[Analytics] Vietnam’s environmental challenges risk EU free trade
Vietnam needs to address environmental challenges to fully reap the benefits from its new free trade and investment agreements with the European Union. Thang Nam Do specially for the East Asia Forum.
On 8 June, Vietnam’s National Assembly ratified the EU–Vietnam Free Trade Agreement and Investment Protection Agreement, following the European Parliament’s approval in February. Ratifying the agreement clears the path for Vietnam to expand exports to the potentially lucrative EU market and to attract more investment from the economic bloc.
It is expected to increase Vietnam’s GDP and exports by 2.4 and 12 per cent respectively by 2030. This is among the most comprehensive trade agreements between the European Union and a developing country. It will remove 99 per cent of tariffs on goods traded between Vietnam and the European Union. It also involves strong, legally binding and enforceable commitments on sustainable development.
Vietnam is the European Union’s second largest trading partner in ASEAN after Singapore, with trade in goods and services worth €54.4 billion (US$61.1 billion) a year. Vietnam’s major exports include textiles and clothing, electronic products, rice, coffee, seafood and furniture. It imports aircraft, motor vehicles and pharmaceutical products from the European Union. The European Union is one of the largest foreign investors in Vietnam, with foreign direct investment totalling €6.1 billion (US$6.9 billion) in 2017, mainly in the industrial processing and manufacturing sectors.
Apart from free trade and associated labour issues, the agreement commits the European Union and Vietnam to implement the Paris Agreement on climate change and to meet other international environmental agreements. Since negotiations started in 2012, Vietnam has come a long way to meet the Agreement’s requirements. But significant environmental challenges remain.
With commitments ranging from an 8–25 per cent reduction in greenhouse gas emissions by 2030 relative to business as usual without and with international assistance respectively, Vietnam’s efforts are deemed insufficient by some EU climate advocacy organisations. Vietnam’s current trajectory of increasing the share of coal and gas to up to 57 per cent in the electricity mix by 2030 appears at odds with its greenhouse gas reduction commitment under the new EU agreements. Vietnam may face the risk of the European Union imposing carbon border adjustments — a tax levied on imports from countries without carbon pricing mechanisms.
Vietnam’s water pollution may also raise concerns about the quality of its exported agricultural products among EU consumers who pay close attention to the quality of food sourcing conditions. Further, if not properly addressed, Vietnam’s illegal, unreported and unregulated fishing will prolong the current EU ‘yellow card’ imposition which impedes fishery exports.
High EU environmental standards require Vietnamese businesses to make huge efforts to improve environmental performance. The Agreement’s requirements for conservation and sustainable use of biological diversity, conservation and sustainable management of forest resources, sanitary and phytosanitary measures, and non-tariff barriers to trade and investment in renewable energy generation involve significant capacity building and regulation reforms. Vietnam’s incomplete environmental institutions also present challenges to protecting the environment under increasing industry activities associated with foreign investment.
Vietnam could overcome these challenges with sound and timely policy. Setting more ambitious nationally determined contribution targets, followed by imposing a carbon tax on fossil fuels and establishing an emissions trading scheme for large emitters, such as cement and steel manufacturers, would strengthen its commitment to the Paris Agreement. Increasing the share of renewables such as wind and solar power in the electricity mix in Vietnam’s forthcoming eighth National Power Development Master Plan would also help facilitate achieving the greenhouse reduction targets.
There are opportunities to strengthen environmental institutional capacity by revising the Law on Environmental Protection. Improving and enforcing environmental compliance standards could address water pollution, eliminate pollutant contamination of agricultural products and improve product quality. Strengthening regulations on illegal wildlife trade and consumption, and facilitating the promotion of trade in forest products from sustainably managed forests, would demonstrate Vietnam’s commitment to the agreement. This would help develop trust in Vietnamese production and supply chains among EU consumers and investors.
Environmental education and training, particularly for small- and medium-sized enterprises, would build business and industry capacity in meeting EU environmental requirements. Raising awareness for fishermen, assisting with economic diversification of their livelihoods and applying advanced monitoring technologies could help alleviate illegal, unreported and unregulated fishing. As ASEAN Chair in 2020, Vietnam could promote cooperation with other ASEAN countries to solve this common problem.
These measures would enable Vietnam to reap the potential benefits of its new trade and investment agreements with the European Union, particularly in revitalising its economy in the post-COVID-19 period. This would also affirm the government’s commitment to address increasing public demand for better environmental quality and standards. Vietnam Prime Minister Nguyen Xuan Phuc’s statement that ‘economic development must go together with environmental protection and social development to ensure sustainable growth and prosperity’ is useful guidance for policymakers.
Thang Nam Do is a research fellow with the Zero-Carbon Energy for the Asia-Pacific Grand Challenge Program of the ANU Energy Change Institute and the Crawford School of Public Policy, The Australian National University.