DISSERTATION THE EU VIETNAM FREE TRADE AGREEMENT (EVFTA) AND ITS IMPACTS ON VIETNAM FOOTWEAR INDUSTRY

MINISTRY OF EDUCATION AND TRAINING
FOREIGN TRADE UNIVERSITY

DISSERTATION
THE EU-VIETNAM FREE TRADE AGREEMENT
(EVFTA) AND ITS IMPACTS ON VIETNAM
FOOTWEAR INDUSTRY

Major: Master of International Trade Policy and Law

Student: Nguyen Khanh Chi
Supervisor: Assoc. Prof. Dr. Nguyen Thi Tuong Anh

Hanoi - 2016


I

ACKNOWLEDGEMENT
I would like to express my deepest appreciation to all people who gave
me help, support and encouragement so that I can complete this Master‟s
thesis.
First of all, I would like to show my heartfelt gratitude to my direct
supervisor, Ms. Nguyen Thi Tuong Anh, Assoc. Prof. Dr. Thanks to her care
and guidance, I could understand, develop and complete my thesis. From the
bottom of my heart, I wish all the best things will come to her.
Next, it is an honor for me to thank all professors of the International trade
law and policy program, Foreign Trade University in cooperation with the
World Trade Institute of Berne, Switzerland for the knowledge and support.
Finally, I owe my warm thanks to all members in my family and friends who
always supported and encouraged me to fulfill the thesis.

COMMITMENT
I hereby confirm that the thesis is my own research under guidance of
Assoc. Prof. Dr. Nguyen Thi Tuong Anh. Contents and result of the research
are true. Information and data, collected from various sources for analysis and
evaluation, have been stated in references of the thesis.
Student

Nguyen Khanh Chi


II

TABLE OF CONTENTS
INTRODUCTION .....................................................................................................1
CHAPTER I: THEORETICAL BASIS OF FREE TRADE AGREEMENT
AND INTRODUCTION TO THE EVFTA ............................................................6
1.1.

Theoretical basis of FTA ...............................................................................6

1.1.1.

Concept of the FTA ...................................................................................6

1.1.2.

Types of the FTA .......................................................................................7

1.1.3.

Main content of the FTA ...........................................................................9

1.1.4.

Role of the FTA .......................................................................................13

1.2.

Impact of a FTA on an industry and an economy of a country...............14

1.2.1.

FTA’s impact on member countries........................................................14

1.2.2.

FTA’s impact on an industry ..................................................................18

1.3.

Overview of the EVFTA ..............................................................................20

1.3.1.

Introduction to the EU ............................................................................20

1.3.2.

Context of the EVFTA .............................................................................21

CHAPTER II: IMPACTS OF THE EVFTA ON VIETNAM FOOTWEAR
INDUSTRY ..............................................................................................................31
2.1.

Overview of global and Vietnam footwear industry .................................31

2.1.1.

Circumstances of footwear industry in the world...................................31

2.1.2.

Background of footwear industry in the EU ...........................................34

2.1.3.

Situation of footwear industry in Vietnam ..............................................40

2.2.

Impacts of the EVFTA on Vietnam’s footwear industry .........................52

2.2.1.

Positive impacts ......................................................................................52

2.2.2.

Negative impacts.....................................................................................64

2.3.

General assessment ......................................................................................66

CHAPTER III: RECOMMENDATIONS FOR VIETNAM FOOTWEAR
INDUSTRY IN THE CONTEXT OF THE EVFTA............................................68
3.1.

Forecast of the world footwear situation ...................................................68


III

3.2. Orientation of Vietnam government towards development of Vietnam‘s
footwear industry ....................................................................................................72
3.2.1.

Orientation for Vietnam footwear industry ............................................72

3.2.2.

Orientation for Vietnam footwear supporting industry ..........................75

3.3. Recommendations for Vietnam’s footwear industry in the context of the
EVFTA .....................................................................................................................76
3.3.1.

For the government ................................................................................77

3.3.2.

For Vietnam footwear association .........................................................81

3.3.3.

