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The deal eliminates nearly all tariffs on products traded between the Asian nation, one of the continent's largest manufacturing nations, and the 28-member trading bloc.
"It is a special day for relations between the EU and Vietnam. The agreement has opened a new horizon for the development of both sides," Vietnamese Prime Minister Nguyen Xuan Phuc said.
The agreement, which culminates talks begun in 2012, calls for the EU to lift 85 percent of its tariffs on Vietnamese products, including shoes, agricultural goods, textiles, phones and clothing. Some tariffs will be cut over a 10-year period. Agricultural products will be limited by quotas.
Vietnam, the EU's second-largest trading partner, will lift 45 percent of its import duties on EU products, including planes, vehicles, drugs and high-tech machinery. The remaining tariffs will be eliminated over the next decade.
"The agreement is very important for Vietnam," economist Pham Chi Lan, a former adviser to several Vietnamese prime ministers, said. "On one hand, it will urge the country to fasten its constitutional reform to match clauses in the agreement. On the other, it will boost the economy, especially in the private sector."
Under terms of the deal, Vietnam also agrees to improve its human rights record, uphold agreements on climate change under the Paris accord and protect workers' rights.
The EU already has trade agreements with Japan, South Korea and Singapore. EU negotiators are currently in trade talks with Malaysia, the Philippines, Indonesia and Thailand.
The Associated Press contributed to this report.