Documents considered by the Committee on 15 May 2019 Contents

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3EU-Vietnam trade agreement and investment protection agreement

Committee’s assessment	Legally and politically important
Committee’s decision	Not cleared from scrutiny; further information requested; drawn to the attention of the International Trade, Committee on Exiting the European Union and the Foreign Affairs Committee
Document details	(a) Proposal for a Council Decision on the signing, on behalf of the EU, of the Free Trade Agreement between the EU and Vietnam; (b) Proposal for a Council Decision on the conclusion of a Free Trade Agreement between the EU and Vietnam; (c) Proposal for a Council Decision on the signing, on behalf of the EU, of the Investment Protection Agreement between the EU and its Member States, of the one part, and Vietnam, of the other part; (d) Proposal for a Council Decision on the conclusion, on behalf of the EU, of the Investment Protection Agreement between the EU and its Member States, of the one part, and Vietnam, of the other part
Legal base	(a) and (b): Articles 91, 100(2), 207 and 218(11) TFEU (in accordance with Opinion 2/15 of the Court of Justice of the EU issued on 16 May 2017), in conjunction with 218(5) (on signing) and 218(6) TFEU (on conclusion) (c) and (d): Article 207 TFEU (in accordance with Opinion 2/15 of the Court of Justice of the EU issued on 16 May 2017), in conjunction with 218(5) (on signing) and 218(6) TFEU (on conclusion)
Department	International Trade
Document Numbers	(a) (40137), 13312/18 +ADDs 1–12, COM(18) 692; (b) (40136), 13313/18 + ADDs 1–12, COM(18) 691; (c) (40135), 13314/18 + ADDs 1–2, COM(18) 694; (d) (40134), 13315/18 + ADDs 1–2, COM(18) 693

Summary and Committee’s conclusions

3.1In October 2018, the Commission presented two separate agreements that will govern future EU trade and investment relations with Vietnam, in line with the Commission’s new approach to the architecture of free trade agreements (FTAs):

• an ‘EU-only’ FTA, which aims to eliminate over 99% of all bilateral tariffs (with 65% of duties being eliminated at entry into force of the agreement and the remainder over a 10-year period), removes non-tariff barriers in goods and services trade, and includes provisions on intellectual property protection, investment liberalisation, public procurement, competition and sustainable development. It requires the approval of the Council and European Parliament only (and not Member States) and is expected to enter into force late 2019/early 2020; and
• a ‘mixed’ investment protection agreement (IPA), which aims to establish a common framework for investment protection and dispute settlement, including a new Investment Court System (ICS). As mixed agreements need to be ratified by individual Member States (including in some instances approval by their national parliaments in line with their own domestic procedures), the process tends to take several years and is therefore highly unlikely to come into effect before the end of any transition/implementation period. Once ratified by all parties, it would replace the existing 21 bilateral investment treaties (BITs) between Vietnam and EU Member States.

3.2Following consideration of the Government’s Explanatory Memorandum of 5 November 2018 on the proposed FTA and Explanatory Memorandum of 5 November 2018 on the proposed IPA at its meeting on 19 December 2018, the Committee:

• noted that these agreements raise significant legal and policy issues for the UK, regardless of the Brexit ‘endgame’ (i.e. ‘no deal’ withdrawal or negotiated withdrawal with a transition period and backstop) as they will impact the continuity of UK-Vietnam trade relations and the UK’s approach to investment protection and dispute resolution with Vietnam after UK exit; and
• sought further information from the Minister of State for Trade Policy (George Hollingbery MP) on the implications of the proposals for the UK in all foreseeable Brexit scenarios, in particular the continuity of the proposed FTA post-exit, its expected potential benefits for UK stakeholders and the Government’s approach to investment protection and dispute resolution after exit.

The Minister’s letter of 25 February 2019 and the Government’s Impact Assessment of 29 March 2019

3.3The Minister’s letter of 25 February 2019 responds in part to the outstanding queries raised by the Committee on 19 December 2019. On 1 April 2019, the Minister notified the Committee of the publication of the Government’s impact assessment of the proposed EU-Vietnam FTA and externally commissioned analysis. The key points are summarised below.

