Impacts of EVFTA on trade flows of fruits and vegetables between vietnam and the EU

TRƯỜNG ĐẠI HỌC NGOẠI THƯƠNGKHOA KINH TẾ QUỐC TẾ Impacts of EVFTA on trade flows of fruits and vegetables between Vietnam and the EU Pham Thi Huong Ly Foreign Trade University, Hanoi, Vie

TRƯỜNG ĐẠI HỌC NGOẠI THƯƠNG

KHOA KINH TẾ QUỐC TẾ

Impacts of EVFTA on trade flows of fruits and vegetables

between Vietnam and the EU

Pham Thi Huong Ly

Foreign Trade University, Hanoi, Vietnam

Pham Thi Thuy Trang

Foreign Trade University, Hanoi, Vietnam

Dao Ngoc Phuong Linh

Foreign Trade University, Hanoi, Vietnam

Le Thi Nam Thanh

Foreign Trade University, Hanoi, Vietnam

Tran Huyen Trang

Foreign Trade University, Hanoi, Vietnam

Vu Thu Ha

Foreign Trade University, Hanoi, Vietnam

Nguyen Quynh Anh

Foreign Trade University, Hanoi, Vietnam

Nguyen Hoang Minh Ngoc

Foreign Trade University, Hanoi, Vietnam

Abstract:

The research aims to identify the impacts of EVFTA on trade flows of fruits and vegetablesbetween Vietnam and the EU The research follows a qualitative approach to analyze theagreement and its opportunities drawn on text and data analysis, as well as a literaturereview This research has confirmed that there is a positive relationship between EVFTAand trade flows of fruits and vegetables between Vietnam and the EU The report givesrecommendations on trade flows of fruits and vegetables between Vietnam and the EU inthe context of EVFTA

Keywords: EVFTA, import, export, fruit,

Vegetables and fruits are one of the economic sectors that are forecasted to take themost benefits from EVFTA with opportunities opened up for both export and import andattract investment To support Vietnamese fruit and vegetable enterprises to seizeopportunities, realize potential benefits from EVFTA, new generation FTAs and theirimpacts are therefore primarily to be analyzed in this study The methodological approach

of this report is qualitative methods, which analyze the agreement and its opportunitiesdrawn on text and data analysis, as well as a literature review In this report, impacts ofEVFTA on fruits and vegetables trade flow would be clarified through 4 main sections:literature review, background, research methodology, results and discussion

2 Literature review

2.1 Trade impacts of an FTA

The implications of FTAs have been a topic of interest for many economists Trade impacts

of an FTA have widely been accepted among scholars to include static and dynamic effects.FTAs enhance trade flows among countries through trade creation and trade diversioneffects, which were first clarified by Viner (1950) as a fundamental theory of internationaleconomic integration Trade creation occurs when domestic production in an FTA member

is replaced by lower-cost production from another FTA member as a result of tradeliberalization Consumers gradually shift from higher-priced domestic products to lower-priced products from other FTA members (Baier & Bergstrand, 2007) The formation of acreation FTA therefore promotes trade between member states, improves the efficientallocation of resources and create a greater specialization in producing comparativeadvantage goods As a result, a creation of an FTA leads to the increase in consumersurplus and finally the welfare of member nations On the contrary, a FTA can divert tradeflows due to its nature of discrimination between member nations and non-member nations,resulting in resource misallocation This statement has also been applied by manyresearchers such as Cline et al (1978), Francois & Reinert (1997), Ju & Krishna (2000),and Cuyvers & Dumont (2005) Besides the static effects, FTAs also bring about dynamiceffects that take a longer time to be exposed in the economy but tend to continue generatingbenefits overtime even after the withdrawal of a country from an FTA With thedevelopment of new-generation FTAs, they also promote cooperation in other areas such asproperty right protection, job creation and sustainable development

However, there are some challenges from FTAs that member nations should take intoconsideration, Vietnam is an example The study of Vo et al (2018) mainly emphasized thenegative aspects of EVFTA, showing the difficulties that Vietnam has to face in joining theFTA It is stated that the Vietnamese legal system was not yet capable of coping with many

changes Joining multiple FTAs simultaneously has brought many challenges forbusinesses and the Government in complying with the rules of origin and legal framework(Minh et al., 2018) Nguyen et al (2014) stated that anti-dumping policies had adverseimpacts on the volume and value of Vietnam's footwear exports, forcing many businesses

to shift their export targets from the EU to the United States market

2.2 EVFTA’s impacts on Vietnam’s economy and trade

Only a few papers have been published investigating the impacts of EVFTA on theVietnamese economy since data collection in developing countries has many limitations,such as the lack of available data for research purposes The EVFTA is a new-generationFTA signed between Vietnam and the 28 EU’s Member States

