Vietnam ratified a landmark trade deal Monday with the European Union that is expected to energize the country’s manufacturing sector and exports, as it recovers from the impact of the coronavirus pandemic.

Lawmakers approved the agreement in their first National Assembly session since the pandemic began.

Members of Vietnam's National Assembly

The deal was signed in Hanoi last June and was ratified by the European Parliament in February.

When it takes effect next month, the EU will lift 85% of its tariffs on Vietnamese goods, gradually cutting the rest over the next seven years. Vietnam will lift 49% of its import duties on EU exports and phase out the rest over 10 years.

The implementation of the EU-Vietnam Free Trade Agreement “can’t come at a better time for Vietnam when it’s on the path of economic recovery after several months of closure due to COVID-19,” said economist Pham Chi Lan, a former adviser to several of Vietnam’s prime ministers.

Vietnam prioritized public health and safety when the coronavirus started to peak in China. It closed the border with China in January and with the rest of the world in February while imposing a social shutdown that lasted until the end of April. The tough measures contained Vietnam’s outbreak to just over 300 cases with no known deaths. No local infections have been reported for almost two months.

Still, the economy has been hit as the shutdowns at home and abroad restricted movements of goods and people.

The pandemic revealed shortcomings in Vietnam’s manufacturing sector. After Vietnam’s own factories reopened, output was constrained by a lack of supplies of materials from China. That was particularly true for textiles, footwear and electronics, the country’s key exports.

“COVID-19 has given Vietnam a hard lesson about being dependent on China,” Lan said. “It also showed other countries, including the EU, the negative impact of relying too much on China in their product value chain. The EVFTA (free trade agreement) comes in the right time as all parties realize they need to pivot and restructure to diversify the supply chain.”

Vietnam is the EU’s second-largest trading partner in Southeast Asia, with two-way trade reaching $56 billion last year, according to the national general statistics office.

The agreement with the EU is expected to improve Vietnam’s competitiveness, enhancing its attractiveness for investors shifting factories out of China.

Tiny Singapore is the only other country in Southeast Asia that has a free-trade agreement with the EU.

“EVFTA will add to the positive momentum drawing manufacturing to Vietnam,” said Michael Sieburg, a partner of YCP Solidiance, a corporate strategy consulting firm focusing on Asia.

“Manufacturers looking to locate in the region and seeking a more competitive access to EU markets will be more inclined to shift manufacturing to Vietnam as a result of EVFTA,” he said.

Foreign direct investment in Vietnam hit a 10-year high of $38 billion in 2019. About two-thirds of that went into manufacturing, and the agreement should help sustain that trend, Sieburg said.

Lawmakers also ratified a second pact that protects investors. Negotiated since 2012, it gives EU companies equal treatment with domestic bidders in competing for public contracts in Vietnam. Vietnam, a communist-ruled country, also committed to standards for sustainable development, including improving its human rights record, protecting labor rights and upholding its pledges to deal with climate change under the Paris accord.

Vietnam has agreed to similar pledges in a Pacific Rim trade deal called the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.

More than 30 years since carrying out economic reforms to integrate with the global economy, the country with a population of 95 million, is emerging as a manufacturing powerhouse.

But it has a long way to go, trailing far behind Singapore, Hong Kong and Malaysia, with a per capita GDP of about $2,600, or less than half that of Thailand.

The aim is to build ties with countries that have advanced technologies and good corporate governance, said Lan.

“The free trade agreement with the EU will help Vietnam raise its skills and standards. It is a great opportunity for Vietnam to excel,” Lan said.

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