This week the European Union took the final step in its procedure for approving the EVFTA/EVIPA trade deals with Vietnam. All that is left is for Vietnam’s National Assembly to give its opinion on the matter and the deal will, officially and finally, be sealed.

The EVFTA and EVIPA are the fruit of over eight years of negotiation between Vietnam and trade representatives of the European Union. The overall agreement consists of two parts, the free trade agreement (EVFTA)—which outlines the reduction of tariffs on goods and services between the two countries—and the investment protection agreement (EVIPA)—which codifies investment protections in each country and creates a dispute resolution mechanism for disputes regarding the two agreements and for investors whose rights as guaranteed by the agreements are violated by a host government—which work together to create one of the most liberal free trade agreements signed to date.

Signed last year and still in the process of receiving the final approvals from legislative bodies in the two countries, it is anticipated that the two agreements will enter into force sometime later this year. For Vietnam, these agreements mark the opening wide of an important and powerful trade partner while for the EU, this agreement—coming on the heels of their agreement with Singapore—is the next step in coming to terms with ASEAN as a whole market.

This article will examine the specifics of each agreement and outline relevant mechanisms that will affect investors and businesses across the two markets. It will first examine the EVFTA—though not looking at specific commitments in goods or services—and then the EVIPA and its mechanism for resolving investor / state disputes in relation to the two agreements.

EVFTA

The EVFTA is what it sounds like, a free trade agreement. According to the European Commission, it is the “most ambitious free trade deal ever concluded with a developing country.” It covers individual tariff commitments across almost all goods and services sectors as well as other aspects important to liberalized trade.

Ultimately, the bread and butter of the agreement is the near complete removal of all tariff barriers—over 99% of customs duties—on exports to both markets to be phased in over the next decade. In addition to tariff relief, the agreement addresses non-tariff barriers to trade such as compliance with and acceptance of international standard certifications. This is especially important in the motor vehicle and pharmaceutical sectors where Vietnam has required country-specific testing.

The agreement also opens each market’s government contracts to bidding by providers from the other market. Both markets will also make it easier for service suppliers to operate in the other’s territory, removing barriers to registration and certification.

One of the most important aspects of the agreement is Vietnam’s commitment to comply with international standards in several sustainable development sectors. From labor law to intellectual property, Vietnam will strive to improve its enforcement and compliance in order to protect EU investments in the country.

Finally, the EVFTA will open up some previously closed sectors to investment from the EU. These sectors include the manufacture of food, tires, and construction materials. And while the EVFTA provides the bulk of line-item commitments, perhaps the most innovative part of the combined treaties lies in the EVIPA.

EVIPA

The first substantial commitment of the EVIPA is the National Treatment clause. This is a common element in trade treaties, but it also creates a major guarantee for foreign investors from each of the parties. Both the EU and Vietnam agree to grant treatment to investors of the other party “no less favourable than that it accords, in like situations, to its own investors and to their investments.”

The other commitment here that harks back to the Unequal Treaty System in China is the Most Favoured Nation Treatment. This guarantees that both parties to the EVIPA will treat the investors from the other party at least as well as they treat investors from any other country. This means that if Vietnam enters into a trade treaty with, say, the United States, it cannot offer better terms than are included in the EVFTA without also granting those improved terms to investors from the EU.

Each party’s government, in treating with investors from the other party, must act fairly and equitably. De facto violations of this standard include the following actions by a government against investors from the other party:

(a)        a denial of justice in criminal, civil or administrative proceedings;

(b)        a fundamental breach of due process in judicial and administrative proceedings;

(c)        manifest arbitrariness;

(d)        targeted discrimination on manifestly wrongful grounds, such as gender, race or religious belief;

(e)        abusive treatment such as coercion, abuse of power or similar bad faith conduct;

Furthermore, the EVIPA guarantees that a party will not expropriate or nationalize an investment of an investor from the other party unless.

(a)        for a public purpose;

(b)        under due process of law;

(c)        on a non-discriminatory basis; and

(d)        against payment of prompt, adequate and effective compensation.

All of these elements must be met in order for the expropriation not to be in violation of the party’s commitments in the EVIPA. One party’s government cannot arbitrarily expropriate an investment of the other party’s investors without being in violation.

Finally, the EVIPA guarantees that investors may transfer funds cross border without restriction for most any legitimate purpose, and that an investor may transfer rights assigned to it under contract to any party of its choosing and that such subrogation will be recognized by the authorities of the host party’s government.

The above guarantees and commitments provide the basis upon which the dispute resolution mechanism is enforced. A violation of the above guarantees and agreements will trigger the dispute resolution mechanism and provide investors the ability to pursue reparations from the violating government.

The EVIPA provides for two types of dispute resolution. If one of the Parties violates the EVFTA the wronged party may proffer notice to the party perceived in violation and initiate consultation. Consultation may escalate to mediation. Mediation may escalate to arbitration. This is consistent with contractual relations and not terribly innovative as concerns Vietnam.

The second type of dispute resolution, however, is new to Vietnam and may prove a major driver for institutional change in the country. This mechanism is for disputes between investors and the party itself. This provides that, for example, an investor from Germany that invests in Vietnam may institute dispute resolution proceedings against the government of Vietnam for certain violations of the investment protections.

If one of the parties violates the investment protections set out in the EVIPA, then the investor may attempt negotiations with the government in violation. They are also, if the violation results in damages, to have attempted action in the courts in the territory of the violating party, however, if such a violation exists it is likely that the courts will not provide relief. Assuming such attempts at relief have been exhausted, the investor may sue for consultation with the party it deems in violation.

At any point in the process, the parties may turn to mediation. Mediation will not affect either party’s legal standing to pursue any other remedy available under the EVIPA.

Failing resolution through consultation, the investor may submit a claim. Claims are brought before the ICSID under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States. Using the Additional Facility Rules, an arbitration tribunal is established and procedures are followed according to UNCITRAL rules which will, eventually, lead to an arbitral award.

In order to implement this arbitration procedure, the parties equally fund the establishment of a nine-person tribunal that oversees the resolution of disputes between investors and a party. This tribunal shall be supplemented by an appeals tribunal, also set up and funded in cooperation between the parties.

This dispute resolution process creates an atmosphere to foster bilateral cooperation. It also protects foreign investors from one party investing in the other party from expropriation and other evils that have been seen commonly to occur. It is the first time that Vietnam has allowed for investor action against its government in an FTA and may well prove the beginning of a new era in FDI in Vietnam.