Phillip et al (2011), Baker et al (2014), and Nguyen (2014) examined the effects oftariff reductions under EVFTA on the entire Vietnamese economy, including domesticdemand, saving, investment, trade, employment, and state budget through using theComputable General Equilibrium (CGE) model and qualitative approach The first fourpapers focused on analyzing the effects of tariff reduction under the EVFTA on the wholeVietnam’s economy such as state budget, domestic demand, price, saving, investment,trade, employment and economic growth, and pointed out opportunities and challenges forVietnam while Vu (2015) used trade indicators such as Revealed Comparative Advantage,Export Specialization and Trade Inten-sity to anticipate the potential benefits and losses ofthe EVFTA Philip et al (2011) and Baker et al (2014) using the computable generalequilibrium (CGE) also tried to estimate changes in Vietnam’s imports from EU in severalsectors such as rice, garments, sugar, electronics, machinery, chemicals, transport andcommunication Nguyen (2014a) adopted the gravity model to estimate changes in overalltrade flows between two nations Philip et al (2011), Baker et al (2014) and Nguyen(2014a) provided qualitative analysis of current development of some sectors such asautomotive, electronics, garments, furniture, coffee and fisheries in the context ofupcoming EVFTA According to the findings, the agreement would increase Vietnam’sGDP growth rate from 2.7% to 3.7%, and exports would rise by an average of 4% per year

3 Background

3.1 EVFTA and Impacts of EVFTA on trade

The impacts of FTAs on trade have been widely accepted among many economists (Võ, LêQuỳnh and Hoàng Thu, 2018) By creating a more integrated trading area, FTAs eliminatetrade barriers on goods between member nations Thus, the agreement increases tradevolume among the member countries through trade creation and diversion effects - this isknown as the static impact presented by Viner (1950)

The trade creation effects arise from the fact that new trade is created as a result of thegreater purchasing power of consumers due to the lowering of tariffs Since the goods areoften obtained for cheaper prices because of the lack of restrictions and tariffs, consumerscan purchase the goods at a reduced price creates a redirection of the flow of goods to adifferent country that uses imported goods instead of those produced locally This bringsabout a better allocation of resources (Laird & Yeats, 1986)

Trade diversion refers to trade which is deflected from the most efficient supplier infavour of a country that is less efficient but which benefits from lower tariff barriers.Before FTAs, when a country applies the same tariff to all nations, it will always importfrom the most efficient producer, since the more efficient nation will provide the goods at alower price With the establishment of FTAs that may not be the case If the agreement issigned with a less-efficient nation, it may well be that their products become cheaper in theimporting market Consequently, the importing country would acquire products from ahigher-cost producer This leads to ineffective allocation of resources (Laird & Yeats,1986; Othieno & Shinyekwa, 2011).

Generally speaking, as Vietnam liberalizes its tariffs, it will experience trade creationwith the EU (where the EU will benefit from market opening) and trade diversion (wheretrade which originally was sourced from more efficient suppliers) will now enter Vietnam.The effects are relatively small overall, but significant for some sectors The size ofrevenue loss arising from reducing tariffs to zero is quite negligible for the selected sectors

Table 1 Revenue losses of different sectors after EVFTA takes effect

Sectors Revenue Losses

3.2 Fruits and Vegetables Sector Overview

3.2.1 Fresh Fruit and Vegetables

The area used to grow fruit and vegetables has been inexorably increasing in recent years(accounting for the bulk of cultivation area, at the average growth rate of 6%/year In 2020,Vietnam had about a total 2-million-hectare fruit and vegetable growing area, with a totaloutput of more than 25 million tons per year

Fruit trees: have reached 1.1327 thousand ha in 2021, an increase of 3.2% mainly in thegroup of citrus trees and groups of high value trees Fruits with large planting areas are:mango, durian, jackfruit, guava, avocado,…

Vegetable: in the two first quarters of 2021, the whole country has grown about 995,000 hectares of vegetables of all kinds (2019 - 996.000 hectares), with a yield of 186 quintals/ha and an output of 18.5 million tons From the beginning of 2021 until now, the output of vegetables of all kinds reached about 12.5 million tons, an increase of 2.2% over the same period last year Particularly in the South, the output is estimated at 7.2 million tons.