For Vietnam enterprises .........................................................................83

CONCLUSION ........................................................................................................88
REFERENCES .......................................................................................................... i
APPENDIX ............................................................................................................ viii


IV

LIST OF TABLES
Table 2.1 Amount of footwear produced by Vietnam between 2012 and 2014 .......40
Table 2.2 Scale of Vietnam footwear industry (in 2013)..........................................41
Table 2.3 GSP rules of origin – Chapter 64 ..............................................................53
Table 2.4 Annex 4a of the EVFTA ...........................................................................53
Table 2.5 EU‟s tariff on shoes imported into the EU................................................56
Table 3.1 Shoes production and average growth, 2020 ............................................74


V

LIST OF FIGURES
Figure 2.1 World Top 10 footwear producing countries, 2015 (million pairs) ........31
Figure 2.2 World top 10 footwear consumers, 2015 (million pairs) ........................32
Figure 2.3 World top 10 exporters, 2015 (million USD) ..........................................32

Figure 2.4 World top 10 importers, 2015 (million USD) .........................................33
Figure 2.5 EU footwear exports, top ten EU countries (million USD).....................35
Figure 2.6 EU exports of footwear by leading countries (million USD) ..................36
Figure 2.7 EU footwear imports, top ten countries, 2011 -2015 (million USD) ......37
Figure 2.8 EU imports of footwear by leading countries (million USD) .................37
Figure 2.9. The EU‟s turnover of shoes imported from Vietnam (million USD).....44
Figure 2.10 Vietnam's top 07 imports in 11 months of 2016 (billion USD) ............45
Figure 2.11 Vietnam's top 07 imports from the EU in the first half of 2016 (million
USD)..........................................................................................................................46
Figure 2.12 Global value chain of footwear .............................................................47
Figure 3.1 Forecast of the world footwear development, 2011-2018 .......................69
Figure 3.2 Footwear retail sales through store, 2011-2018 (million USD) ..............69
Figure 3.3 Asia-Pacific footwear market forecast, 2011-2018 (million USD) .........70

LIST OF GRAPH
Graph 2.1 Smiling curve of Stan Shih ......................................................................63


VI

LIST OF ABBREVIATIONS
ASEAN
CITES

Association of Southeast Asian Nations
Convention on International Trade in Endangered Species of Wild
Fauna and Flora

CSR

Corporate Social Responsibility

EC

European Commission

EMAS

Eco-Management and Audit Scheme

ENs

EU Standardization and standards

EU

European Union

EVFTA

EU-Vietnam free trade agreement

FDI

Foreign direct investment

FTA

Free trade agreement

GATT

General Agreement on Tariffs and Trade

GPSD

General Product Safety Directive 2001/95/EC

GSP

Generalized Scheme of Preferences

IPRs

Intellectual Property Rights

LEFASO

Vietnam leather, footwear and handbag association

MFN

Most-favored-nation

MUTRAP

The Multilateral Trade Assistance Project

PCA

Partnership and Cooperation Agreement

REACH

Registration, Evaluation, Authorization and Restriction of Chemicals

ROOs

Rules of origin

SPS

Sanitary and Phytosanitary Measures

TBTs

Technical barriers to trade

UK

United Kingdom

US

United states

VCCI

Vietnam Chamber of Commerce and Industry

WTO

World Trade Organization


1

INTRODUCTION
1. Rationale
International economic integration and globalization which speed up bring
benefits and economic development for countries, on the basis of fair trade and
investment. With an increasing number of free trade agreements which Vietnam has
signed with other countries or regions, Vietnam has more favorable opportunities
for development of domestic industries, including footwear industry. Footwear
industry, among national key industries, is planned in Vietnam‟s export strategy to
the world market. Through footwear export activities, Vietnam has gained a
considerable amount of foreign currency. Exported footwear plays an important part
in Vietnam. Export turnover of footwear industry ranked fourth in Vietnam total
export turnover in the first eight months of 2016. Vietnam is the world‟s second
largest shoes exporter and third largest shoes producer in 2015.With rapid growth
and high export turnover in many years, Vietnam's footwear industry has exported
shoes to many countries and regions around the world, and become a partner of
various developed economies, especially the United State (US), European Union
(EU), Japan, Korea, etc. Among these export markets, the EU is considered to be a
large market with its potentiality of shoes expansion and development. Despite the
industry‟s development, there are still existing unfavorable factors affecting
sustainability of the industry‟s development, for example, backward technology,
unskilled workers, undeveloped supporting industry, etc. In the context of
participation in a free trade agreement (FTA) between the EU and Vietnam, it is
expected that the EU-Vietnam free trade agreement (EVFTA), a new generation and

comprehensive agreement will offer Vietnam footwear industry good chances to
open export markets. Therefore, it is necessary to study, forecast and evaluate
potential impacts of the EVFTA on Vietnam footwear industry. By implementing
these tasks, Vietnam government and relevant enterprises may foster efficient
footwear industry development as well as achieve short-term and long-term
objectives to actively promote Vietnam shoes‟ position in both export markets and
domestic market. Thus, it is decided that research of “The EU-Vietnam free trade


