the impacts of viet nam korea free trade agreementin both countries in terms of trade capital andlabor force

UNIVERSITY OF ECONOMICS – THE UNIVERISTY OFDANANG

DEPARTMENT OF INTERNATIONAL ECONOMICS

Lecturer: Pham Ho Ha Tram

1.The Impact of VKFTA on Trade Flow: 3

1.1.Trade between Viet Nam and Korea before the Agreement 3

1.1.1.Overview of the Trade Relationship before the Agreement 3

1.1.2.Import and Export Data before the Agreement 3

1.2.Trade between Viet Nam and Korea after the Agreement 5

1.2.1.Non-Tariff Measures and Trade Facilitation 5

1.2.2.Trade Balance and Imbalance between Korea and Viet Nam 7

1.2.3.Prediction of Viet Nam and Korea’s future under the VKFTA 9

2.The Impact of VKFTA on Capital Flow between Viet Nam and Korea 10

2.1.The capital flow of Viet Nam and Korea before VKFTA 10

2.2.The capital flow of Viet Nam and Korea after VKFTA 10

3.The Impact of VKFTA on Labor Force in Viet Nam and Korea 12

3.1.Labor Force in Viet Nam and Korea before the Agreement 12

3.2.Labor Force in Viet Nam and Korea after the Agreement 14

3.2.1.The Influence of the Agreement on the Vietnamese Labor Force 14

3.2.2.The Influence of the Agreement on the Korean Labor Force 15

VI.REFERENCES: 17

The Viet Nam-Korea Free Trade Agreement (VKFTA), which wentinto effect on December 20, 2015, was a crucial turning point in thebilateral partnership and investment relationship, and it has had asignificant influence on the movement of trade, capital, and laborbetween Viet Nam and Korea This report explores the impact of theVKFTA on economic integration and collaboration between Viet Namand Korea using a detailed examination of trade statistics, capitalinvestment patterns, and labor market indicators They offer usefulinsights into the processes of change in all three categories VKFTA’sfavorable benefits include increased trade volume, enhancedinvestment prospects, and better labor mobility However,challenges are also highlighted, providing potential areas for furtherdevelopment, ensuring a comprehensive understanding of theimpact of VKFTA on the economic relationship between Viet Namand Korea, and providing recommendations to further optimize thebenefits of VKFTA for both Viet Nam and Korea.

II INTRODUCTION

On December 22, 1992, Viet Nam and the Republic of Korea(RoK) established diplomatic ties Over the last three decades, thetwo nations have accomplished a great deal in practically everysphere, including politics, business, culture, society, and education,to become strategic allies and especially in the economic facet withthe Viet Nam - Korea Free Trade Agreement (Viet Nam News Agency,2022).2

The Viet Nam - Korea Free Trade Agreement (VKFTA) is abilateral trade agreement between Viet Nam and South Korea withthe aim to promote economic cooperation and strengthen tiesbetween the two nations Viet Nam and South Korea settled on thewhole terms of the VKFTA Agreement after getting involved in 8rounds of official negotiations and 8 mid-term meetings in more thantwo years (Viet Nam National Trade Repository, n.d.) The agreementwas officially signed on May 5, 2015 and then came into effect onDecember 20, 2015, marking a new chapter in the economicrelations between Viet Nam and South Korea This is a concretestrategy in the execution of an integration plan, with the focus oninternational economic integration, to assist the country'sreorganization, industrialization, and modernization (The Embassy ofSocialist Republic of Viet Nam, n.d.) The VKFTA reflects thecommitment of both Viet Nam and South Korea to deepen theireconomic partnership and capitalize on the mutual benefits ofincreased trade and investment.

The Agreement comprises 17 chapters and 208 articles focusingon reducing the tariff, Trade in Goods, Trade in Services, Investment

and intellectual property, to name but a few (The Embassy ofSocialist Republic of Viet Nam, n.d.).2

Under the VKFTA, both Viet Nam and Korea have madecommitments to liberalize trade and investment Viet Nam hascommitted to reducing or eliminating tariffs on a wide range ofgoods imported from Korea and in return, Korea has made similarcommitments to reduce or eliminate tariffs on Vietnamese goods.