Vegetables with large planting areas are: potatoes, corn, cassava, peanuts, soybeans, leafyvegetables,…

Figure 1 Production of fruits & vegetables (in different areas in Vietnam)

Source: Vietnam Fruit and Vegetable Association (member of Vietnam Chamber of Commerce and Industry - VCCI)

3.2.2 Processed Fruit and Vegetables

Consumer demand in the domestic and export markets for processed fruits and vegetables are increasing Vietnam has developed a fruit processing industry, which now accounts for about 10%

of the country's total fruit production However, the processed fruit and vegetable industry has not yet received adequate attention and investment In particular, there are more than 150 standard fruit and vegetable processing enterprises with a capacity of more than one million tons of products per year In which, the rate of raw materials put into processing is low, only about 5 to 10%, average capacity utilization rate is 56.2% Popular processed fruit and vegetable products of Vietnam are dried fruit, fruit juice and canned vegetable juice.

In the long term, processed fruits and vegetables will still be a potential productcategory for economic growth because of their convenience and long shelf life Theconcentration on exporting of processed products will increase the export value of theentire fruit and vegetable industry, especially in the context of the complicateddevelopment of the Covid-19 epidemic in many countries and territories around the world

3.3 Overview of Fruits and Vegetables Trade Flows

3.3.1 Overview of Vietnamese fruits and vegetables exports

Export volume and value

Vegetables and fruits contributed to the total export turnover of 24 billion USD in the first half of the year of the whole agricultural sector

Fruits and vegetables exports of Vietnam have witnessed a steady growth over recentyears According to the Vietnam Fruit and Vegetable Association, in the first 6 months, thetotal export value of vegetables and fruits reached over 2.063 billion USD, up 17.7% overthe same period in 2020.

Figure 2 Total exports of Vietnam’s fruits and vegetable throughout the years

In 2020, due to the impact of COVID 19 pandemic, vegetables and fruits exportsdropped sharply as a result of the significant decrease in imports from China, a decline ofabout 25% compared to 2019 In the meantime, average total exports of all goods inVietnam still underwent a growth rate of 11% Clearly, fruits and vegetables are one of themost negatively affected sectors by the impact of COVID 19

Export market

Though Vietnam fruits and vegetables now are available in over 60 countries andterritories, the leading export market of Vietnam regarding this sector remains China,accounting for nearly 70% of Vietnam’s total fruits and vegetables exports

However, the structure of the export market for vegetables and fruits continued to have

a positive shift, gradually reducing dependence on the Chinese market, increasing theproportion of exports to demanding markets such as the EU, the US, the Korea and Japan.Until now, China is still the largest consumer market, accounting for 56% of Vietnam’stotal fruit and vegetable export value In the first 6 months of the year, fruit and vegetableexports to China reached over 1.25 billion USD, up 16.2% over the same period in 2020

Figure 3 Export Market Structure of Vietnam vegetables and fruits in 2020

Source: Ministry of Industry and Trade

3.3.2 Overview of Vietnamese fruit and vegetable imports

Import volume and value

Vietnam's fruit and vegetable imports have increased continuously in recent years Theaverage growth rate in the period 2013-2019 is 29.3%, especially turnover of fruit andvegetable imports in 2017 increased by 67% compared to 2016 In the period 2017-2019,the growth of Vietnam's fruit and vegetable imports did not witness any significant change

In 2019, import turnover of Vietnam's vegetables and fruits reached 1.78 billion USD, only

a slight increase of 2.0% compared to 2018

In 2020 and 2021, due to the impact of the COVID-19 pandemic, Vietnam's fruit andvegetable imports also decreased In the first 10 months of 2020, total import value ofvegetables and fruits was 1.04 billion USD, a decline of 30.9% over the same period in

2019 Import turnover of vegetables and fruits to Vietnam in June 2021 reached 117.66million USD, decreased by 0.2% compared to May 2021 and by 8% compared to June

