vietnam and its major trade pacts or how the country could have deep impact on our global supply...
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OLIVER MASSMANN - Partner, General Director
DUANE MORRIS VIETNAM LLC
VIETNAM AND ITS MAJOR TRADE PACTS OR
HOW THE COUNTRY COULD HAVE DEEP
IMPACT ON OUR GLOBAL SUPPLY CHAINS
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AGENDA:
• OUTLOOK ON VIETNAM’S POLITICAL SITUATION
• OVERVIEW OF THE RECENT TRADE PACTS: ASEAN
ECONOMIC COMMUNITY (AEC), EU- VIETNAM
FREE TRADE AGREEMENT (EVFTA) AND THE
TRANS-PACIFIC PARTNERSHIP (TPP)
• MARKET ACCESS COMPARISON OF CERTAIN
COMMERCIAL SECTORS IN THE WTO, AEC, EVFTA
AND TPP
• CONCLUSION
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Vietnam to be Asia’s second fastest growing
country
• In 2016, Vietnam’s GDP is expected to grow at 6.9%, higher than the
6.6% forecast, through better construction activity and manufacturing
strength (Standard Chartered Bank)
• The second fastest-growing economy in Asia, second only to India.
• Progressing for the third year in a row, Vietnam reached the 56th
position in 2015 on the Global Competitiveness Index (GCI) list, a jump
of 12 positions compared to 2014.
• Vietnam tops 6 European Union countries on the GCI list
• Consumption is likely to remain the biggest growth driver in 2016,
closely followed by investment.
• China’s economic slowdown and the US Federal Reserve increasing
interest rates were driving investor withdrawals from emerging markets.
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OUTLOOK ON VIETNAM’S
POLITICAL SITUATION
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Vietnam Quo Vadis
• Central Committee of Communist Party Vietnam:
180 official members; 20 alternate members. 104
members are re-elected.
• Average age: 53
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Vietnam Quo Vadis (cont.) • The loss of power of Prime Minister Nguyen Tan Dzung …
– Secretary General Nguyen Phu Trong continues his next 5-year term
– Components of the new Government are elected 3 months sooner than scheduled
– PM Dzung is not allowed to perform another term
– Mr. Tran Dai Quang – Minister of the Ministry of Public Security was elected to be the
President.
– The Secretary General is pro-China while PM Dzung is pro-America.
Mr. Trong was hesitant to criticize China when it brought Drill 981 to the Paracels in 2014
Mr. Dzung in his capacity of the PM has supervised the foreign investment inflow and improved
relations with top US leaders. He criticized China more strongly than other members of the
Congress of its defiant acts in the East Sea.
• ….and the fear of “Vietnam could move back”:
– PM Dzung is considered to be better at dealing with foreign investors and more willing to
remove the cover of Marxism ideology of the Congress than Mr. Trong
• However: Vietnam was and always is a consensus driven society
No person cult --- No “God” like figures as Mao in China
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ASEAN ECONOMIC COMMUNITY
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AEC establishment • One of the 3 pillars of ASEAN Community, together
with ASEAN Security Community and ASEAN Socio-
Cultural Community
• Originated from ASEAN Vision 2020 adopted in 1997
on the 30th anniversary of the Association of Southeast
Asian Nations
• The realization of the end goal of economic integration
as espoused in the Vision 2020, which is based on a
convergence of interests of ASEAN member countries
to deepen and broaden economic integration through
existing and new initiatives with clear timelines.
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AEC Market Snapshot – Asia’s main
investment hub
• GDP: US$2311.3 billion (2012)
• GDP per capita: US$3748.4 (2012)
• Population: 620 million, 60% under the age of 35
• AEC % of world GDP: ~3.3%
• AEC % of world population: 9%
• AEC’s merchandise exports: US$1.2 trillion - ~54% of total
ASEAN GDP and 7% of global exports
• If ASEAN were one economy, it would be the 7th largest in
the world – 4th largest by 2050 if growth trends continue
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Key characteristics of AEC
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AEC Tariff Liberalization
• Started in 1992 when the Common Effective Preferential Tariff
Scheme (CEPT) was signed.