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agreement and its impacts on Vietnam footwear industry" will be implemented.
2. Literature review
The official negotiations of free trade agreement between Vietnam and the
EVFTA have been gaining attention from not only Vietnamese but also foreign
media, researchers and enterprises. Currently, there are a number of papers and
research reports addressing EVFTA-related issues from different perspectives such
as:
 “The free trade agreement between Vietnam and the European Union:
quantitative and qualitative impact analysis” report was published by The
Multilateral Trade Assistance Project (MUTRAP) team in October, 2011. The
research report was conducted by national and international experts under the
framework of MUTRAP III so as to assess possible impacts of the EVFTA on
Vietnam‟s economy in the future. In addition, the report analyzed the possible
impacts on Vietnam‟s key industries such as textile, footwear, electronics,
machinery and banking. It also provided recommendations for Vietnam to have
sustainable economic growth. In the matter of footwear, quantitative assessment
through SMART simulation methodology was used in the report to evaluate the
impact of the agreement on Vietnam footwear industry. The quantitative analysis
was implemented with four different scenarios and the results of the four scenarios

were that the FTA would enhance Vietnam‟s shoes export activities and promote
market shares of the country in the EU‟s market. However, it was mentioned in the
report that the impact of the EVFTA on domestic footwear industry might not fully
be evaluated since the author did not include in the assessment impact of institution
and regulation reform when the agreement came into effect.
 Vietnam Chamber of Commerce and Industry (VCCI) issued the report
“Vietnam enterprise community‟s recommendations on outlook of the EVFTA”
based on public opinions, researches of the chamber‟s Committee on International
Trade Policies and recommendations of relevant Vietnam industry associations in
2011. The report analyzed the benefits and disadvantages that the EVFTA might
bring to domestic economy and recommended FTA negotiation options which


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would be most beneficial for Vietnam. However, the report just provided general
recommendations for the country and did not cover specific recommendations for
Vietnam industries.
 The paper “Future Vietnam-EU free trade agreement (Vietnam-EU FTA): an
analysis of trade creation and trade diversion effects” of Nguyen Binh Duong and
Nguyen Thu Trang, co-author was released in 2014. In the report, the authors used
theory of trade creation and trade diversion in international trade to evaluate
impacts of EVFTA on Vietnam‟s welfare. With the usage of gravity model and
implementation of national data analysis, the report showed that when the EVFTA
took effects, application of tariff elimination or decrease would have positive
impacts on bilateral trade between Vietnam and the EU.
 In 2014, MUTRAP team announced “Sustainable impact assessment: EUVietnam FTA” report in 2014. The report presented an overview of overall impacts
from the Vietnam – EU FTA using standard framework to implement evaluation.
The report which was conducted per request of the Government of Vietnam used
quantitative methods (through economic modeling and data analyzing) and

qualitative methods (through surveys, consultations and research). It also listed a
number of opportunities and challenges that Vietnam footwear industry could meet
as well as provided some recommendations for the industry.
 In 2004, “Free trade agreement between the EU and Vietnam: difficult
partnership” paper of Rabea Brauer, Vu Dang Tuan and Natalie Frey analyzed the
benefits and challenges that the EVFTA might pose to Vietnam„s economy. It was
concluded that because the agreement might bring Vietnam more opportunities
(enhance trade relation with the EU, maintain its political position, etc.) than
challenges and challenges was supposed to be a part of the growth process that
Vietnam had to experience, it was necessary for Vietnam to enter a free trade
agreement with the EU.
 The paper “Vietnam-EU free trade agreement: Impact and policy implications
for Vietnam” was published by Nguyen Binh Duong on June 2016. The paper
evaluated effect of EVFTA on trade between Vietnam and the EU. With decrease of


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tariffs, trade between the two partners would experience positive effects from the
EVFTA. Opportunities and challenges from the EVFTA for Vietnam were also
mentioned in the paper.
With reference to the above-mentioned reports and papers, most of them
analyzed the impact as well as opportunities and challenges that the agreement
might create for Vietnam's economy. Among them, MUTRAP‟s report in 2011
evaluated the impact of the EVFTA on Vietnam footwear industry through
quantitative analysis. However, the assessment had limitations and did not fully
evaluate the impact of the agreement on the industry. MUTRAP‟s report in 2014
stated opportunities and challenges for Vietnam footwear industry after the
agreement was reached but the relevant content was very briefly.
In general, most of the documents focused on the agreement‟s overall impacts on

the national economy. They did not cover detailed analysis of possible impacts on
Vietnam footwear industry, or recommendations for the industry to take advantages
or overcome challenges provided by the EVFTA to promote Vietnam‟s footwear
export to the EU‟s market or promote the industry‟s position in the global value
chain.
3. Research purpose
First, study the impact of the free trade agreement between Vietnam and the
EU on Vietnam footwear industry, and;
Then, make recommendations to Vietnam enterprises, shoes association and
government so that they may take advantage of opportunities and overcome
challenges to boost footwear production for purpose of exporting to the EU market
and increase market share in promising domestic shoes market.
4. Scope of research
Subjects of the research are Vietnam footwear industry and the EVFTA.
Scope of the research is impact of the agreement on Vietnam footwear industry.
Period mentioned in the research is between 2011 and the first eight months of 2016