Viet Nam’s exports had more opportunity to enjoy the marketshare with average growth of 26.9% per year (Viet Namplus, 2019)by diminishing the tariffs on Viet Nam’ products, making them morecompetitive in the Korean market Consequently, Viet Nam’s exportshave been boosted and contribute to economic growth Moreover,the Agreement has also encouraged the investment from Korea toViet Nam in terms of capital, technology and advanced managementskills Korean investors perceived more potential benefits to invest inViet Nam when the legal framework became more transparent, thiswould help to promote the flow of capital, labor, and assets to VietNam Furthermore, the VKFTA may result in knowledge andtechnology transfer from Korea to Viet Nam This can help VietNam's industry flourish and increase its competitiveness in theglobal market (Viet Nam Briefing, 2023).

III METHOD OF THE STUDY:

The methodology used in this report is to comprehensivelyevaluate the impact of the Viet Nam-Korea Free Trade Agreement(VKFTA) on trade, capital, and labor flow between the two countries.Quantitative data will be gathered from official trade statistics fromVietnamese and Korean government agencies to analyze import, andexport volumes, tariff rates, and trends in capital flows and labor Inorder to identify significant shifts and patterns, it involves comparingand contrasting pre-VKFTA and post-VKFTA data using statisticalmethods and econometric models Complementing this quantitativeanalysis, qualitative data will be gathered through in-depth analysisconducted with policymakers, and experts in trade and economicsfrom both countries An in-depth research gives a comprehensiveand multi-dimensional view of the impact of VKFTA on trade, capital,and labor flow between Viet Nam and Korea.

IV DISCUSSION

1 The Impact of VKFTA on Trade Flow:

1.1.Trade between Viet Nam and Korea before the Agreement1.1.1 Overview of the Trade Relationship before the Agreement

Viet Nam began undertaking policy reforms in 1986, embracinga market economy and liberalizing commerce Since then, ourcountry’s international economic integration has accelerated

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considerably This was highlighted by the establishing of officialdiplomatic ties with South Korea in December 1992, which was aturning point in history In 1997, Viet Nam signed the ASEAN-KoreaFree Trade Agreement (AKFTA) This represents a significant event inViet Nam’s initial stages of integration into the world economy, whentrade between Viet Nam and Korea is rising at a comparable rate asViet Nam’s integration (Nguyễn, 2022) The two nations establisheda comprehensive agreement in 2001, which was then elevated to astrategic partnership in 2009 As a result, the economic cooperationbetween Viet Nam and Korea has grown significantly By 2015, VietNam and Korea had signed the VKFTA agreement, officiallyestablishing their bilateral connection and starting a new era ofeconomic cooperation between the two nations.

1.1.2 Import and Export Data before the Agreement

There have been several positive advances in Viet Nam andKorea bilateral commercial relationship Trade turnover has surged74 times from roughly 500 million USD in 1992 to 37 billion USD in2015 Viet Nam’s exports to Korea climbed by approximately 19%annually on average, while imports from Korea increased by around25% per year over this period (Phan & Jeong, 2016) Korea becameone of Viet Nam’s primary economic partners from 1992 In 2015,Viet Nam was Korea’s fourth largest import and export market(Figure 1c), while Korea was Viet Nam’s second import and fourthexport market As shown in Figure 1a, the trade ratio between VietNam and Korea has risen dramatically throughout the years VietNam is also one of Korea’s largest export markets for industrialgoods There has been a period when South Korea’s trade marketshare declined, but Korea’s standing among Viet Nam’s top 10trading partners was maintained during the previous 20 years, asshown in Figure 1b (UNSD, 2016) On May 5, 2015, the TradeMinisters of Viet Nam and South Korea agreed to sign a Free TradeAgreement (FTA) to strengthen their previously established strategicalliance.