• The ASEAN Free Trade Agreement (AFTA) was created with an
aim to further tariff reduction and elimination of goods with
ASEAN origin.
• The ASEAN Trade in Goods Agreement (ATIGA) in 2009 and its
enforcement in 2010 made it possible for traders to enjoy much
reduced tariff rates under this Agreement.
• In 2014, the average ATIGA rate was 0.04% for ASEAN-6
(Brunei Darussalam, Indonesia, Malaysia, Philippines, Singapore
and Thailand). For other countries (Laos, Cambodia, Myanmar and
Vietnam), this was 1.33%. 12
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ASEAN Rules of Origin
• Products are considered as originating from ASEAN
countries if:
– They are wholly obtained or produced in the exporting Member
State; or
– They are not wholly obtained or produced in the exporting Member
State but satisfy substantial transformation requirements such as
regional value content; change in tariff classification or some other
product-specific requirements.
• In order for a good to be eligible for preferential tariff
treatment, the exporting Member State has to obtain a
Certificate of Origin (Form D) issued by a Government
Authority designated by the exporting Member State. 13
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EU – Vietnam Free Trade Agreement
(EVFTA)
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EU- Vietnam trading partnership
• The EU is currently the second largest trading partner and
one of the 2 largest export markets of Vietnam.
• By the end of 2014, 23 out of 28 EU countries have invested
in Vietnam with over 2,000 projects worth more than USD37
billion.
• Vietnam’s main exports to the EU: footwear, textile products,
coffee, seafood and wood products, etc.
• EU’s main exports to Vietnam: machines, chemicals, milk
and milk products, steel products, etc.
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EVFTA – Bilateral negotiations
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Launch of
negotiations
First
round in
Hanoi
15 rounds
alternately
in Vietnam
and
Brussels
Last
round in
Hanoi
Agreement
in
principle
06/2012 10/
2012
Conclusion
of
negotiation
FTA text
released
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EVFTA – Comprehensive agreement
• Trade in goods
Market access for goods – tariffs
Rules of Origin
Export duties
Technical Barriers to Trade (TBT)
Sanitary and Phytosanitary Measures
Customs and Trade Facilitation
Administrative Cooperation in Customs Matters
• Services and investment:
National treatment
Liberalisation commitments / market access
Investment to state dispute settlement
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Cross-cutting issues
Dispute Settlement and Investment
Dispute Settlement
Government Procurement
State Owned Enterprises & Subsidies
Intellectual Property Rights
Geographical Indications
Trade and Sustainable Development
Cooperation and Capacity building
Annexes (car; green tech and pharma)
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EVFTA – Tariff Liberalization
• Tariff liberalization:
– 99% of tariffs both value and number of tariff lines
– After 7 years for EU
– Vietnam: 10 years
• Coverage at entry into force:
– 70.3% of value of Vietnamese exports / 86% tariff lines
– 65% value of EU exports / 49% tariff lines
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Rules of Origin in the EVFTA
• Products are considered originating under the agreement if they
meet one of the following requirements:
– wholly obtained in the EU Member States or in Vietnam
– products produced in the EU or in Vietnam incorporating materials which
have not been wholly obtained there, provided that such materials have
undergone sufficient working or processing within the EU or Vietnam.
• There are prescribed set procedures for certain goods that must be
completed within the EU or Vietnamese borders to be qualified as
originating goods.
• Procedures such as breaking-up and assembly of packages; simple
painting and polishing operations or sharpening, etc. are exempted
areas of working to obtain originating status.