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of Vietnam footwear industry and after the EVFTA taking effect to see its impact
on the industry.
5. Research tasks
To achieve defined objectives, the thesis needs to solve the following tasks:
- Determining characteristics and main content of the EVFTA.
- Analyzing current situation of Vietnam footwear industry and assess the
impact of the EVFTA on the industry.
- Proposing recommendations for Vietnam government, footwear association
and enterprises in the context of the EVFTA.
6. Research methodology

In order to achieve the above purpose, the thesis will employ qualitative
research methodology. Main methods of carrying out the research include data and
document collection, synthesis, analysis and comparison.
7. Research structure
Apart from preamble, conclusion, list of tables, list of acronyms, references,
the thesis includes three following chapters:
Chapter I: Theoretical basis of free trade agreement and introduction to the
EVFTA.
Chapter II: Impacts of the EVFTA on Vietnam footwear industry.
Chapter III: Recommendations for Vietnam footwear industry in the
context of the EVFTA.


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CHAPTER I: THEORETICAL BASIS OF FREE TRADE AGREEMENT
AND INTRODUCTION TO THE EVFTA
1.1. Theoretical basis of FTA
1.1.1. Concept of the FTA
1.1.1.1. Traditional concept
The concept of traditional FTA can be seen in General Agreement on Tariffs
and Trade (GATT) 1947‟s subparagraph 8b and paragraph 5 of Article XXIV. In
subparagraph 8b, Article XXIV of GATT 1947, it is stated about free-trade area that
“A free-trade area shall be understood to mean a group of two or more customs
territories in which the duties and other restrictive regulations of commerce….are
eliminated on substantially all the trade between the constituent territories in
products originating in such territories.” In addition, Article XXIV:5 of GATT 1947
states that “…the formation of a customs union or of a free-trade area or the
adoption of an interim agreement…” Though Article XXIV provides only the
concept of the free-trade area, GATT 1947‟s ideas about free trade agreement might

also be seen in this Article as follows:
Firstly, member countries, joint a free-trade area, made commitments to reduce duty
and other trade regulations. Secondly, goods which were originated from the
member countries would be benefited from duty and regulation reduction. Thirdly,
it was because at that time of GATT 1947, trade relations between nations focused
mainly on handling goods, GATT 1947 mainly dealt with trade in goods.
In general, the concept of traditional FTA was mostly about trade in goods and level
of commitments was about duty or trade regulation reduction.
1.1.1.2. New concept
Scope and liberalization commitments of FTAs have been expanded since the
1990s. FTAs nowadays mention not only tariff reduction and non-tariff barriers, but
also other issues related to commitments under the GATT/ World Trade
Organization (WTO) and a wide range of new issues which WTO does not
regulations. New-generation FTAs cover new issues such as trade facilitation,


7

investment, government procurement, competition policy, non-tariff measures,
services, intellectual property rights, dispute settlement mechanism, labor, and
environment. In addition, they also include issues such as democracy, human rights,
and counter-terrorism. The concept of the FTAs, widely used today, no longer falls
within the narrow scope of bilateral or regional integration agreements which
weakly link with the economy. The FTAs mean economic integration agreements
between two or a group of nations. Moreover, there are also cases that the FTAs
may be called under many different names, for example, the Economic Partnership
Agreement. Although names are different, nature of the FTAs is unchanged (Trung
tam xuc tien dau tu, thuong mai, du lich, 2015).
1.1.2. Types of the FTA
Organizations and scholars, depending on their purposes of researches, will

base on different criteria to classify the FTA. However, two most common
classifications of the FTA may be based on number and type of signatories and by
level of integration (Trung tam xuc tien dau tu, thuong mai, du lich, 2015).
1.1.2.1. Based on number and type of signatories
Based on the number and type of FTA member countries, the FTA will be
divided into three types: bilateral FTA, regional FTA, and mixed FTA.
a.