Figure 1a Viet Nam’s Trade Shares in2 2 Figure 1b Korea’s

Trade Shares in22 22222 2 Korea’s Trade (%)2 2 2 2 2 2 2 2 2 2 2 2 2 2 Viet Nam’s Trade (%)

Source: UN Comtrade database, 2015Figure 1c Korea’s top 5 export and import partners

Source: Korea, Rep Trade Summary 2015 | WITS DataBetween 1992 and 2007, Korea imported a significant amountof goods, mostly seafood, crude oil, and agricultural items Followingthat, the nation continued to import these products while also addingadditional items such as textiles and wireless communicationequipment Intermediate products and means of production make fora significant share of Korean exports to Viet Nam The average shareof intermediate goods during this period was 71.3%, means ofproduction was 14.9%, while consumer goods was 10.2% Over2015, the fraction of consumer goods fell from 10.2% to 7.6%, whilethe proportion of intermediate items increased from 71.3% to76.9%.2 2

Throughout the first 15 years of diplomatic ties, South Koreanexports to Viet Nam grew by an average of 18.8% per year, reachingUSD 5.7 billion in 2007 The bilateral partnership between the twonations became upgraded to a “Strategic Cooperation Partnership”in 2009, which was deemed an important chapter in the eight yearsfrom 2007 to 2015 Korea’s export value to Viet Nam in 2009reached 7.9 billion USD, increasing considerably to 13.6 billion USDin 2013 and 18 billion USD in 2015 The average annual growth ratewas 21.7% during a period of 8 years.

Before the signing of the VKFTA agreement, several productssuch as garlic, ginger, honey, sweet potatoes, and so on wereregarded as highly sensitive in the Korean market and were subjectto extremely substantial import tariffs ranging from 241% to 420%.Furthermore, Viet Nam faces a very high tariff burden on fresh andprocessed fruit items, with tariff rates ranging from around 30% to50%, including mangoes delivered from Viet Nam to Korea with a30% tariff Similarly, textile and footwear commodities transportedfrom Viet Nam to Korea are subject to tariff at 10-13%, as are shrimp(20%) and cashew nuts (8%) Korean cosmetic exports to Viet Nam

paid tariffs at 20% at the time, while car components were tariffed at15%.

1.2.Trade between Viet Nam and Korea after the Agreement1.2.1 Non-Tariff Measures and Trade Facilitation

Basically, the tariff commitments in the VKFTA are built on thetariff commitments in the ASEAN-Korea FTA (AKFTA), but with ahigher level of liberalization After signing VKFTA, Korea liberalized96.48% of import value from Viet Nam, whereas Viet Nam liberalized92.75% of total import value from Korea in 2012 In terms of thenumber of tariff lines, Korea liberalized 95.43% of tariff lines, VietNam committed to liberalize 89.75% of tariff lines (Thuong, n.d.) Inother words, VKFTA will further cut some tariff lines that have notbeen cut in AKFTA or the level of reduction is still limited.Specifically, compared to AKFTA, in VKFTA:

Korea will eliminate 506 additional tariff lines for Viet Nam(accounting for 4.14% of the tariff schedule and equivalent to 5.5%of total import turnover from Viet Nam to Korea in 2012).

Viet Nam will eliminate 265 additional tariff lines for Korea(accounting for 2.2% of the tariff schedule and equivalent to 5.91%of total import turnover from Korea to Viet Nam in 2012).

(TTWTO VCCI - Trang Chủ - Trung Tâm WTO Và Hội Nhập VCCI,n.d.)

Figure 2.1 a Tariff commitments in VKFTA

Source: The Ministry of FinanceSouth Korea gives Viet Nam incentives to cut and reducetariffs, creating important new export opportunities for keyagricultural and aquatic product groups such as: Shrimp (from 20%to 0%), cashew nuts from 8% % down to 1.6% (2018), mango from30% down to 18% (2018), tropical fruits and industrial goods such astextiles, garments, mechanical products (Giang, n.d.) However,According to NIF, South Korea will maintain the same tariff rates onsome agricultural products such as onions (135%), bell peppers(270%), garlic (360%), oranges (50%), apples (45% ), pear (45%),green tea (513.6%) In addition, Korea did not include rice innegotiations in this agreement Korea cut tariffs on some of VietNam's strong products, but in return, Viet Nam also had to reduce

import tariffs on many key Korean products In 2021 alone, importedcommodity groups from Korea increased sharply such as computers,electronic products and components with 20.3 billion USD, anincrease of 18.4%; other machinery, equipment, tools, and spareparts with 6.1 billion USD, an increase of 1.8%; phones andcomponents with 10.73 billion USD, an increase of 38.2% Althoughthere is pressure from imported goods increasing competition withdomestic goods, a part of businesses using raw materials from Koreawill enjoy many benefits from the VKFTA Agreement (Giang, n.d.)