EU-Vietnam FTA

No deal (non-negotiated) exit from the EU

3.4In response to the Committee’s request for the Minister to share the Government’s intended approach to future trade relations with Vietnam in the event of a no-deal exit, the Minister stresses that as “part of the Government’s priority to ensure continuity of all existing EU FTA agreements”, it would seek to replicate the effects of the EU-Vietnam FTA in a no deal scenario, as it would in a deal scenario. He stresses that the only practical difference is that in a no deal scenario the Government would aim for the replicated bilateral [UK-Vietnam] agreement to “enter into force at the same time as the EU-Vietnam FTA or soon after”, whereas in a deal scenario, it would be replicated at the end of the transition/implementation period “as “the UK would continue to be covered by the EU-Vietnam FTA until this time”.

Negotiated withdrawal from the EU

a) During any transition/implementation period (including possible extension) and/or if the backstop applied as provided for the in draft Withdrawal Agreement

3.5At its meeting on 19 December 2019, the Committee noted that if the EU-Vietnam FTA enters into force during the transition/implementation period, the UK would be bound by the FTA obligations, but sought clarification on whether and how it would secure the benefits (notwithstanding the ‘EU notification’, as set out in the draft Withdrawal Agreement, that the UK is to be treated as a Member State for the purposes of international agreements during the transition/implementation period).

3.6The Minister states that:

• he is confident that EU notification, as described in the Withdrawal Agreement “means that the UK will be bound by the FTA obligations and will also secure the benefits”; it therefore “provides certainty and confidence that there will be no disruption to existing relationship underpinned by international agreements” during the transition/implementation period; and
• the Vietnamese Ministry of Industry has publicly confirmed9 that Vietnam “would apply the EU-Vietnam FTA to the UK during any transition/implementation period” (once it has entered into force).

3.7In response to the Committee’s question on how the backstop, if applied, will impact the UK’s obligations and benefits under the EU-Vietnam FTA and its ability to negotiate a future trade deal with Vietnam, the Minister states that “the UK would be able to negotiate, sign, ratify and implement its own trade deals, but those elements of that affect the functioning of the backstop would need to be aligned with the EU until we [the UK] moved to the future partnership”.

b) Post-transition/implementation period

3.8In response to the Committee’s questions on when/whether the Government intends to negotiate a new bilateral UK-Vietnam trade agreement and its level of ambition, the Minister:

• states that “Vietnam has agreed to replicate the effects of the EU-Vietnam FTA once it ceases to apply to the UK” and that “DIT officials are currently in discussion with Vietnamese officials to achieve this”;
• concedes that the Government does not intend to “run negotiations on a more ambitious UK-Vietnam FTA in parallel to negotiations for the future UK-EU relationship” as its “priority is to replicate the EU-Vietnam agreement, whose provisions are deep and comprehensive”.

The Government’s Impact Assessment

3.9In his letter of 25 February 2019, the Minister states that his Department commissioned external analysis on the impacts of the EU-Vietnam FTA on the UK at a macroeconomic and sectoral level compared to the agreement not being in place (i.e. compared to the baseline where the EU-Vietnam FTA is not implemented and the EU28 continue to trade with Vietnam on WTO most favoured nation (MFN) terms and Vietnam trades with the EU28 under the EU’s Generalised System of Preferences (GSP)—a lower tariff rate than the MFN rate). He highlights that it does not consider how impacts on the UK economy may change “under different UK-EU trading relationships” as he considers “this outside the scope of the proposed Council Decision”.