2020 Generally for the first 6 months of 2021, the import turnover of vegetables and fruits

to Vietnam reached US$691.48 million, down 3.6% over the same period in 2020

Figure 4 Import turnover of vegetables and fruits of Vietnam in the period of 2013-2019

Source: General Statistics Office

In the first 6 months of 2021, Vietnam's fruit and vegetable imports from China reached196.97 million USD (accounting for a market share of 28.49%), a rise of 37.9% over thesame period in 2020; US reached 155.36 million USD (accounting for 22.47%), increased

by 4.8% over the same period in 2020; Australia reached 54.4 million USD (accounting for7.8%), a rise of 8% over the same period in 2020 Some imported items increased such asapples (a surge of 50.2% over the same period in 2020), grapes (increased by 50.2% overthe same period in 2020), grapes (a grow of 23.9%), strawberries (an increase of 32%); Onthe contrary, some imported items decreased such as chestnuts, almonds, bonbon, etc

4 Research methodology

4.1 Qualitative research approach

Qualitative research is also described as an unfolding model that occurs in a natural setting that enables the researcher to develop a level of detail from high involvement in the actual experiences (Creswell, 1994) Qualitative research can also be described as an effective model that occurs in a natural setting that enables the researcher to develop a level of detail from being highly involved in the actual experiences (Creswell, 2003) In this research paper, the group of authors decided to collect in-depth data from trade activities & import and export of

agricultural products of Vietnam, then used content analysis method to interpret from thedata collected and give recommendations on the outcomes.

4.2 Qualitative research methodology

Quantitative research in this study will not be able to give an overview as well asaccurately reflect the current status of trade activities and the effects of the EVFTA onimport and export of agricultural products in Vietnam Instead, qualitative research allowsthe research team to dig deeper by analyzing & selecting data from the available datacollection to achieve the highest objective analysis possible and involves identifying thebody of material to be studied and defining the characteristics or qualities to be examined

In this research paper, the group of authors analyzed the materials and put them in afrequency table as each characteristic or quality was mentioned Second, the researchersconducted a statistical analysis so that the results were reported in a quantitative format.The research report has 3 main sections: The Terms of the Agreement regarding Fruit andVegetable sector; Impacts of EVFTA on Vietnam’s Fruit and Vegetable Imports from theEU; Impacts of EVFTA on Fruit and Vegetable Exports from Vietnam to the EU

4.3 Data collection method

In this study, the collection of qualitative data is done through data study of the Department

of Trade - Ministry of Industry and Trade of Vietnam, General Statistics Office ofVietnam, data from International Trade Center, Report on import and export statistics offruits & vegetables from provinces and some other statistical sources The research teamcollects data based on 3 main timelines: Before, during and after Vietnam officially signed

& the EVFTA agreement was put into action The data included in the article were selectedbased on 3 criteria: timeliness, accuracy, relevance to the study

4.4 Data analysis method

Once the data was collected, duplicates were made to convert all the data from raw textinto documents Collected data has been arranged and hierarchical information Severalcitations obtained during data collection were selected to be used for direct citation in thestudy During data analysis, data taken from different sources is also compared andcontrasted to ensure accuracy and highlight similarities and differences

Qualitative data were discussed using content analysis because it supported thesystematic conversion of large amounts of text into an organized summary of key findings(Erlingsson & Brysiewicz, 2017) In addition, content analysis is a flexible reflectiveprocess to support research in the ongoing work with data to find connections andrelationships (Krippendor, 2004)

5 Results and discussion

5.1 The Terms of the Agreement regarding Fruits and Vegetables sector

It is vital to pay attention to the following terms while exporting Vietnamese fruits: Tariff barriers; rules of origin; and sanitary and phytosanitary (SPS) measures According to Chapter 2 of EVFTA - National Treatment and Market Access for Goods, the EU will eliminate tariffs immediately after the agreement enters into force (94% of the total 547 tariff lines), with the

majority of products currently subject to the 10% MFN rate and some with 20%; theremainder will be gradually reduced to 0% after 7–10 years.