Bilateral FTA

Bilateral FTA is an agreement which is negotiated and signed by two nations.
After signing the agreement, the two signatories will be bound by provisions
specified in the text of the FTA. In regard to the signatories, if they are WTO
member countries and are enjoying Most-favored-nation (MFN) treatment, market
access privilege and other benefits, joining bilateral FTA will help boost bilateral
trade between the nations. If one of them is WTO non-member, by participating in
the agreement, the non-member will receive MFN treatment, National treatment,
intellectual property right protection and other issues from the other. Moreover, by
participating in bilateral FTA, trade between member countries will be facilitated
and relevant issues will be solved quickly. Because bilateral FTA has only two


8

member countries, the process of conducting negotiation and reaching the
agreement is easier and quicker than that of regional or mixed FTA. Among types
of FTAs, Bilateral FTA is mostly signed by nations. Typical examples of this FTA
are FTA between Vietnam and Korea, Vietnam and Japan, etc.
b.

Regional FTA

Regional FTA is an agreement which is negotiated and signed by at least three
nations having close geographical locations. By joining regional FTA, nations may
take advantages of geographical locations and then can create a trading market to
enhance trade and tighten solidarity between nations and improve the position of
each country in the international market. It is because of numerous signatories with
different interests in Regional FTA, preparation period for this type of FTA is
longer than that of Bilateral FTA. The ASEAN Free Trade Area and European Free
Trade Association are examples of this FTA.
c.

Mixed FTA

Mixed FTA is an agreement signed between a free trade area and a
country/several countries/another free trade area. Mixed FTA which often has
complex negotiation is signed by member countries in the following ways:
 All member countries of a free trade area will together negotiate with a
country to reach consensus on the FTA.
 Each member of a free trade area will negotiate with partners separately.
Content of each negotiation then will be synthesized into that of the FTA.
Although mixed FTA is much complicated and takes more time than bilateral and
multilateral FTAs are, it can create a potential and diversified market for its member
states. The EVFTA and the Trans-Pacific Partnership are several examples of mixed
FTAs in the world.
1.1.2.2. Based on level of liberalization
Based on level of liberalization, the FTA may be divided into United States
FTA, European Union FTA and developing-country FTA.

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 United State FTA has the highest level of integration, which requires all
member countries to open their markets for all fields, including service sector unless
other provisions in the agreement regulate otherwise. In addition, MFN and
National Treatment will be applied and reduction of trade barriers is required in the
agreement. North American FTA is an example of this FTA.
 European Union FTA has a high level of integration. The EU FTA regulates
that member countries will open market for fields that they commit together or
separately. An example of this is the commitment of the EU to trade liberalization.
The EU will not make the commitment to liberalize trade related to agricultural
sector because this sector is very sensitive and protected by most of the EU member
states. Each EU member states has their own agricultural policies which are
developed suitably for their agricultural sector‟s characteristics.
 Developing country FTA has a lower level of liberalization than that of U.S
FTA and EU FTA. This type of FTA focuses more on liberalization of trade in
goods and rarely includes provisions on opening market in the areas of services,
investment and intellectual property rights for each other. ASEAN FTA is an
example of this type of FTA.
1.1.3. Main content of the FTA
1.1.3.1. Trade in goods
a.

Tariff

Trade in goods is one of major areas in which member countries take most
interests. Commitments on trade in goods will help countries expand their markets
and facilitate exports. The following content is the content of trade in goods which
is often agreed in an FTA. Tariff under the FTA is reduced more quickly and
considerably than that under WTO on the grounds that FTA parties focus only on

areas of interest. In accordance with Article XXIV of the GATT, parties
participating in the FTA must commit to abolishing tariffs on most trade facilitated
between parties. It is unofficially understood that the FTA will eliminate the tariff
on at least 90% of trade value and tariff lines within the period of ten years.


10

Commitments of member countries on tariff reductions under the FTA can be
divided into groups as follows:
-

Eliminate tariff immediately as the FTA takes effect;

-

Reduce tariff gradually to 0% based on tariff schedule;

-

Decrease tariff significantly in the first year and then gradually in the

following years;
-

Not reduce tariff in the first time but in the last years of roadmap; and

-

Make no commitment;

Besides tariffs, FTA parties can also make commitments on tariff quotas, especially
for sensitive agricultural products. While with import quotas, imports from FTA
partners will enjoy preferential tariff rates, imports outside the quota will be subject
to external tariff quota (in many cases are non-quota tariffs under the WTO). Apart
from import tariff, member countries may discuss and commit export tariff based on
their policy objectives in some FTAs (EU-MUTRAP, 2012).
b.