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EVFTA – Benefits for Vietnam
• Vietnam’s annual economic expansions rate may grow an additional 15%
every year (said Tomaso Andreatta, representative of the European Business
Association in Vietnam (EuroCham), at the Vietnam Business Forum 2014)
• Tariffs for most of Vietnamese export product to the EU will gradually
reduce to 0% and Vietnam’s export to EU is expected to grow about 35%
for next few years
• The real wages of skilled laborers may increase by up to 12% while real
salary of common workers may rise by 13%
• The EVFTA is the legal framework for a more stable relationship in bilateral
trade for Vietnam when competing in the international market
• The EVFTA will generate greater effects, e.g. increased quality of
investment flows from EU, acceleration of the process of sharing expertise
and transfer of green technology and the creation of more employment
activities
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TRANS-PACIFIC PARTNERSHIP
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History of the TPP
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Trans-pacific Strategic
Economic Partnership
(P4) signed
Scope of negotiation
extended with
participation of other
countries, including the
US Negotiation of the
TPP officially launched First negotiation round in
Melbourne- Australia
with 7 members Other countries such
as Malaysia, Japan,
Canada and Mexico
participated in the
negotiation
Finally agreement reached
in Atlanta negotiation
round
05 Oct. 2015
03 June 2005
Dec 2009
Oct 2010 –
July 2013
2007
March 2010
Text released on 05 Nov.
2015 and the agreement
was signed on 4 Feb 2016
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How is the TPP Different?
• GDP of 12 TPP Members is nearly $28 trillion, 40% of global GDP and
one-third of world trade
• The TPP is being touted as a “high-standard agreement” meaning “a
landmark, 21st-century trade agreement, setting a new standard for
global trade and incorporating next-generation issues”
• So-called "key elements" including the notion of comprehensive
market access, a fully regional agreement, cross-cutting issues
(regulatory coherence, competiveness and business facilitation, small and
medium sized enterprises, and development), new trade challenges
(particularly rules on state owned enterprises); as well as, finally, the
notion of a living agreement.
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TPP Trade in Goods
• Tariff and non-tariff barriers on most industrial goods are
eliminated immediately, with tariffs on some sensitive products will
be phased out as agreed by the TPP Parties.
• Each TPP Parties provide a tariff schedule covering all goods.
• Parties agree not to use performance requirements, such as local
production requirements.
• Parties agree not to impose WTO-inconsistent import-export
restrictions and duties. If any, they are required to notify the others
about the procedures to ensure transparency and promote trade
flows.
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Trade in Services
• Negative approach, meaning that their markets are fully
opened to service suppliers from other TPP Parties, except
otherwise indicated in their commitments (non-conforming
measures)
• In order to make such reservations, the member state must
prove the necessity of such preservation and negotiate with
other member states. If approved, the non-conforming
measures are only limited to such list, except for measures in
certain sensitive sectors which are included in a separate list
• Ratchet approach: Member states are only allowed to adopt
policies that are better than what they commit
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Rules of Origin
• Originating goods:
– Wholly obtained or produced goods;
– Produced in and from materials originating from TPP countries; or
– Produced in and using material not originating from TPP countries nut
satisfying TPP rules of origin.
• Separate rules of origin for each specific type of goods
• Separate chapter on rules of origin for textile products
• Rules of origin in TPP are predominantly based on a specified shift in
tariff classification, regional value content and production stages
• No requirement for certificates of origin under TPP, or third-party
certification of origin but self-certification is sufficient
• Note that Vietnam applies different schedules of tariff elimination/
reduction for different categories of goods 27
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Textiles and Apparel
• Most tariffs on textiles and apparel will be eliminated
immediately, although tariffs on some sensitive products will
be phased out as agreed by the TPP Parties.
• Yarn-forward rule of origin: requires use of yarns and fabrics
from TPP countries in end products qualifying for
preferential treatment under TPP.
• Exceptions:
– a carefully tailored short supply list (when certain yarns and fabrics
not widely available in the region).
– de minimis
– 1 for 1 rule applied for women’s and men’s cotton trousers exported
to the US
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Yarn-forward rule: Impact on Vietnam’s textile industry
• Current status and Issues:
– Around 6,000 textile companies in Vietnam - ~600,000 machines have to be replaced
– 60% of imported materials sourced from other non-TPP countries (mainly China)
– Domestic production of materials has not met the demand
– Yarn production must go together with weaving and dying but environment protection
is currently an issue.
• Impacts and what to do next:
– More foreign investment in textile industry with investment value of up to USD1
billion.
