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

ABSTRACTThe Viet Nam-Korea Free Trade Agreement VKFTA, which went into effect on December 20, 2015, was a crucial turning point in the bilateral partnership and investment relationship,

UNIVERSITY OF ECONOMICS – THE UNIVERISTY OF

DANANG DEPARTMENT OF INTERNATIONAL ECONOMICS

- -

REPORT

THE IMPACTS OF VIET NAM–KOREA FREE TRADE AGREEMENT

IN BOTH COUNTRIES IN TERMS OF TRADE, CAPITAL AND

LABOR FORCE

GROUP 2

1 Tran Quang Gia Bao

2 Phan Le Ha My

3 Tran Thi Thanh Ngoc

4 Phan Hoai Khanh Tien

5 Nguyen Khanh Uyen

Lecturer: Pham Ho Ha Tram

Da Nang, December 4, 2023

TABLE OF CONTENTS

I ABSTRACT 2

II INTRODUCTION 2

III METHOD OF THE STUDY: 3

IV DISCUSSION 3

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

V CONCLUSION 16

VI REFERENCES: 17

I ABSTRACT

The Viet Nam-Korea Free Trade Agreement (VKFTA), which went

into effect on December 20, 2015, was a crucial turning point in the

bilateral partnership and investment relationship, and it has had a

significant influence on the movement of trade, capital, and labor

between Viet Nam and Korea This report explores the impact of the

VKFTA on economic integration and collaboration between Viet Nam

and Korea using a detailed examination of trade statistics, capital

investment patterns, and labor market indicators They offer useful

insights into the processes of change in all three categories VKFTA’s

favorable benefits include increased trade volume, enhanced

investment prospects, and better labor mobility However,

challenges are also highlighted, providing potential areas for further

development, ensuring a comprehensive understanding of the

impact of VKFTA on the economic relationship between Viet Nam

and Korea, and providing recommendations to further optimize the

benefits 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, the

two nations have accomplished a great deal in practically every

sphere, including politics, business, culture, society, and education,

to become strategic allies and especially in the economic facet with

the Viet Nam - Korea Free Trade Agreement (Viet Nam News Agency,

2022).2

The Viet Nam - Korea Free Trade Agreement (VKFTA) is a

bilateral trade agreement between Viet Nam and South Korea with

the aim to promote economic cooperation and strengthen ties

between the two nations Viet Nam and South Korea settled on the

whole terms of the VKFTA Agreement after getting involved in 8

rounds of official negotiations and 8 mid-term meetings in more than

two years (Viet Nam National Trade Repository, n.d.) The agreement

was officially signed on May 5, 2015 and then came into effect on

December 20, 2015, marking a new chapter in the economic

relations between Viet Nam and South Korea This is a concrete

strategy in the execution of an integration plan, with the focus on

international economic integration, to assist the country's

reorganization, industrialization, and modernization (The Embassy of

Socialist Republic of Viet Nam, n.d.) The VKFTA reflects the

commitment of both Viet Nam and South Korea to deepen their

economic partnership and capitalize on the mutual benefits of

increased trade and investment

The Agreement comprises 17 chapters and 208 articles focusing

on reducing the tariff, Trade in Goods, Trade in Services, Investment

and intellectual property, to name but a few (The Embassy of

Socialist Republic of Viet Nam, n.d.).2

Under the VKFTA, both Viet Nam and Korea have made

commitments to liberalize trade and investment Viet Nam has

committed to reducing or eliminating tariffs on a wide range of

goods imported from Korea and in return, Korea has made similar

commitments to reduce or eliminate tariffs on Vietnamese goods

Viet Nam’s exports had more opportunity to enjoy the market

share with average growth of 26.9% per year (Viet Namplus, 2019)

by diminishing the tariffs on Viet Nam’ products, making them more

competitive in the Korean market Consequently, Viet Nam’s exports

have been boosted and contribute to economic growth Moreover,

the Agreement has also encouraged the investment from Korea to

Viet Nam in terms of capital, technology and advanced management

skills Korean investors perceived more potential benefits to invest in

Viet Nam when the legal framework became more transparent, this

would help to promote the flow of capital, labor, and assets to Viet

Nam Furthermore, the VKFTA may result in knowledge and

technology transfer from Korea to Viet Nam This can help Viet

Nam's industry flourish and increase its competitiveness in the

global market (Viet Nam Briefing, 2023)

III METHOD OF THE STUDY:

The methodology used in this report is to comprehensively

evaluate 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 from

Vietnamese and Korean government agencies to analyze import, and

export volumes, tariff rates, and trends in capital flows and labor In

order to identify significant shifts and patterns, it involves comparing

and contrasting pre-VKFTA and post-VKFTA data using statistical

methods and econometric models Complementing this quantitative

analysis, qualitative data will be gathered through in-depth analysis

conducted with policymakers, and experts in trade and economics

from both countries An in-depth research gives a comprehensive

and 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 Agreement

1.1.1 Overview of the Trade Relationship before the Agreement

Viet Nam began undertaking policy reforms in 1986, embracing

a market economy and liberalizing commerce Since then, our

country’s international economic integration has accelerated

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considerably This was highlighted by the establishing of official

diplomatic ties with South Korea in December 1992, which was a

turning point in history In 1997, Viet Nam signed the ASEAN-Korea

Free Trade Agreement (AKFTA) This represents a significant event in

Viet Nam’s initial stages of integration into the world economy, when

trade between Viet Nam and Korea is rising at a comparable rate as

Viet Nam’s integration (Nguyễn, 2022) The two nations established

a comprehensive agreement in 2001, which was then elevated to a

strategic partnership in 2009 As a result, the economic cooperation

between Viet Nam and Korea has grown significantly By 2015, Viet

Nam and Korea had signed the VKFTA agreement, officially

establishing their bilateral connection and starting a new era of

economic cooperation between the two nations

1.1.2 Import and Export Data before the Agreement

There have been several positive advances in Viet Nam and

Korea bilateral commercial relationship Trade turnover has surged

74 times from roughly 500 million USD in 1992 to 37 billion USD in

2015 Viet Nam’s exports to Korea climbed by approximately 19%

annually on average, while imports from Korea increased by around

25% per year over this period (Phan & Jeong, 2016) Korea became

one 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 fourth

export market As shown in Figure 1a, the trade ratio between Viet

Nam and Korea has risen dramatically throughout the years Viet

Nam is also one of Korea’s largest export markets for industrial

goods There has been a period when South Korea’s trade market

share declined, but Korea’s standing among Viet Nam’s top 10

trading partners was maintained during the previous 20 years, as

shown in Figure 1b (UNSD, 2016) On May 5, 2015, the Trade

Ministers of Viet Nam and South Korea agreed to sign a Free Trade

Agreement (FTA) to strengthen their previously established strategic

alliance

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 Data

Between 1992 and 2007, Korea imported a significant amount

of goods, mostly seafood, crude oil, and agricultural items Following

that, the nation continued to import these products while also adding

additional items such as textiles and wireless communication

equipment Intermediate products and means of production make for

a significant share of Korean exports to Viet Nam The average share

of intermediate goods during this period was 71.3%, means of

production was 14.9%, while consumer goods was 10.2% Over

2015, the fraction of consumer goods fell from 10.2% to 7.6%, while

the proportion of intermediate items increased from 71.3% to

76.9%.2 2

Throughout the first 15 years of diplomatic ties, South Korean

exports to Viet Nam grew by an average of 18.8% per year, reaching

USD 5.7 billion in 2007 The bilateral partnership between the two

nations became upgraded to a “Strategic Cooperation Partnership”

