportunity, following obligatory consultation procedures and subject to strict limitation periods, to initiate a dispute settlement procedure against the host Party (or, in the case of the EU, against its relevant member State) if it alleges that the host Party or member State has violated any of the substantive investment protection provisions of the EVIPA.

The EVIPA offers an investor from either the EU or Vietnam possessing an investment in the other Party the opportunity, following obligatory consultation procedures and subject to strict limitation periods, to initiate a dispute settlement procedure against the host Party (or, in the case of the EU, against its relevant Member State) if it alleges that the host Party or Member State has violated any of the substantive investment protection provisions outlined above.

The dispute settlement mechanism provides for a permanent investment tribunal as well as a permanent appeal tribunal.  The permanent investment tribunal is composed of nine members in total:  three from the EU, three from Vietnam and three from third States.  Each claim shall be heard before a tribunal composed of three members, one from each of these categories, with the third State national presiding.  Proceedings can be carried out under the ICSID Rules of Arbitration, the ICSID Additional Facility Rules, the UNCITRAL Arbitration Rules or any other rules agreed by the parties to the dispute.  This dispute settlement system differs sharply from the system of investor-State dispute settlement before ad hoc arbitral tribunals established under the majority of the BITs between Vietnam and individual EU Member States, which the EVIPA replaces.

 

What’s next?

The Agreements will open the doorway to new trade and investment opportunities for businesses in the EU and in Vietnam.  Yet the Agreements also raise important questions on how best to capitalise upon those prospects and to navigate the changing legal environment.  In particular, investors should be aware of, and consider mitigating the risks associated with, the replacement of BITs between Vietnam and individual EU Member States by the EVIPA.  Investors can ultimately reduce costs by maximising their legal protections now and may wish to seek timely expert advice in this regard.

For further information about these developments and other issues related to foreign investment, please contact Graham Coop (graham.coop@volterrafietta.com) or Florentine Vos (florentine.vos@volterrafietta.com).