– Sourcing managers are looking for alternatives due to rising costs, labor shortages, strict
compliance and environmental regulations and a move to production of high value
products in China
– Establish domestic supply chain
– Bring into operation domestic yarn production factories
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How will TPP benefit Vietnam? 70% 70% of the total export value of Vietnam’s textile industry is from TPP countries. By participating in
the TPP, the market is expected to double. Export turnover to the US may reach USD55 billion in 2025
0% The average tax rate on textile products into
the US market is currently 17.5%, after TPP
it falls down to 0%
0% The whole import tariffs on footwear currently
from 3.5% to 57.4% also falls down to 0%
USD 335.7 billion According to a study by East – West Centre (USA), Vietnam’s GDP may increase by USD35.7 billion,
equivalent to 10.5% until 2025. At the same time, Vietnam’s exports also increase by 28.84%, equivalent
to USD67.9 billion
Investment increases by 9.2% TPP helps Vietnam’s GDP increase by 1-2%/year as a result of an increase in investment by 9.2% (mostly
inbound investment), consumption increase by USD6.9 billion and production increase by USD2.4 billion
Opportunities to
export flagship
products
Create more than 6
million jobs in textile
industry until 20
Liberalizing investment
environment among TPP
countries
Expectation on more competitive business
environment, cheaper goods and services at
higher quality
TPP offers free market access for enterprises
operating in service sectors
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Investor-state dispute settlement (ISDS)
• Through binding arbitration, including for violations of the investment
and financial services chapters.
• ISDS provisions are expected to include protections commonly found in
investment agreements such as non-discrimination; fair and equitable
treatment; full protection and security; the prohibition of expropriation
that is not for public purpose, without due process, or without
compensation; the free transfer of funds related to investments; and the
freedom to appoint senior management positions regardless of
nationality.
• Expected new protections in the TPP:
– Transparency in arbitral proceedings, disclosure of filings and arbitral awards, and
participation of interested non-disputing parties to make amicus curiae submissions
to a tribunal
– Safeguards to ensure government’s ability to regulate in the public interest (public
health, safety and the environment)
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TPP and AEC intersection
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Thailand
Malaysia
Brunei
Canada Australia
Cambodia
Indonesia Myanmar
Peru
Philippines
Japan
Laos
Mexico New Zealand
Singapore
The United States
Vietnam
Chile
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ASEAN TPP: Market Access Liberalization as
Consequence of TPP
• Indonesia plans to loose restrictions on foreign investment in
nearly 50 sectors, including e-commerce, retail, healthcare,
movie and several other industries
• Indonesia prepares for the so-called “Negative Investment
List”, which provides a greater openness to foreign
investment and gets itself ready for the TPP
• China, Korea, the Philippines, Indonesia and Thailand are
also keen to join the TPP to overcome the disadvantages
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MARKET ACCESS COMPARISON OF
CERTAIN COMMERCIAL SECTORS IN
THE WTO, AEC, EVFTA AND TPP
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Notes regarding the market access
commitments
• The WTO, AEC and EVFTA take a positive approach,
meaning what is open to foreign investment is listed.
• The TPP only lists the restrictions, meaning what is not
written therein is fully open (negative approach).
• In WTO Market Access Service Sector the principle applies:
Who does not ask and demand might not get the market
access for investment. There is NO Automatic Right for
Market Access for the WTO members in the WTO Services
Sectors in principle.
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Distribution sector
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Distribution of cigarettes and cigars,
publications, precious metals and stones,
pharmaceutical products and drugs, explosives,
processed oil and crude oil by foreign
investors are still prohibited
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Distribution sector
WTO / AFAS EVFTA TPP
The establishment of outlets for
retail services (beyond the first
one) shall be allowed on the basis
of an Economic Needs Test
(ENT)
Same as in the WTO / AFAS but
added cases for ENT exemption
and timeline for ENT abolishment
In case of establishing an outlet
less than 500m2 within the area
planned for trading activities and
already completed construction of
infrastructure, ENT is not
required.
5 years from the date of entry into
force of the Agreement, the
requirement of the ENT will be
abolished.
Same as in the EVFTA but
clarifies the criteria of the ENT.
