CHAPTER 2: SITUATION ANALYSIS OF VIETNAMESE AGRICULTURAL PRODUCTS’
2.1.1. Analysis of macro environmental factors
The EU operates on its own legal personality and orders separate from international law. This is also equivalent to the fact that the national law and the legal system of each member state will also be directly or indirectly affected by the EU law.
In order to govern the EU, there are several major political institutions that exist alongside one another: European Parliament (elected by and represents the EU’s citizens), the European Council (consists of the Heads of State or Government of the EU Member States), the Council (represents the governments of the EU Member States, and the European Commission (represents the interests of the EU as a whole) (European Commission. Directorate General for Agriculture and Rural Development., 2021).
Owning to the close linkages between the institutions and the member states, overall, the EU has political stability in the region.
By 2020, the EU has achieved its goal: to ensure a wide consumer market for goods. With the EU’s main economic engine being a single market, the union strives to enable goods, services, money and people to move freely so that Europeans can gain maximum benefit from it. The economic policies set forth by the EU are aimed to improve the business environment and at the same time allow businesses to access the markets more easily, creating favorable conditions for businesses conducting business in the EU market in general as well as businesses in the agricultural products market in particular to have a basis for development in this area.
As tariffs play a very important role in determining the prices of goods in the market as well as the decision to penetrate the market, it is definitely necessary for Vietnam to understand the tariff levels and relevant regulations. While this is the union with many member states, the EU still has uniform regulations on tax policy. To clarify, the governments of the coalition members are free to establish tax laws in accordance with their commerce and overall national priorities, however, they must still respect and follow basic principles of the EU, such as non-discrimination and respect for the free movement of goods and services on the single market. In the case of the EU, it can be reasoned that there will be no need to pay customs duties when goods are transported from one state member to another within the union.
Graph 2.1: EU simple average applied MFN tariffs (in percentage)
Source: WTO, EU Trade Policy Review (2019) One of the most distinct features of the EU is also the formation and signing of free trade agreements (FTAs). According to a report by the (European Commission, 2021c), the union’s trade with the 67 trading partners amounted to €1,167 billion (32.0%
of EU total external trade). Though the severe impact on the economy of the COVID-19 pandemic caused the trade with the preferential partners fell by 9.1%, there were notable exceptions, for example, an increase in pharmaceuticals exportation. Agri-food trade with preferential partners also grew by 2.2% with agri-food exports under preferential agreements grew by 1.8% and imports grew by 2.7%. In addition, the signing of enhanced trade agreements opens up opportunities for businesses doing business in the EU market to develop and prevent unfair competition from outside the EU.
For Vietnam, the newest agreement called EVFTA, a Trade Agreement and an Investment Protection Agreement signed between the EU and Vietnam on June 30, 2019.
The EU is one of the largest export markets for Vietnam's agricultural products (European Commission, 2021b). The EVFTA is considered a great opportunity for Vietnamese agricultural products to integrate deeply into large European markets with
high selling prices but this also poses a challenge that requires manufacturing and exporting enterprises to change more dramatically towards sustainable export growth in this so-called “hard to please” market. Vietnam is gaining long term advantages with EVFTA as well since the country will now apply the same import requirements to products coming from all EU Member States but for approved categories of products, Vietnam will now automatically allow imports from all of the establishments without prior individual inspections. And also on a good note, EVFTA officially taking effect will help to reduce taxes on some agricultural products to 0% in the 5-10 years roadmap (European Commission, 2021a). Vietnamese rice has relatively high import duties ranging from 5% to 45%, depending on the variety. Some EU member states even impose a 100% or greater import duty on Vietnamese rice. However, rice is exempt from taxes under the EVFTA, and if Vietnam uses the option of exporting its 80,000-ton quota, export turnover may treble compared to current levels (Asia News Monitor, 2020).
Progressive elimination of customs duties for representative agri-food products when exporting from Vietnam to the EU, including
After EVFTA
Tax rate Quota Customs duties’
elimination time
Rice 0%
(within quota)
The total quota is 80,000 tons/year, specifically:
- Unmilled rice: the quota is 20,000 tons/year
- Milled rice: the quota is 30,000 tons/year
- Fragrant rice: quota is 30,000 tons/year
Broken rice: 5 years Products made of rice:
3-5 years
Coffee No tax - EVFTA comes into
effect
Sugar 0%
(within quota)
- White sugar: 10,000 tons/year
- Products containing more than 80% sugar: 10,000 tons/year,
EVFTA comes into effect
Natural honey No tax - EVFTA comes into
effect Fresh/processed
vegetables and fruits, juices, fresh flowers
No tax - EVFTA comes into
effect
Other agricultural
products
0%
(within quota)
- Processed poultry eggs:
500 tons/year
- Garlic: 400 tons/year - Sweet corn (except those with a core diameter of 8 mm or more but
no more than 12 mm): 5,000 tons/year
- Tapioca starch: 30,000 tons/year
- Mushrooms: 350 tons/year - Ethyl alcohol: 1,000 tons - Some chemical products (mannitol, sorbitol, dextrins etc.): 2,000 tons
EVFTA comes into effect
Table 2.1: Progressive elimination of customs duties article of EVFTA for representative agricultural products (2020)
Source: VCCI (2020) In short, with the political and legal environment with many favorable conditions as above, when participating in the European Union, agricultural manufacturers will be treated equally and are subjected to the same rules and procedures in order to do business most efficiently. Especially with EVFTA and policies on international trade, the EU
market will also help businesses benefit and thrive from a transparent, advantageous business environment in the EU.
