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TRƯỜNG ĐẠI HỌC NGOẠI THƯƠNGKHOA KINH TẾ QUỐC TẾImpacts of EVFTA on trade flows of fruits and vegetablesbetween Vietnam and the EUPham Thi Huong Ly Foreign Trade University, Hanoi, Vietnam Pham Thi Thuy Trang Foreign Trade University, Hanoi, Vietnam Dao Ngoc Phuong Linh Foreign Trade University, Hano...

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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 vegetables between Vietnam and the EU. The research follows a qualitative approach to analyze the agreement and its opportunities drawn on text and data analysis, as well as a literature review. This research has confirmed that there is a positive relationship between EVFTA and trade flows of fruits and vegetables between Vietnam and the EU. The report gives recommendations on trade flows of fruits and vegetables between Vietnam and the EU in the context of EVFTA.

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Keywords: EVFTA, import, export, fruit, vegetable 1. Introduction: The EU - Vietnam Free Trade Agreement (EVFTA) is a new generation FTA between Vietnam and the 28 EU member states. EVFTA has officially taken effect from August 1, 2020. With a wide range of commitments, deep liberalization and high standard commitments, the EVFTA is forecasted to have strong impacts on the entire economic situation as well as business activities of Vietnamese enterprises. Vegetables and fruits are one of the economic sectors that are forecasted to take the most benefits from EVFTA with opportunities opened up for both export and import and attract investment. To support Vietnamese fruit and vegetable enterprises to seize opportunities, realize potential benefits from EVFTA, new generation FTAs and their impacts are therefore primarily to be analyzed in this study. The methodological approach of this report is qualitative methods, which analyze the agreement and its opportunities drawn on text and data analysis, as well as a literature review. In this report, impacts of EVFTA 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 diversion effects, which were first clarified by Viner (1950) as a fundamental theory of international economic 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 trade liberalization. Consumers gradually shift from higher-priced domestic products to lower-priced products from other FTA members (Baier & Bergstrand, 2007). The formation of a creation FTA therefore promotes trade between member states, improves the efficient allocation of resources and create a greater specialization in producing comparative advantage goods. As a result, a creation of an FTA leads to the increase in consumer surplus and finally the welfare of member nations. On the contrary, a FTA can divert trade flows due to its nature of discrimination between member nations and non-member nations, resulting in resource misallocation. This statement has also been applied by many researchers such as Cline et al. (1978), Francois & Reinert (1997), Ju & Krishna (2000), and Cuyvers & Dumont (2005). Besides the static effects, FTAs also bring about dynamic effects that take a longer time to be exposed in the economy but tend to continue generating benefits overtime even after the withdrawal of a country from an FTA. With the development of new-generation FTAs, they also promote cooperation in other areas such as property right protection, job creation and sustainable development. However, there are some challenges from FTAs that member nations should take into consideration, Vietnam is an example. The study of Vo et al. (2018) mainly emphasized the negative aspects of EVFTA, showing the difficulties that Vietnam has to face in joining the FTA. It is stated that the Vietnamese legal system was not yet capable of coping with many 2

changes. Joining multiple FTAs simultaneously has brought many challenges for businesses 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 adverse impacts 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 the Vietnamese 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-generation FTA signed between Vietnam and the 28 EU’s Member States. Phillip et al. (2011), Baker et al. (2014), and Nguyen (2014) examined the effects of tariff reductions under EVFTA on the entire Vietnamese economy, including domestic demand, saving, investment, trade, employment, and state budget through using the Computable General Equilibrium (CGE) model and qualitative approach. The first four papers focused on analyzing the effects of tariff reduction under the EVFTA on the whole Vietnam’s economy such as state budget, domestic demand, price, saving, investment, trade, employment and economic growth, and pointed out opportunities and challenges for Vietnam while Vu (2015) used trade indicators such as Revealed Comparative Advantage, Export Specialization and Trade Inten-sity to anticipate the potential benefits and losses of the EVFTA. Philip et al. (2011) and Baker et al. (2014) using the computable general equilibrium (CGE) also tried to estimate changes in Vietnam’s imports from EU in several sectors such as rice, garments, sugar, electronics, machinery, chemicals, transport and communication. Nguyen (2014a) adopted the gravity model to estimate changes in overall trade 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 as automotive, electronics, garments, furniture, coffee and fisheries in the context of upcoming EVFTA. According to the findings, the agreement would increase Vietnam’s GDP 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, Lê Quỳnh and Hoàng Thu, 2018). By creating a more integrated trading area, FTAs eliminate trade barriers on goods between member nations. Thus, the agreement increases trade volume among the member countries through trade creation and diversion effects - this is known 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 the greater purchasing power of consumers due to the lowering of tariffs. Since the goods are often obtained for cheaper prices because of the lack of restrictions and tariffs, consumers can purchase the goods at a reduced price. creates a redirection of the flow of goods to a different country that uses imported goods instead of those produced locally. This brings about a better allocation of resources (Laird & Yeats, 1986).