Figure 2.1b.2 Regarding tariff lines that Korea abolished for VietNam in VKFTA

tariff linescut

Import turnoverfrom Korea (2012)/Current import tax

of Korea

1 Shrimp group 7 lines (tariffrate quotasapplied)

2 Textile group 24 lines 60 million USD

3 Wood product group 64 lines 21 million USD

4 Tropical fruit group (fresh, canned)

18 lines 9 million USD

5 Seafood group (frozen, canned) includes fish and crab products (except squid)

68 lines 31 million USD

6 Garlic and ginger group (dried, frozen)

7 lines Current import taxranges from 27 to300-400%.

7 Group of vegetables and

agricultural products 50 lines 800.000 USD

8 Honey 1 line Current import tax243%

9 Other goods (coffee, chemicals, processed foods, etc.)

Remaininglines

Total502 lines324 million USD

Source: The Ministry of Finance

Figure 2.1c Viet Nam commits to eliminate tariff lines for Korea

Source: The Ministry of Finance

According to the handbook for international economicintegration, Korea also pledged to expand market prospects for VietNam's investment and service sectors, boost economic cooperation,and offer extensive technical assistance across a range of industries.In comparison to other competitors in the region, Viet Nam now hasconsiderable competitive prospects as Korea opened its market tohighly sensitive products including garlic, ginger, honey, shrimp, andmore The Vietnamese side gives preferential treatment to Korea forindustrial product groups such as textile and garment raw materials,plastic raw materials, electronic components, trucks and cars of2,500cc or more, auto parts, and household electrical appliances ,iron and steel products, electric cables.

1.2.2 Trade Balance and Imbalance between Korea and Viet Nam

Viet Nam and Korea have seen a steady expansion in bilateralcommerce following the adoption of the VKFTA more than six yearsago According to MOTIE statistics, Viet Nam and South Korea'sbilateral trade hit $87.7 billion in 2022 Figure 4 illustrates that thecombined value of trade between the two countries last year was

$87.47 billion The Republic of Korea (RoK)'s exports to Viet Namtotaled US$60.98 billion in 2022, and imports hit US$26.72 billion,resulting in a surplus of US$34.25 billion, reported the KoreanMinistry of Trade, Industry and Energy (Dung, 2023)

Figure 2.2a Trade between Viet Nam and The Republic ofKorea

Source: Government News

According to the Ministry of Trade, Industry and Energy, andFederation of Korean Industries (FKI), the country's largest businesslobby, Viet Nam became Korea's third-largest trading partner in2022, generating the largest trade surplus for Korea (이경민, 2023).Due to the fact that Korea's trade surplus with Viet Nam is higherthan the trade surplus with the U.S., which recorded at $25.4 billion.The total trade volume between Korea and Viet Nam was $500million in 1992, but after implementation of VKFTA, there was an2increase to $87,7 billion in 2022.

