Workers make garment products in a factory in Long An Province.
Photo by VnExpress/Quynh Tran. 

The EU-Vietnam free trade agreement will increase Vietnam’s annual GDP growth by 0.1 percentage points and boost exports of various sectors, HSBC says. 

Vietnam’s National Assembly Monday ratified the EU-Vietnam Free Trade Agreement (EVFTA) which will cut or eliminate 99 percent of tariffs on goods traded between the two sides. It is set take effect in July.

An HSBC release said that the ratification of the trade pact "affirms Vietnam’s position among the forefront of the world’s great trading nations," as the E.U. has a combined GDP of $15 trillion.

Two-thirds of E.U. export duties will be removed as soon as the agreement takes effect, while around 71 percent of tariffs on Vietnam’s exports to the E.U. will be eliminated immediately, with the rest following a seven to 10-year roadmap, according to the bank.

HSBC analysts estimate that the trade pact will add an average of 0.1 percentage points to Vietnam’s GDP growth each year, with textile and footwear industries benefitting the most. These two industries traditionally bear the highest import tariff rates.

Last year, Vietnam exported over $9 billion worth of textiles, garments and footwear to the EU at a weighted average tariff of 9 percent.

Vietnam is the one ASEAN economy where the HSBC continues to forecast positive growth in 2020, making it an attractive destination for companies looking to tap local and regional consumption; and now the new trade agreement gives them privileged access to 450 million consumers in the E.U.

"The benefits that the EVFTA will bring to Vietnam’s future growth are substantial," the release said.

However, Vietnam will need to adjust and redesign its supply chains to take full advantage of the opportunities, it added.

It noted that the the products of many Vietnamese textile and garment manufacturers do not have enough locally produced inputs to satisfy the E.U.’s demanding rules on country of origin.

This means the government and businesses will need to work together to expand the domestic textile and garment industry to include the production of input materials instead of importing them, it said.

The government needs to assist the adoption of global standards by Vietnam’s supporting industry, guiding businesses on the new regulatory framework and the commitments under the EVFTA, in terms of environment, copyright and country of origin.

The EVFTA is the E.U.’s second deal with an ASEAN country, after Singapore, and one of few the bloc has signed with developing countries.

The E.U. was Vietnam’s second largest export market last year after the U.S. with a value of $41.48 billion, down one percent year-on-year.