After the EVFTA takes effect, the EU promises to eliminate tariffs on fruit products.EVFTA has been helping fruit products acquire a price competitive advantage since then.Meanwhile, the COVID-19 pandemic makes it difficult to reduce demand while alsoenhancing supply competitiveness; as a result, exports to markets in general, and the EU inparticular, are currently declining in the short term

The attraction of investment projects is another key development brought about by theEVFTA Agreement for Vietnam's agriculture sector It paves the way for technologytransfer and production organization, allowing Vietnamese fruits to boost output and exportquality while also meeting demanding EU industry standards

Before the EVFTA, Vietnamese fruit was more expensive in the EU than itscompetitors, but thanks to tariff reductions since the Agreement's implementation,importers are favoring Vietnamese products The tax incentives offered by the Vietnam-EUFree Trade Agreement (EVFTA) give Vietnamese fruits and vegetables a significant priceadvantage in the EU import market, especially in comparison to those from other countriesthat do not have an FTA with the EU, such as Thailand, China, Malaysia, and Indonesia.Vietnamese fruit has more potential to enter the EU market thanks to the EVFTA Agreement However, as previously stated, firms must overcome technical challenges, quality standards, food safety, and traceability to compete in this competitive global marketplace Low or no residue levels are required for all types of vegetables and fruits If the EU's rules are broken, products will be returned, affecting businesses and possibly Vietnam's import and export industries Traceability is required for fresh fruit and vegetable imports; hence the EU will need verification of origin for all fruits As a result, enhancing the quality of vegetables and fruits in Vietnam following the Agreement has garnered considerable attention.

In terms of import duties, Vietnam has committed to eliminating most levies on itemsimported from the EU Reduced tariff income in Vietnam will result in a significant andbetter supply of fruit products imported from the EU, meeting Vietnamese demand forquality and variety In addition, the decrease of numerous import and export tariff lines hasaided Vietnam in attracting more EU foreign direct investment (FDI)

Following the enactment of EVFTA, the agriculture industry in general, and thevegetables and fruit sector in particular, has focused on quality standards and packagingdesign in order to comply with not only EVFTA but also other FTAs It is because nostandardization only leads to unsustainable integration Furthermore, both the Vietnameseand EU governments have established numerous policies to nudge enterprises towardsexporting fruit, as well as rules to safeguard vegetables and fruits in order to protectdomestic businesses' market share It is apparent that the importance and implications of theEVFTA Agreement must be considered by not only enterprises but also Vietnam and the

EU as a whole

5.2 Impacts of EVFTA on Vietnam’s Fruits and Vegetables Imports from the EU

Regarding import duties of Vietnam, Vietnam commits to abolish most of the taxes on goods imported from the EU Reducing Vietnam’s tariff revenue will result in a larger and better

supply of fruit products imported from the EU, which will meet Vietnamese’s demand for

quality and diversity in the products After the EVFTA Agreement takes effect, Vietnam

commits to cut tariffs for fruits and vegetables imported from the EU Most of the fresh and

semi-processed vegetable products that Vietnam imports are: potatoes, garlic, peas, some

vegetables, olives, mushrooms, onions These products are imported because Vietnam is

not capable of producing them or can only produce at a limited level, which is not enough

to meet the needs of consumers In the EVFTA, Vietnam commits to eliminate import

tariffs within 6 years for all the products above and right after 01/08/2020 for seedlings of

these products imported from the EU

The fresh and semi-processed fruit products that Vietnam imports the most from the

EU are: tropical and temperate fruit products such as apples, kiwis, grapes, pears, plums,

apricots… In the top 10 groups of fresh and semi-processed fruit products (HS 6 numbers),

most of which are subject to MFN tax 2020 is 30%, only kiwi 7%, fresh grapes and fresh pears

(10%) According to EVFTA, Vietnam will eliminate tariffs for this group of products within 6

years, only kiwi tariffs will be cut immediately and fresh pears will be free of tariffs on a 4-year

schedule This is a group of fresh and semi-processed fruit products that Vietnam imports a lot and

tends to increase in recent years due to increased consumer demand Currently, Vietnam is

importing many tropical fruits and temperate from countries that have FTAs with Vietnam such as

Australia, New Zealand, Japan, Korea… According to EVFTA,

Vietnam will cut tariffs for fresh fruits imported from the EU and open more opportunities

for Vietnamese consumers to access these products at lower prices

Table 2 Comparison between EVFTA tariffs and average MFN tariffs for the top 10 fresh

and semi- processed fruit products that Vietnam imported from EU in 2019

Value

Average imported

Name of the product in 2020

(USD

2020 thousand)

eliminate after

10%

4 yearseliminate right

081190 Frozen fruit and nuts, uncooked or 438 eliminate after 30%