The European Union (EU) and Vietnam have agreed on the terms of a free trade deal following two and a half years of negotiations. The agreement will remove nearly all tariffs on goods traded between the two economies.

Vietnam will liberalise 65% of import duties on EU exports at entry into force, with the remainder of duties being gradually eliminated over a 10-year period. Besides eliminating tariffs, Vietnam will also remove almost all of its export duties. Vietnam will open its market, liberalising trade in financial services, telecommunications, transport, and postal and courier services, and removing or easing limitations on the manufacturing of food products and beverages, as well as in non-food sectors.

EU duties will be eliminated over a seven-year period. “The EU-Vietnam free trade agreement [FTA] represents an important boost for Vietnamese exports over the medium term, as the bilateral FTA will remove tariffs on 99% of goods traded over the next seven years. The EU is already Vietnam’s second-largest export market, accounting for €22bn or 18% of total Vietnamese exports in 2014, so the overall impact on Vietnam’s export industry will be substantial. If the Trans-Pacific Partnership [TPP] deal is also concluded, this will represent a double boost for Vietnamese manufacturing exports into both the EU and the markets of the TPP member countries, notably the US,” Rajiv Biswas, Asia Pacific chief economist, IHS, tells GTR.

Both the EU deal and the TPP however include restrictions related to the origin of garments, which require the use of fabrics produced in Vietnam to avoid opening trade backdoors to Chinese products. Vietnam sources almost half of its total annual fabrics imports from China, worth around US$4.7bn. According to Biswas, this restriction will encourage multinationals to build up their textiles and electronics supply chain in Vietnam so that a high share of value-adding for the final product is completed in the country. “[Strict rules of origin requirements] will catalyse more foreign direct investment into Vietnam’s textiles and clothing industry. Vietnamese total exports of textiles and clothing were estimated at US$24.5bn in 2014, showing strong growth of 19% on the previous year,” he explains.

EU trade commissioner Cecilia Malmström comments on the agreement: “Vietnam is a growing economy and once this agreement is up and running, it will provide significant new opportunities for companies on both sides, by increasing market access for goods and services.”

“Vietnam stands to benefit from even more free exports to one of its already biggest export markets. As this is the first agreement of its kind that the EU has signed with a developing country, it demonstrates the continued importance of Vietnam, both as a member of ASEAN, and as a growing Asian economy offering a 90-million consumer market,” says Pham Hong Hai, CEO of HSBC in Vietnam.

This agreement is the second FTA between the EU and a country of the Association of Southeast Asian Nations (ASEAN), following Singapore’s in 2014. It represents one more step towards EU’s goal of a comprehensive region-to-region FTA with ASEAN as a whole.

On the basis of the deal, the negotiating teams will now finalise the legal text. The agreement will then need to be approved by the European Council and Parliament. It is expected that this process could be finalised in a few months’ time and most likely before the end of the year.