3.10The Government’s impact analysis was formally published on 29 March 2019. It assumes that the EU-Vietnam FTA will enter into force by late 2019, that the effects of the agreement will be replicated bilaterally with Vietnam once the UK leaves the EU without changes to rules of origin and that the EU and UK continue to trade on current terms. It estimates that by 2030 (compared to the baseline of no EU-Vietnam FTA), the proposed FTA would:

• increase the UK’s annual GDP by £391 million (or 0.01 per cent) and Vietnam’s annual GDP by £1.6 billion (or 1.2 per cent);
• increase overall national welfare by £293 million per annum;
• increase UK exports to Vietnam by £486 million per annum—predominantly in UK services sectors; and
• increase UK imports from Vietnam by 1.7 billion per annum—with the main increases in textiles, leather and motor vehicle parts.

EU-Vietnam IPA

3.11At its meeting on 19 December 2019, the Committee noted that the Government’s assessment that the proposed IPA is “unlikely” to enter into force “before the UK leaves the EU” and asked the Minister:

• to confirm that the UK intends to vote in favour of the Council Decisions on signature and conclusion of the IPA and to set out its reasons for doing so, including its position on the proposed ICS; and
• for urgent clarification on its approach to investment protection and dispute resolution agreements after 29 March 2019 (the original exit date).

3.12The Minister:

• confirms the Government’s intention to vote in favour of the proposed IPA proposals on the basis that it will “continue to support the EU’s ambitious trade agenda and remain a constructive partner as a Member State of the EU”;
• notes that the UK-Vietnam BIT will remain in place and in force until the EU-Vietnam IPA is ratified (which is unlikely to enter into force for several years);
• states that the UK would not be bound by the proposed IPA if it enters into force during the backstop “as Article 129 of the Withdrawal Agreement on the continued application of the EU’s international agreements to the UK only applies during the implementation period”;
• declines to share the Government’s position on the proposed ICS, stating it “would be premature to comment further” on the basis that “the system is not yet operational” and the Government is awaiting the final opinion of the Court of Justice of the European Union (CJEU) on the compatibility of ICS with the EU treaties (Opinion 1/17);
• notes that existing investment agreements between Vietnam and individual EU Member States would be terminated upon entry into force of the EU-Vietnam IPA and that the ‘sunset clauses’10 in individual Member State BITs would cease to have effect too; therefore, in the “unlikely” event that the proposed IPA enters into force before the end of the transition/implementation period, the Government would “seek to work closely with [its] Vietnamese partners to ensure continuity and certainty for [the UK’s] investors based on the legal framework as applicable”;
• restates the Government’s ambitions for supporting an investment dispute resolution process that is capable of delivering fair dispute outcomes in a transparent manner, to ethical standards, and in a cost-effective manner; and
• states that the Government is “considering a range of options for [the UK’s] future bilateral trade and investment arrangements”, including its approach to ICS and wider discussions with UNICTRAL on the EU’s proposed Multilateral Investment Court (MIC) (intended to replace bilateral ICS included in EU level agreements with the EU’s FTA partners) and its “future approach to investment with Vietnam will be a matter for discussion in the context of our future bilateral relationship”.

Transparency and scrutiny of trade negotiations

3.13In response to the Committee’s question on what steps the Government intends to take to ensure transparency in, and effective scrutiny of a) the EU—Vietnam FTA and IPA during any implementation/transition period or backstop, and b) the negotiation and conclusion of a future UK-Vietnam trade and investment deals, the Minister states that the Government is “committed to”:

• “continuing to support and facilitate a strong scrutiny process” of the proposed agreements during the implementation period, with the “degree of scrutiny” being a “matter for both Houses to determine”; and
• “providing Parliament with the ability to inform and scrutinise new trade agreements”, through “updates on the progress of negotiations to both Houses”, the Constitutional Reform and Governance Act process and scrutiny of any primary legislation required to implement a FTA.

3.14The Committee reiterates that the proposed FTA and IPA will impact future UK trade and investment relations with Vietnam after UK exit in all Brexit scenarios, whether negotiated or non-negotiated.

