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The UK–Vietnam Free Trade Agreement could be a strategic surprise

Vietnam and the United Kingdom, which have been in a strategic partnership since 2010, are expected to strike a free trade agreement soon. Vietnam’s Prime Minister Nguyen Xuan Phuc expressed hope for an agreement when he received British Foreign Secretary Dominic Raab in Hanoi on 30 September 2020.

Concluding the UK–Vietnam free trade agreement (UVFTA) by the end of 2020 is a realistic goal for three reasons.

First, it is an operational necessity for both countries. Brexit means that the EU–Vietnam free trade agreement — which took effect on 1 August 2020 — will no longer apply to the United Kingdom after 31 December 2020. Second, both the United Kingdom and Vietnam are keen to close this deal as soon as possible to boost their post-COVID-19 economic recoveries. Third, the terms of the 2020 UK–Vietnam FTA will largely resemble the EU–Vietnam FTA, meaning the two countries do not need to undertake a decade of negotiations.

But while the process of closing the deal seems straightforward, realising its full potential is a challenging task.

Embracing globalisation has been one of Vietnam’s core strategies for fostering economic growth and reform. Vietnam succeeded in transforming itself from an isolated country into one of the most globally integrated economies, with total trade in 2019 amounting to US$518 billion in merchandise goods and US$50 billion in services.

Vietnam has also been a strong driver of ASEAN’s international trade — particularly with its major trade partners. Vietnam’s share in ASEAN’s total merchandise trade with the United Kingdom increased from 8.1 per cent to 14.4 per cent between 2010–2014 and then to 18.6 per cent in 2019.

The United Kingdom is a leading player in global trade. In 2019, the United Kingdom exported US$469.7 billion and imported US$695.8 billion of merchandise goods while these respective figures were US$411.8 billion and US$279.2 billion for commercial services. Although the United Kingdom’s international goods trade has declined in recent years, its trade with ASEAN and Vietnam recorded strong growth. Merchandise trade with Vietnam has grown at 9 per cent per annum between 2014–2019.

The United Kingdom is also an increasingly significant investor in ASEAN. Since 2014, the United Kingdom’s FDI into the region averaged at US$5.1 billion per year, while this figure was US$4.9 billion for South Korea, US$835 million for France, US$605 million for Germany and US$199 million for Italy.

The current dynamics of these economic ties amid the COVID-19 pandemic and the US–China trade war suggests that ASEAN and Vietnam will be increasingly important partner for the United Kingdom to pursue its post-Brexit economic revival strategy.

The UVFTA is a strategic step for the United Kingdom. It is also a big boost for Vietnam for exports, FDI and engaging UK firms in the country’s efforts to move up the value chain.

In the short term, product categories with a large share of, or a rapid growth rate in, the merchandise trade between the two countries are expected to benefit most from the UVFTA. These product categories can be classified into three groups. The first group consists of products produced by Vietnam, which includes garments, footwear, seafood, coffee, and fruits and nuts. The second group contains products produced by the United Kingdom, which include pharmaceuticals, wood pulp, and vehicles and spare parts.

The third group contains categories with strong exports from both countries — including machinery and mechanical appliances, electronics, furniture, iron and steel products, and aircraft and spare parts. It is likely that this third group will play a strategic role in strengthening economic ties between the two countries by fostering their participation in global value chains.

As the UVFTA will lay a solid foundation for a long-term partnership, the two countries should go beyond a focus on short-term gains. They should leverage this agreement to address both countries’ core challenges and reap greater benefits from global integration.

Vietnam’s core challenges are low productivity and weak innovation capability. Vietnam’s manufacturing labour productivity is one tenth of the United Kingdom’s. On innovation capability, Vietnam’s share in ASEAN is tiny (0.1 per cent in exports and 2.3 per cent in imports for intellectual royalties in 2019) in comparison to its shares in the block’s trade and FDI inflows.

The United Kingdom’s core challenges lie in revitalising its economy through global dynamism and engagement. Success in this endeavour is the only way for the United Kingdom to justify its costly Brexit.

Vietnam can tap into the United Kingdom’s distinctive strengths in services related to research and development and management consulting services. As a leading global provider of this services category (exporting US$111 billion in 2019), the United Kingdom has great potential to help Vietnam boost its labour productivity and innovation over the next 5–10 years.

Vietnam is also expected to extend its special partnership with the United Kingdom on higher education to ensure that its schools and universities will have access to native English teachers via online platforms. Vietnam can also help the United Kingdom to boost its presence in ASEAN and back it in joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) trading group.

The UVFTA is not only an operational necessity but could be a strategic surprise to the international community. As the world is experiencing profound changes with unprecedented opportunities and challenges, the United Kingdom and Vietnam may trailblaze a path to prosperity.

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