2.1.1.2. Economic environment
The EU can be assessed as one of the largest trading powers and one of the most open economies in the world though the alarmingly rapid spread of the Omicron variant continues to shape the economic outlook of the EU. According to Eurostat (2022), the GDP of the EU grew by 5.2% for 2021, following a record-breaking recession in 2020 (Graph 2.2). The GDP stood at just over $17 trillion, regaining its pre-pandemic size and accounts for about 1/6 of the global economy and making it the third largest economy in the world. world, after the US and China. One of the signature features of the EU is the issue of its own currency, the euro, which is currently used by more than 340 million people in 19 member countries and generally the official currency in 25 countries. The euro is also known as the second largest reserve currency and also ranks second in international transactions after the US dollar.
Graph 2.2: Real GDP per capita from the European Union - 27 countries (as of 2020) (in percentage)
Source: Author’s comprisal from Eurostat data The COVID-19 pandemic stroke and left enormous impacts upon the EU’s economy, causing the steepest decrease in output in Europe’s post-war history. By mid-
2020, the primary income of households had declined by 7.3% over the same period (European Investment Bank, 2021). Data from the European Investment Bank’s Investment Survey (EIBIS) also reveal the often uneven effects of the epidemic on firms as 49% of EU firms suffered a drop in sales due to the pandemic, compared to 21% that showed an increases and losses at firms were concentrated in areas such as transport, in addition to hotels and restaurants. However, with the EU government bodies’ timely responses, the countries were able to absorb most of the income lost by households because of the pandemic, and to prevent companies from going out of business. Using policy support, the EU was able to weaken the impact of COVID-19 to the economy in general as firms that received policy support experienced a significantly more tamed loss of revenue. Though, it is noted that this intervention came at the cost of rising public debt, which poses potential risks for the future, particularly in EU members that were already more indebted (European Investment Bank, 2021).
One more variable that needs to be taken into account is the war against Ukraine that Russia started having considerable economic consequences for the EU and according to Pisani-Ferry (2022), alarming to leave a long-lasting legacy shaping Europe's priorities and policy choices for years and decades to come. With Russia being a supplier for about 40% of gas and a third of its oil imports for the EU, the union’s energy and related prices are rising and predicted to continue in the near future (Espiner, 2022). This prompts the EU to rethink their wholesale electricity pricing system, which currently applies for the energy sources by gas prices, making the supply chains and logistics system in the EU prone to major adjustments in the future.
For the EU’s economic structure, service is by far the most important sector making up 74.7% of GDP, next up is manufacturing industry with 23.8% of GDP and agriculture with only 1.5% of GDP. With a low percentage, the figures showed that the demand for agricultural products import in the EU is fairly prominent.
According to data from the General Department of Customs (2021), the total export turnover of Vietnam's main agricultural products to the EU market in 2021
reached about 2.2 billion USD and increased by 10.1% over the same period in 2020.
Especially with EVFTA, Vietnam is gaining large advantages in terms of trade such as having the elimination of 99% of all tariffs, the reduction in regulatory barriers and overlapping red tape etc. These are important prerequisites for Vietnam's agricultural product industry to boost exports, build brands, and expand market share in European markets.
2.1.1.3. Natural environment
According to the research of Selin and VanDeveer (2015), the EU has one of the highest environmental standards in the world. The union has established a variety of environmental policies in order to become more environmentally friendly, protect its natural resources as well as the health of its citizens.
However, in recent years, experts have declared that centuries of exploitation have taken a massive toll on Europe’s biodiversity. According to the European Union Habitat Directive and the European Environmental Monitoring Agency (European Commission, 2020), coastal habitats, sand dunes, bogs and mud are severely degraded.
In the last ten years, despite the common EU objectives, there has been little evidence of an improvement in the habitat of natural organisms. This resulted in the EU’s decision to further direct their focus to the forest land area as the union is planning to continue their increase to surpass the agricultural areas up to 2031, due to their important role in the battle against climate change and the conversion for the EU’s deteriorating natural habitat. According to the European Commission. Directorate General for Agriculture and Rural Development. (2021), total utilized agricultural area is projected to slightly decline over the outlook period, to 160.5 million hectares in 2031. Alongside the decision to concentrate on the forest area, the reduction is also due to the downward trend of yields making production in the EU.
It is also worth noting down that demand for feed from arable crops is expected to decrease in the EU. Alongside, there’s also the decline in herds of EU pigs, beef and milk as the population is more conscious of their personal health and eating habits. This
causes an increase in organic production, as well as the expansion and diversification of organic production. The increase in the feed ration of proteins coming from grass with the area dedicated to organic production is also expected to reach 15% of the total agricultural land by 2031.
With the decline in the EU’s arable crops as well as the high demand in organic agricultural products, this poses a great opportunity to Vietnam’s agricultural products’
penetration into the market. Having such an advantageous market, this period will be a fairly ideal circumstance for Vietnam to further increase the market’s share as well as promote consumption and boost distribution activities, making a mark by catering our quality agricultural products.