The main criteria of the ENT
include the number of existing
service suppliers in a particular
geographic area, the stability of
market and geographic scale.
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WTO / AFAS requires an ENT for establishment of outlets for retail services (beyond the first one). EVFTA
requires the same but adds cases for ENT exemption and timeline for ENT abolishment. Meanwhile, in addition
to what EVFTA covers, the TPP clarifies on what basis the ENT is conducted.
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Power/ Energy Sector
Level of commitment in Power / Energy sector
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WTO / AFAS
EVFTA
TPP
N/A Low High
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Power/ Energy Sector
WTO / AFAS EVFTA TPP
N/A Commitments are only made
in 3 sub-sectors
Vietnam makes commitments in
all sub-sectors with listed
restrictions (no other
restrictions are permitted).
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Transport Services
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Maritime Transport
WTO =
AFAS =
TPP
EVFTA
Internal Waterways Transport
WTO =
TPP
AFAS =
EVFTA
Rail Transport
WTO =
EVFTA TPP AFAS TPP
WTO =
EVFTA AFAS
Air Transport
Low High Low High
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Transport Services
• Maritime transport
– WTO / AFAS/ EVFTA: joint venture with maximum 49% foreign ownership
while the TPP allows joint venture with maximum 70% foreign ownership
• Internal waterways transport
– WTO/ TPP: joint venture with maximum 49% foreign ownership while EVFTA/
AFAS allows joint venture with maximum 51% foreign ownership.
• Rail freight transport
– WTO/ TPP/ EVFTA: joint venture with maximum 49% foreign ownership while
AFAS allows joint venture with maximum 51% foreign ownership.
• Air transport (Selling and Marketing of Air Transport Services)
– WTO/ EVFTA: Airlines are permitted to provide service in Viet Nam through their
ticketing offices or agents in Viet Nam but in the AFAS, there is no such restriction.
Meanwhile, the TPP does not make any commitment in this sub-sector.
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Transport
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Insurance Services
Level of commitment in Insurance sector
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EVFTA
WTO / AFAS
TPP
Low Med High
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Insurance Services
EVFTA WTO / AFAS TPP
No commitment
regarding cross-border
supply of health
insurance services
Non-life branches of
foreign insurance
enterprises shall be
permitted subject to
prudential regulations. No
specific conditions are
specified, meaning the
Government can adopt
conditions as it wishes to.
No restriction regarding
cross-border supply of
health insurance service
Same as EVFTA
Supply of Cross-border services by foreign insurance company
must be conducted via an insurance broker which has the
license to establish and operate in Vietnam.
Non-life branches of foreign insurance enterprises shall be
permitted with conditions. The Government can adopt
different conditions than what mentioned but must not be
more restricted.
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The TPP provides the same requirements as the EVFTA/ WTO/ AFAS but clarifies the
conditions to apply such requirements.
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Banking Services
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WTO = AFAS =
EVFTA TPP
Low High
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Banking services
WTO/ AFAS / EVFTA TPP
Mode 1: No commitment, except:
Provision and transfer of financial information, and financial data
processing and related software by suppliers of other financial
services; and
Advisory, intermediation and other auxiliary financial services on all
activities listed in subparagraphs from (a) to (k), including credit
reference and analysis, investment and portfolio research and advice,
advice on acquisitions and on corporate restructuring and strategy.
Mode 3: Foreign purchase of shares in each Viet Nam's joint-stock
commercial bank may not exceed 30% of the bank's chartered capital.
A branch of foreign commercial bank is not allowed to open other
transaction points outside its branch office, excluding ATMs.
Mode 1: No restriction
Mode 3: No other restrictions other than:
A foreign credit institution or a foreign institution engaged in a
banking operation shall only be permitted to establish one
representative office in each province or city under central authority.
General directors (directors), deputy general directors (deputy
directors), chief accountants, directors of branches and directors of
subsidiary companies and people assuming equivalent positions must
reside in Viet Nam during their term of office whenever they assume
the positions in the Board of Directors of a credit institution.
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Mode 1: The WTO/ AFAS/ EVFTA only commits on 2 sub-sectors with restrictions
while the TPP does not place any restriction for all sub-sectors.