Sanitary and Phytosanitary Measures (SPS)

Sanitary and Phytosanitary measures are measures to ensure hygiene and food
safety for the purpose of protecting human health, animal and plant life against a
spread of pests, and infectious diseases, etc. While sanitary measures are related to
animal and human health, phytosanitary measures are related to plant health. Like
WTO Agreement, the FTA covers SPS provisions which contain rules and
standards in protection life of humans, crops, and livestock. SPS provisions also
contain an agreement on establishment of an SPS committee which will handle
issues related to SPS, its workflow, and responsibility. Other SPS contents in the
FTA are similar with that in WTO SPS agreements (EU-MUTRAP, 2012).
c.

Technical barriers to trade (TBTs)

Like WTO TBT Agreement, TBTs in an FTA are not imposed to require
member countries to change a level of protection or apply TBT international
standards which will substitute countries‟ standards. Instead, the FTA often


11

encourages member states to apply international standards in line with their national
conditions. TBTs are included in the FTA in order to ensure that regulations,
standards, testing process and certification do not create unnecessary obstacles to
commercial activities. Key issues which are covered in TBT chapter of the FTA
include: technical standards and regulations, conformity assessment procedures; list
of applicable international standards; transparency of regulations, standards and
conformity assessment procedures; agreement on TBT committee establishment,
workflow and responsibility; this committee; deadline for replying request of
information from concerned parties (EU-MUTRAP, 2012).
d.

Rules of origin

Rules of origin (ROOs) are set of regulations and standards which are used to
determine origin of goods. These rules are important in the FTA because goods
shall be entitled to enjoy preferential tariff treatment specified in the FTA only
when they meet requirements of these rules. ROOs also help prevent transfers of
one country‟s imports into customs territory of other countries which has lower
tariff so that the country later will transfer exports to other members. Besides
general ROOs (often regional value content), member countries also negotiate rules
on group conversion and ROOs according to specific items (EU-MUTRAP, 2012).
1.1.3.2. Trade in services
Content of trade in services in the FTA focuses on:
- Mainly comply and strengthen WTO key principles such as Most favored
nation treatment, transparency, domestic regulation, payments and transfers,
safeguard, subsidies, etc. and annex on some specific service industries (finance,
telecommunications, etc.);
- Schedule of commitments to open market;
In traditional FTAs, modes of supply related to trade in services are divided into

following modes: (a) Cross-border supply; (b) consumption abroad; (c) commercial
presence; and (d) presence of natural persons. In new-generation FTAs, modes of
supplies related to trade in services include only mode (a) and mode (b). While


12

mode (c) is included in investment chapter, mode (d) is covered in a separate
chapter on movement of natural persons. There are two approaches to liberalization
of trade in services. Firstly, only sectors/ subsectors of services listed in the
schedule of commitment will be liberalized. Secondly, sectors/ sub-sectors of
services that are preferred to be reserved in the schedule will be listed; remaining
sectors/ subsectors will be liberalized (EU-MUTRAP, 2012).
1.1.3.3. Customs and trade facilitation
In order to establish a fair and neutral system in determining value of imported
goods and support custom import management, provisions of Customs and Trade
Facilitation in the FTA are often specified. The provisions may cover requirements
for publicity of regulations on customs procedures, establishments of risk
management systems, prior notification of changes in regulations and procedures,
and management of information confidentiality; procedures for reviewing and
appealing decisions of customs; regulations on sanctions in case of procedure
violations, etc. The provisions are not only to identify and reduce trade barriers but
also to help enterprises collect information about other countries‟ import or export
regulations, and custom clearance procedures. Limiting bureaucracy at border
crossings and providing sufficient information to enable uncomplicated import
customs clearance will create favorable conditions for trade operations between
FTA member countries (EU-MUTRAP, 2012).
1.1.3.4. Investments
In the FTA, key issues of investment chapter are principles of national
treatment in investment sector; regulations on expropriation, compensation and

investment transfer; appointment of managers and board of directors; impacts of
investments on environment; principles of dispute resolution for investors‟
countries; arbitration agreements and procedures, principles of transparency in the
legal proceedings (EU-MUTRAP, 2012).
1.1.3.5. Intellectual Property Rights (IPRs)