3.15We draw to the attention of the House the following points raised by the Minister in his latest correspondence with us:

• that the Vietnamese Government has “reconfirmed” its support for replicating the proposed FTA in both a no deal and deal scenario (both during and after the planned transition period); the Minister does not expand on how this it to be given legal effect;
• that the Government is confident that the EU notification process under Article 129 of the draft Withdrawal Agreement (that the UK is to be treated as a Member State for the purposes of international agreements during the transition/implementation period) enables the UK to secure the benefits of the EU-Vietnam FTA during the transition/implementation period agreement;
• that if the backstop were to be applied, “the UK would be able to negotiate, sign, ratify and implement its own trade deals, but those elements that affect the functioning of the backstop would need to be aligned with the EU until [the UK] moved to the future partnership [with the EU]”;
• that post-exit/transition period, the Government is simply seeking to replicate the effects of the proposed FTA and concedes that it does not intend to run negotiations for a more ambitious future UK-Vietnam FTA until after the conclusion of the negotiations determining the future UK-EU relationship; we note that lengthy negotiations on the future UK-EU relationship are therefore likely to significantly delay/impact the negotiation and implementation of future UK-negotiated trade agreements;
• the Government is clear that it intends to vote in favour of the proposed EU-Vietnam IPA, which includes the Commission’s favoured ICS, but declines to share its position on the proposed ICS underpinning the IPA, stating it “would be premature to comment further” pending the final option of the Court of Justice of the European Union (CJEU) on the compatibility of ICS with the EU treaties (Opinion 1/17) and the system becoming operational;
• that just one month prior to the original exit date (of 29 March 2019), the Government was “still considering its approach to investment protection and dispute settlement” and continued to repeat its well-rehearsed, high-level objectives for an investment dispute resolution process that is capable of delivering fair dispute outcomes in a transparent manner, to ethical standards, and in a cost-effective manner, offering no further detail;
• the Government’s impact assessment of the proposed EU-Vietnam FTA on the UK does not consider different UK-EU relations post-exit and how this may impact the expected net benefits of the deal to the UK as the Minister considers this “outside the scope” of the analysis; yet we note that the baseline scenario does include EU agreements that are not yet into force (namely the EU-Singapore FTA) to ensure that the modelling can provide a more accurate assessment of the proposed agreement between now and 2030;
• that the Government simply repeats its mantra of remaining committed to transparency in trade matters both under current EU parliamentary scrutiny processes and under future UK bilaterally negotiated agreements, but does not put forward any substantive proposals; we note that these issues have been considered in depth by the International Trade Committee’s Sixth Special Report on UK trade policy transparency and scrutiny11 and also flag the Government’s Response.12

3.16We request the following further information:

