Will China 'suffer' following recent Vietnam-EU FTA?

Will China 'suffer' following recent Vietnam-EU FTA?

Vietnam's National Assembly recently ratified the European Union Vietnam Free Trade Agreement (EVFTA) and the EU-Vietnam Investment Protection Agreement (EVIPA), aiming to eliminate almost 99 percent of customs duties between Vietnam and the EU over the next 10 years.

Media has reported that the spread of COVID-19 is facilitating the trend of foreign investment leaving China. Vietnam, as the reports said, is apparently taking over China's role, and the EU could also take the opportunity to reduce its dependence on China's economy. Both the "takeover" and "decoupling" theories have been escalating in recent years, with China always passively involved. Unfortunately, both are just wishful thinking.

Pursuing multilateralization and the diversification of foreign trade have always been Vietnam's goals for foreign cooperation, and "taking over" China's role is neither what the country wants nor what it could achieve. Thus far, Vietnam has joined roughly 20 bilateral or multilateral free trade agreements including the EVFTA, Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), and the China-ASEAN Free Trade Area.

Vietnam is the EU's second-largest trade partner among the ASEAN countries and the EU is Vietnam's second-largest importer. According to Vietnam's official estimation, the EVFTA would boost the growth of exports to the EU by 44.37 percent by 2030, compared to a scenario without the agreement. However, Vietnam's exports may still face non-tariff barriers like rules of origin and principles of sustainable development, which are the country's shortcomings that cannot be solved in the short term to meet the EU's requirements.

The CPTPP since it came into effect in 2019 was expected to contribute $1.7 billion to the country's GDP by 2035, up 1.32 percent, per Vietnam's official data. But compared to the trade bonus, the CPTPP has actually brought severe challenges to its national system.

It is the China-ASEAN Free Trade Area that has contributed enormously to Vietnam. Bilateral trade between China and ASEAN members surged tenfold from $54.8 billion in 2002 to $587.9 billion in 2018. Trade maintained strong growth even amid the pandemic.

Based on the strong growth momentum of China-ASEAN trade, trade between China and Vietnam has been hitting record highs. Vietnam became China's largest trading partner among ASEAN members in 2019. Vietnam is in a different phase of industrialization than China and needs to rely on the Chinese market due to its insufficient industrial and supply chains.

With a limited market size, Vietnam recorded only $260 billion in exports in 2019. China reported $2.5 trillion in exports the same year, making it difficult to imagine Vietnam taking over China's role.

And the notion of China and the EU decoupling does not hold water against the backdrop of closer ties between two sides. It is the US that has been beating the decoupling drum.

China and the EU have maintained their roles as important trade partners and markets from trade and investment perspectives. More and more European countries are participating in projects of the China-proposed Belt and Road Initiative (BRI), with some having signed memoranda of understanding with China on jointly promoting the BRI.

Additionally, China-Europe freight trains have been increasing in frequency and cargo volume amid the pandemic. Besides goods which could stabilize global supply chains, the trains have also delivered critical pandemic prevention materials to Europe. Instead of decoupling, China and the EU will develop to a tighter coalition with shared interests.

Although the Chinese economy has been hit by the virus, its promising fundamentals remain unchanged, and economic cooperation between China and the EU - as well as with ASEAN - is expected to bounce back gradually. Resolutely expanding opening-up and upholding the stabilization of global industrial and supply chains have always been China's goals. "Takeover" and "decoupling" theories are neither realistic nor beneficial to their instigators.

The author is director of the Center for Southeast Asian Studies of the Chinese Academy of Social Sciences.

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