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Intellectual property rights can be divided into two following types: copyright
and industrial property (including patents, industrial designs, trademarks and
geographical indications). Trademarks, geographical indications, copyright,
industrial property, enforcement in case of infringement, etc. are the key issue of
IPRs chapter in the FTA (EU-MUTRAP, 2012).
1.1.3.6. Dispute settlement
A dispute settlement mechanism is often mentioned in most FTAs which set
out scope of application and procedure and mechanism to handle disputes arising
during FTA implementation. The FTA covers such issues related to dispute
settlement between FTA member countries: regulations on conciliation; necessary
procedures to request arbitrator; model rules of litigation; and alternative measures
to settle the dispute, etc (EU-MUTRAP, 2012).
1.1.4. Role of the FTA
1.1.4.1. FTA helps promote economic integration
Regarding regional trade, FTA promotes formation of free trade area and
economic integration of member countries and gives countries advantages in
political and economic negotiations with other countries. In other words, free trade
agreements are important fundamentals of formation of free trade area and deeper
links between the member countries (Trung tam xuc tien dau tu, thuong mai, du
lich, 2015).
1.1.4.2. FTA creates opportunities for member countries

Benefits of the countries are clear when they take part in bilateral FTA. For
example, labour and material resources from developing countries may be taken
advantages by developed countries. Meanwhile, developing countries have
opportunities to penetrate markets of developed countries with preferential
conditions and increase foreign investment. In addition, the FTA will help countries
accumulate experience, then adjust reasonably to participate in the international
trade, and have more chance of success when they take part in bigger markets in the
future. FTA also helps countries‟ economy:


14

• Promote trade liberalization among member countries;
• Boost cooperation, investment and economic growth between countries;
• Strengthen innovation, reform and restructuring of economy in countries,
especially least developed countries and developing countries (Trung tam xuc tien
dau tu, thuong mai, du lich, 2015).
1.1.4.3. FTA is an important tool to promote strategic partnerships
• Apart from economic benefits, FTA can be an important tool for many
countries to implement security and political goals such as strengthening strategic
partnerships and ensuring national security. One example of this is FTA between
the US and countries in the Middle East such as Israel or Jordan. Although
economic benefits resulting from these agreements are small, they ensure security
and foreign economic policies of the US (Trung tam xuc tien dau tu, thuong mai, du
lich, 2015).
1.2. Impact of a FTA on an industry and an economy of a country
1.2.1. FTA’s impact on member countries
1.2.1.1. Positive impact
a. Economic impact
 Competition promotion

When the FTA is signed, barriers to trade will be reduced and a larger market
is opened. Enterprises will face tougher competition from both domestic and foreign
enterprises. Joining broader market will help enterprises expand their scale as well
as increase number of enterprises entering the market. Moreover, with a merger of
many smaller markets, the FTA will be formed. Therefore, the FTA may reduce
degree of monopoly when there are more enterprises from different member
countries joining the market and competing with each other. In the economy, an
increase in competition between enterprises could be a threat to domestic
enterprises which operate inefficiently. However, in regard to the whole economy,
the increase in competition will be a positive effect, especially for countries which
aim to develop their market economies. Development of competition between


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enterprises can bring benefits to the economy. Firstly, because of competitive
pressure, enterprises have to cut costs and increase sales, which helps reduce
distortions in the market and bring benefits for consumers. Secondly, enterprises
need to diversify their products so that they may compete with the others.
Consumers then will have large choices of which products they will buy. Thirdly,
while enterprises have to eliminate inefficient operations within their systems and
increase productivity, workers have to enhance their work performance to adapt
new working conditions which are more competitive and easier to lose their jobs.
Fourthly, member countries will reform their relevant legislation in order to achieve
a complete and reasonable legal system consistent with the process of liberalization.
 Investment promotion
Effect of investment promotion created by the FTA reflected in the creation of
a positive impact on the investment environment and investor behavior. Firstly,
when the FTA is formed, it can boost both domestic and foreign investment flows,
between FTA members and non-members. Secondly, the FTA promotes quality of

investors‟ business activities through enhancement of manufacture operations and
reduction in distortion of the investment environment. In regard to foreign direct
investment (FDI) inflows, because the FTA offers countries opportunities to access
a larger potential market with higher purchasing power, with such opportunities,
FTA member countries will attract new FDI flows into their countries. Furthermore,
the aim of FDI flows between FTA members is to take advantages of costs of inputs
or factors of production, e.g low costs of labor from other member countries in the
FTA. Afterward, when there is free trade agreement between individual countries
and a free trade area such as the EU, investors from FTA non-members will invest
in sectors of the individual countries, and then take advantages of the FTA to access
market of the free trade area. In this way, investors can avoid tariff barriers which
are set up differently by member states of the free trade area.
 Learning and transferring knowledge, technology and information
FTA provides opportunities to share and transfer their technology between
member countries, especially countries with different economic growth. In addition,