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Securities services
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WTO =
AFAS EVFTA TPP
Low High
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Securities services
WTO/ AFAS EVFTA TPP
Commitments on 6 sub-sectors
Mode 3:
foreign securities service suppliers are
permitted to establish representative
offices and joint ventures with maximum
foreign ownership of 49%.
After 5 years from the date of accession,
securities service suppliers with 100%
foreign-invested capital shall be
permitted.
Same commitments in 6 sub-sectors
Commitments on 2 additional services:
Provision and transfer of financial data
processing; and credit reference and
analysis.
Mode 3: Same as the WTO/ AFAS
No restrictions except the following:
The operation and services provided by
branches of foreign securities company
and fund management company in Viet
Nam are subject to approval of the
Government of Viet Nam, including the
imposition of conditions for the approval.
Foreign participation from above 49% to
less than 100% of charter capital of a
securities company, fund management
company in Viet Nam is subject to
approval of the Government of Viet
Nam, including the imposition of
conditions for the approval.
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The TPP allows 49-100% foreign ownership right at the time of effective date subject to
Government’s approval while the WTO/ AFAS / EVFTA only allows 49%. 100% ownership
is only permitted after 5 years from the date of accession.
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Telecommunication Services
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WTO =
AFAS EVFTA TPP
Low High
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Telecommunication Services
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• Non facilities-based services: WTO/ AFAS:
maximum 65% foreign ownership forever but in the
EVFTA after 5 years, this could be 75%. For the TPP
after 5 years, this is 100%.
• Other services - Virtual Private Network (VPN):
maximum 70% foreign ownership forever but in the
EVFTA after 5 years, this could be 75%. For the TPP
after 5 years, this is 100%.
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Government Procurement
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Low High
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Government Procurement
• Thresholds: EVFTA provides shorter period of time and
higher initial transitional threshold.
• Entities covered: under the EVFTA, more entities are
subject to government procurement rules than in the
TPP.
• Application of offsets: under the EVFTA, offsets are
applied based on value of a contract (including non-
covered procurement) but in the TPP, it is based only on
the covered procurement.
•
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Government Procurement Criteria EVFTA TPP
Monetary values that determine whether
procurement by central government is
covered under an agreement
130,000 Special Drawing Rights (SDRs) (US$191,000) from 15 years
since the entry into force of the agreement
Initial transitional threshold: 1.5 million SDRs
130,000 Special Drawing Rights (SDRs) (US$191,000)
from 25 years since the entry into force of the agreement
Initial transitional threshold: 2 million SDRs
Procurement of construction services by
central government entities
Initial threshold: 65.2 million SDRs
After 15 years, 8.5 million SDRs
Initial threshold: 40 million SDRs
After 15 years, 5 million SDRs
Entities covered 22 central government bodies (added the Ministry of Public Security)
42 other entities: added two state-owned enterprises (Vietnam
Electricity and Vietnam Railways) and two universities (Vietnam
National University – Hanoi and Vietnam National University – Ho Chi
Minh City)
Sub-central government coverage: Adds 2 cities: Hanoi and Ho Chi
Minh – expansion of the list within 15 years since the entry into force of
the agreement
21 central government bodies
38 other entities
No sub-central government coverage - expansion of the
list within 3 years since the entry into force of the
agreement
Exclusion of preferences for SMEs Broad exclusion applies only to procurement of goods and services whose
value is estimated at 260,000 SDRs or less and may not be
applied to SMEs with more than 500 permanent full-time
employees.
Application of offsets Based on value of a contract Based on the total value of covered procurement 55
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Recommendations for enterprises
• Carefully study rules of origin in each trade agreement
• Understand which specific procedures apply for own
products to build an effective sourcing and product
development plan accordingly
• Note that while different countries apply different tariff rates
for the same products, the rules of origin are still the same. It
means that if a product satisfies the rules of origin in an
agreement, it will be entitled with tariff preferential treatment.
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Questions & Answers
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DUANE MORRIS VIETNAM LLC
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References (1)
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References (2)
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References (3)
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References (4)
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