Figure 2.2b Korea-Viet Nam trade volume

VKFTA has boosted Viet Nam's exports to South Korea Keyexport sectors from Viet Nam to South Korea include textiles,garments, footwear, seafood, agricultural products, electroniccomponents, and mobile phones The agreement facilitated reducedtariffs on these goods, Incentivizing their market access and makingthem more competitive in the South Korean market Besides, SouthKorea is a major exporter of machinery, equipment, automobiles,and high-tech products, also benefited from VKFTA According to theMinistry of Finance e-portal, Korea is the largest foreign investor inViet Nam Data from Viet Nam's statistics body showed Korea'sinvestments to Viet Nam totaled $78.5 billion in 2021, rising by $2.4billion year-on-year to reach a record high (이 경 민, 2023) Theagreement helped South Korean companies expand their marketshare in Viet Nam by reducing tariffs on their manufactured goods,leading to increased exports to Viet Nam South Korean electronicgiants such as Samsung and LG, have set up manufacturing facilitiesin Viet Nam, leading to a surge in South Korean electronic exports toViet Nam More specifically, Samsung Electronics was the largestforeign investor in Viet Nam The global semiconductor powerhouseinvested $2 billion in Viet Nam last year, raising the investment totalto $20 billion (이 경 민, 2023) This dominance of South Koreanelectronics and high-tech products in the Vietnamese market couldlead to a trade imbalance between Viet Nam and South Korea.According to Bark Tae Ho, South Korea’s former Minister of Trade,since VKFTA took effect in 2015, South Korean firms have capitalizedon lower tariff duties under the FTA to boost exports to Viet Namwhile Vietnamese firms have not taken the same step As a result,Viet Nam’s trade deficit with South Korea has widened sharply Toillustrate, exports from South Korea to Viet Nam in 2017 were $48billion USD, up to 70 per cent after three years of VKFTA However,exports from Việt Nam to Korea that year reached only $17 billionUSD, Bark said (Viet NamNews, n.d.) However, Viet Nam and SouthKorea have agreed on a scheme to better the quality of economic,trade, and investment cooperation, with efforts to be made throughdevising more favorable policies so as to increase the bilateral tradeturnover to $100 billion this year and $150 billion by 2030 (VietNamNet News, n.d.) By taking advantage of VKFTA, the twoeconomies have agreed to further open up to goods and servicesfrom both sides.

1.2.3 Prediction of Viet Nam and Korea’s future under the VKFTA

According to Nguyen (2022), Korea has become Viet Nam’sfourth-largest export market, while Viet Nam has become Korea’sthird-largest export market With recent changes in the structure ofcomparative advantage, bilateral trade between the two nationsremains a complementary and mutually beneficial relationship.

This contributed to the expansion of bilateral trade Viet Namstill has several prospects to increase its exports to Korea Mostagricultural goods, such as coffee, tea, rubber, cashew nuts, rice,and so on, have a competitive advantage; yet, only a limited numberof Viet Nam’s primary export items are sold to Korea As a result,Viet Nam is an exporter of low-value basic agricultural products.Therefore, Viet Nam must participate in the global value chain (GVC)in exporting agricultural products in order to improve added value.This is also a chance for Korea and Viet Nam to collaborate togetherto build GVCs for the food and processed agricultural goodsindustries, which will serve as a springboard for expanding exportsto Asia-Pacific markets (Nguyễn, 2022) When it joined the AKFTA,Viet Nam made the greatest use of export incentives, includingspecific tariff concessions under the Agreement of up to 70-80% foritems supplied to Korea that fulfill rules of origin criteria As a result,upon signing the VKFTA Agreement with Korea, Viet Nam intends touse VKFTA to deliver further benefits to enterprises.

As for the import opportunities, Viet Nam is currently importing aconsiderable amount of items from Korea Signing VKFTA will raiserevenues for businesses, and consumers will gain more from theagreement's goal of lowering import duties than AKFTA.

In terms of the opportunities for other sectors and industries, commerce is slowly becoming a significant kind of trade The VKFTAalso acknowledges the severity of the situation and commits to e-commerce activity between the two nations in Article 10 Thisprovision is unique in that it has never been included in any previousVietnamese trade agreement, demonstrating that our governmentcreates conditions for promoting trade-related e-commerce throughcontaining a general effort to adopt or promote electronicsignatures, online consumer protection, and paperless commerce.

E-Furthermore, Article 13.2 of the VKFTA regulates specificbusiness sectors, such as steel and metals, electronics, machinery,automobiles, petrochemicals, textiles and apparel, footwear, andlogistics, in which Korea and Viet Nam should collaborate to carryout mutually beneficial activities Besides, South Korean investorsare anticipated to focus their attention more on petrochemicals,aquaculture, and automobiles in particular.

In addition, Korea and Viet Nam agreed to approve the VKFTA’sincorporation of bilateral cooperation in cultural and entertainmentservices, thereby creating favorable conditions for cultural exchangeand the development of entertainment service businessesentertainment includes music, film and television, publishing anddigital media, radio, and live theater (Viet Nam Investment Review,2022).