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Trade diversion refers to trade which is deflected from the most efficient supplier in favour 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 import from the most efficient producer, since the more efficient nation will provide the goods at a lower price. With the establishment of FTAs that may not be the case. If the agreement is signed with a less-efficient nation, it may well be that their products become cheaper in the importing market. Consequently, the importing country would acquire products from a higher-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 creation with the EU (where the EU will benefit from market opening) and trade diversion (where trade 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 of revenue 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

Footwear

-1

Wood

-3

Fishery Handicrafts

-4 -4

Hi-Tech

-5

Agriculture Textiles

-6 -14

Agro-Processing

-51

Automotive

-130

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 total output 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 the group 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. 4

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

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 product category for economic growth because of their convenience and long shelf life. The concentration on exporting of processed products will increase the export value of the entire fruit and vegetable industry, especially in the context of the complicated development 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. 5

Fruits and vegetables exports of Vietnam have witnessed a steady growth over recent years. According to the Vietnam Fruit and Vegetable Association, in the first 6 months, the total export value of vegetables and fruits reached over 2.063 billion USD, up 17.7% over the 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 exports dropped sharply as a result of the significant decrease in imports from China, a decline of about 25% compared to 2019. In the meantime, average total exports of all goods in Vietnam still underwent a growth rate of 11%. Clearly, fruits and vegetables are one of the most negatively affected sectors by the impact of COVID 19. Export market Though Vietnam fruits and vegetables now are available in over 60 countries and territories, 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 the proportion 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’s total fruit and vegetable export value. In the first 6 months of the year, fruit and vegetable exports to China reached over 1.25 billion USD, up 16.2% over the same period in 2020.

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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. The average growth rate in the period 2013-2019 is 29.3%, especially turnover of fruit and vegetable 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 and vegetable imports also decreased. In the first 10 months of 2020, total import value of vegetables 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 117.66 million 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.

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Figure 4. Import turnover of vegetables and fruits of Vietnam in the period of 2013-2019 Source: General Statistics Office Import market Before 2014, China was always the largest fruit and vegetable import market of Vietnam. From 2014 to 2019, Thailand became the number one fruit and vegetable supplier in Vietnam. However, in the first 10 months of 2020, the import of vegetables and fruits from Thailand only reached nearly 45 million USD (decreased by 80% over the same period). Therefore, the largest fruit and vegetable supply to Vietnam in 2020 was China. In the first 6 months of 2021, Vietnam's fruit and vegetable imports from China reached 196.97 million USD (accounting for a market share of 28.49%), a rise of 37.9% over the same 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 for 7.8%), a rise of 8% over the same period in 2020. Some imported items increased such as apples (a surge of 50.2% over the same period in 2020), grapes (increased by 50.2% over the same period in 2020), grapes (a grow of 23.9%), strawberries (an increase of 32%); On the 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 8

agricultural products of Vietnam, then used content analysis method to interpret from the data 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 as accurately reflect the current status of trade activities and the effects of the EVFTA on import and export of agricultural products in Vietnam. Instead, qualitative research allows the research team to dig deeper by analyzing & selecting data from the available data collection to achieve the highest objective analysis possible and involves identifying the body 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 a frequency table as each characteristic or quality was mentioned. Second, the researchers conducted 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 and Vegetable sector; Impacts of EVFTA on Vietnam’s Fruit and Vegetable Imports from the EU; 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 of Vietnam, data from International Trade Center, Report on import and export statistics of fruits & vegetables from provinces and some other statistical sources. The research team collects 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 selected based 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 text into documents. Collected data has been arranged and hierarchical information. Several citations obtained during data collection were selected to be used for direct citation in the study. During data analysis, data taken from different sources is also compared and contrasted to ensure accuracy and highlight similarities and differences. Qualitative data were discussed using content analysis because it supported the systematic conversion of large amounts of text into an organized summary of key findings (Erlingsson & Brysiewicz, 2017). In addition, content analysis is a flexible reflective process to support research in the ongoing work with data to find connections and relationships (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 agre...