• In the event of a no deal exit, an up-to-date assessment of:
  • the progress made by Government officials in ensuring entry into force of a bilateral UK-Vietnam trade deal at the same time as entry into force of the EU-Vietnam FTA;
  • where the replicated bilateral FTA ‘ranks’ in terms of the Government’s priorities (noting that various other existing EU agreements have yet to be replicated, including major agreements such as the Comprehensive Economic Trade Agreement (CETA) between Canada and the EU-Japan Economic Partnership Agreement); and
  • what would be the practical effect on UK stakeholders if there were to be a gap in its continuity.
• In the event of a negotiated withdrawal as envisaged in the draft Withdrawal Agreement:
  • how Vietnam’s agreement to apply the EU-Vietnam FTA to the UK during any transition/implementation period is to be given legal effect; and
  • if the backstop applies, which “elements that affect the functioning of the backstop” would need to be aligned with the EU until [the UK] moved to the future partnership [with the EU]” and would these elements be UK-wide or Northern Ireland specific? Furthermore, given that the backstop must be superseded by the future relationship for it to cease to be operative (unless new arrangements that avoid a hard border are accepted by the EU), does the Minister share the view that the backstop, by default, sets the baseline for the future relationship?
• In respect of the Government’s impact assessment:
  • how the estimated annual trade deficit of £1.214 billion per annum for the UK (given that UK exports to Vietnam are expected to increase by £486 million per annum and imports from Vietnam are expected to increase by £1.7 billion per annum) translates into expected annual GDP gains of 391 million per annum for the UK and which sectors and regions are expected to gain or lose the most; and
  • we note that the impact assessment relies on the following key assumptions: that the UK continues to trade with the EU on an equivalent basis after EU exit; that the UK trades with Vietnam on an equivalent basis to the EU-Vietnam FTA after EU exit; and that there are no changes to rules of origin, with ‘full diagonal cumulation of EU content in UK exports to Vietnam’.13 Whilst we appreciate that it may not be possible to model the full spectrum of possible future UK-EU trading relationships, the value of the impact assessment is severely diminished by the fact that it does not at the very least provide a qualitative discussion of how ‘low’ versus ‘high’ UK-EU integration (in view of the UK’s withdrawal) and changes to rules of origin could impact trade flows and the expected net benefits of the trade agreement. We ask the Minister to provide this qualitative analysis in his next update to the Committee.
• In respect of the proposed IPA, we:
  • repeat our request for the Minister to set out its intended approach to investment protection and dispute settlement on exit (noting that this should now be fully formulated considering the UK’s original exit date of 29 March 2019). This should consider the relative strengths and weaknesses of the UK continuing and/or expanding its BITs with third countries, replicating the EU’s proposed ICS in future agreements (and therefore replacing any existing BITs) or participating in the Commission’s proposed MIC;
  • note that following the CJEU opinion14 that the ICS provisions of the CETA between the EU and Canada are compatible with EU law, the first reason provided by the Government for withholding its position no longer holds. Furthermore, we challenge the Government’s second reason that it would be “ premature” for the Minister to comment on the basis that the ICS has not yet become operational, as policy decisions have to be made on a wide range of instruments that are ‘new’ or not yet operational; and
  • alert the Minister that failure to provide sufficient information on such a fundamental plank of post-exit relations with Vietnam and other third countries will mean that the Committee cannot clear this proposal from scrutiny and may also decide to call the Minister in to give evidence and/or refer the documents in relation to the proposed IPA for debate on the Floor of the House.

3.17Pending satisfactory responses to the areas identified above, we retain the documents under scrutiny and draw the Minister’s update letters and our conclusions to the attention of the Committee on Exiting the EU, the Foreign Affairs Committee and the International Trade Committee.

Full details of the documents

(a) Proposal for a Council Decision on the signing, on behalf of the EU, of the Free Trade Agreement between the EU and Vietnam : (40137), 13312/18 + ADDs 1–12, COM(18) 692; (b) Proposal for a Council Decision on the conclusion of a Free Trade Agreement between the EU and Vietnam: (40136), 13313/18 + ADDs 1–12, COM(18) 691; (c) Proposal for a Council Decision on the signing, on behalf of the EU, of the Investment Protection Agreement between the EU and its Member States, of the one part, and Vietnam, of the other part: (40135), 13314/18 + ADDs 1–2, COM(18) 694; (d) Proposal for a Council Decision on the conclusion, on behalf of the EU, of the Investment Protection Agreement between the EU and its Member States, of the one part, and Vietnam, of the other part : (40134), 13315/18 + ADDs 1–2, COM(18) 693.

Previous Committee Reports

Forty-ninth Report HC 301–xlviii (2017–19), chapter 5 (19 December 2018).

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9 See press release ‘UK-Vietnam joint statement London 10 October 2018’.

10 Most BITs contain a sunset clause, providing for their provisions to continue in effect for a specified time following termination. Sunset clauses mean that a State will remain bound by its treaty obligations for a period of time notwithstanding a decision to terminate.

11 UK trade policy transparency and scrutiny: Committee’s Sixth Report of Session 2017–19, International Trade Committee, HC 2027, 28 December 2018.

12 UK trade policy transparency and scrutiny: Government Response to the Committee’s Sixth Report, 6 March 2019.

13 See ‘Taxation and Customs Union Common provisions’ for definitions of cumulation.

14 Opinion 1/17. For a summary see the CJEU’s Press Release of 30 April 2019.

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Published: 21 May 2019