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by being partnerships with developed countries, a less developed country can learn
from the developed countries‟ policies, managerial experiences, and good practice,
later they will set up and complete their policies. With regard to enterprises, through
this process of economic integration, enterprises can also learn from other foreign
enterprises. Specifically, enterprises can apply practices in trade relations and
investments to improve efficiency, productivity, and profitability by observing
competitors, cooperating with suppliers and communicating with customers.
b. Non-economic impact
 Improvement of peace and security
It is said that countries want to join an FTA is not only because of their
economic goals, but they also aim at political and security goals. When two partners

have economic ties and conduct trade more often, it may increase trust between
parties, thereby reducing uncertainties in foreign relations. Therefore, a probability
of conflict may be reduced while political relations may be strengthened.
 Enhancement of reform in the member countries, especially developing
ones
When joining an FTA, under pressure from developed countries, developing
countries will make commitments on reform of their national policies and
institutions. It can be required by developed countries that developing ones need to
replace their old policies and institutions and accept free market. Formation of the
FTA also allows the members to maintain consistency in its policy regardless of
which leaders come to power. Without international commitments in the FTA, a
new government of a country can reverse foreign economic policy or have an
insufficient legal basis to sustain internal reform process of former government.
When there is a sudden change in policies of a country which investors intent to
invest in, investors may reconsider their investment decisions. Therefore, the
establishment of the FTA will allow member countries to have consistent and longterm international commitments and thereby increasing credibility of a national
business environment with investors.


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 Sovereignty maintenance
Effect on sovereignty maintenance is one of the main reasons why less
developed countries seek partnership with developed countries in the FTA. The less
developed ones which rely on their export may seek ways to ensure access to their
strategic export markets. They also find ways to obtain the highest legal
commitments from major markets such as the US, the EU and Japan. Taking part in
the FTA with major trade partners, less developed countries can avoid trade war
with these countries and even have their legal commitments on the market access.
By joining the FTA, they may ensure their sovereignty and trade benefits.

 Increase in bargaining power
Participating in bilateral or regional FTA helps member countries improve
their political power in the international market. A single country may not have a
strong political voice in the international market. However, when countries together
join an FTA, it can create a big union which will have much prestige and power in
the international market. Less developed members then can have greater bargaining
power in the international market than when they are single countries without
joining any FTA.
1.2.1.2. Negative impact
-Impact of non-tariff barriers
In the matter of trade liberalization, there will be negotiation on reduction or
elimination of trade barriers between FTA member countries. While tariff barrier is
often negotiated to be reduced immediately or eliminated over a period of time,
non-tariff barriers seem to be developed and used as an effective tool to protect
countries‟ domestic manufacture. When participating in FTAs with developed
countries, developing countries can face non-tariff barriers such as ROOs, technical
barriers to trade, customs procedures and trade remedies, etc. Developed countries
do not tend to reduce these barriers to trade. They, otherwise, increasingly establish
complex standards or strict requirements to ensure quality and safety of goods
circulating in their markets. If developing countries want their goods to enter


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developed countries‟ markets, they have to meet relevant standards/ requirements of
developed countries. This is one of the major challenges for developing countries to
overcome when joining FTAs with developed countries. Besides the abovementioned effects, FTA formation can cause another negative impact. It is FTA
member countries‟ sacrifice or disadvantages in some sectors in order to achieve
FTAs with other partners. Sometimes, due to disagreement between countries over
sensitive sectors, FTA negotiations are prolonged or even canceled.

In general, apart from benefits that the FTA brings to its member countries,
the FTA also creates some negative effects. However, in a comprehensive and longterm way, positive impacts that the FTA makes are greater than negative impacts.
Thus, nowadays, participating in the FTA has a great attraction for many countries.
The FTA is becoming a phenomenon around the world and is a cure-all for
countries when WTO multilateral negotiations are brought to a standstill.
1.2.2. FTA’s impact on an industry
1.2.2.1. Positive impact
The FTA can create the following possible impacts on industries of countries.
First, new generation FTA covers commitments between countries who signed
the FTA to offer each other preferences such as opening markets for goods,
services, investment, and tariffs. Relevant countries must conduct the FTA
commitments according to established schedule on the elimination of tariff and nontariff barriers with the aim of free trade are establishment. Therefore, the FTA will
establish a stable tariff preference mechanism for member countries‟ exports in the
long term.
Second, in reference to investment sector, commitments of an open investment
environment in the FTA will help promote FDI to member countries‟ key industries.
When the FTA is formed, it will strengthen economic ties between parties and
promote their economic efficiency. On that basis, countries can attract the attention
of foreign investors through open liberalization mechanism.