in 2009, which was deemed an important chapter in the eight years

from 2007 to 2015 Korea’s export value to Viet Nam in 2009

reached 7.9 billion USD, increasing considerably to 13.6 billion USD

in 2013 and 18 billion USD in 2015 The average annual growth rate

was 21.7% during a period of 8 years

Before the signing of the VKFTA agreement, several products

such as garlic, ginger, honey, sweet potatoes, and so on were

regarded as highly sensitive in the Korean market and were subject

to extremely substantial import tariffs ranging from 241% to 420%

Furthermore, Viet Nam faces a very high tariff burden on fresh and

processed fruit items, with tariff rates ranging from around 30% to

50%, including mangoes delivered from Viet Nam to Korea with a

30% tariff Similarly, textile and footwear commodities transported

from 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 at

15%

1.2 Trade between Viet Nam and Korea after the Agreement

1.2.1 Non-Tariff Measures and Trade Facilitation

Basically, the tariff commitments in the VKFTA are built on the

tariff commitments in the ASEAN-Korea FTA (AKFTA), but with a

higher level of liberalization After signing VKFTA, Korea liberalized

96.48% of import value from Viet Nam, whereas Viet Nam liberalized

92.75% of total import value from Korea in 2012 In terms of the

number of tariff lines, Korea liberalized 95.43% of tariff lines, Viet

Nam committed to liberalize 89.75% of tariff lines (Thuong, n.d.) In

other words, VKFTA will further cut some tariff lines that have not

been 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 reduce

tariffs, creating important new export opportunities for key

agricultural and aquatic product groups such as: Shrimp (from 20%

to 0%), cashew nuts from 8% % down to 1.6% (2018), mango from

30% down to 18% (2018), tropical fruits and industrial goods such as

textiles, garments, mechanical products (Giang, n.d.) However,

According to NIF, South Korea will maintain the same tariff rates on

some 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 in

negotiations in this agreement Korea cut tariffs on some of Viet

Nam's strong products, but in return, Viet Nam also had to reduce

import tariffs on many key Korean products In 2021 alone, imported

commodity groups from Korea increased sharply such as computers,

electronic products and components with 20.3 billion USD, an

increase of 18.4%; other machinery, equipment, tools, and spare

parts with 6.1 billion USD, an increase of 1.8%; phones and

components with 10.73 billion USD, an increase of 38.2% Although

there is pressure from imported goods increasing competition with

domestic goods, a part of businesses using raw materials from Korea

will enjoy many benefits from the VKFTA Agreement (Giang, n.d.)

Figure 2.1b.2 Regarding tariff lines that Korea abolished for Viet

Nam in VKFTA

tariff lines cut

Import turnover from Korea (2012)/ Current import tax

of Korea

1 Shrimp group 7 lines (tariff

rate 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 tax

ranges from 27 to300-400%

7 Group of vegetables and

agricultural products 50 lines 800.000 USD

8 Honey 1 line Current import tax

243%

9 Other goods (coffee, chemicals,

processed foods, etc.)

Remaininglines

Total 502 lines 324 million USD

Source: The Ministry of FinanceFigure 2.1c Viet Nam commits to eliminate tariff lines for Korea

Source: The Ministry of FinanceAccording to the handbook for international economic

integration, Korea also pledged to expand market prospects for Viet

Nam'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 has

considerable competitive prospects as Korea opened its market to

highly sensitive products including garlic, ginger, honey, shrimp, and

more The Vietnamese side gives preferential treatment to Korea for

industrial product groups such as textile and garment raw materials,

plastic raw materials, electronic components, trucks and cars of

2,500cc 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 bilateral

commerce following the adoption of the VKFTA more than six years

ago According to MOTIE statistics, Viet Nam and South Korea's

bilateral trade hit $87.7 billion in 2022 Figure 4 illustrates that the

combined value of trade between the two countries last year was

$87.47 billion The Republic of Korea (RoK)'s exports to Viet Nam

totaled US$60.98 billion in 2022, and imports hit US$26.72 billion,

resulting in a surplus of US$34.25 billion, reported the Korean

Ministry of Trade, Industry and Energy (Dung, 2023)

Figure 2.2a Trade between Viet Nam and The Republic of

Korea

Source: Government NewsAccording to the Ministry of Trade, Industry and Energy, and

Federation of Korean Industries (FKI), the country's largest business

lobby, Viet Nam became Korea's third-largest trading partner in

2022, generating the largest trade surplus for Korea (이경민, 2023)

Due to the fact that Korea's trade surplus with Viet Nam is higher

than the trade surplus with the U.S., which recorded at $25.4 billion

The total trade volume between Korea and Viet Nam was $500

million in 1992, but after implementation of VKFTA, there was an2

increase to $87,7 billion in 2022

Figure 2.2b Korea-Viet Nam trade volume

VKFTA has boosted Viet Nam's exports to South Korea Key

export sectors from Viet Nam to South Korea include textiles,

garments, footwear, seafood, agricultural products, electronic

components, and mobile phones The agreement facilitated reduced

tariffs on these goods, Incentivizing their market access and making

them more competitive in the South Korean market Besides, South

Korea is a major exporter of machinery, equipment, automobiles,

and high-tech products, also benefited from VKFTA According to the

Ministry of Finance e-portal, Korea is the largest foreign investor in

Viet Nam Data from Viet Nam's statistics body showed Korea's

investments to Viet Nam totaled $78.5 billion in 2021, rising by $2.4

billion year-on-year to reach a record high (이 경 민, 2023) The

agreement helped South Korean companies expand their market

share in Viet Nam by reducing tariffs on their manufactured goods,

leading to increased exports to Viet Nam South Korean electronic

giants such as Samsung and LG, have set up manufacturing facilities

in Viet Nam, leading to a surge in South Korean electronic exports to

Viet Nam More specifically, Samsung Electronics was the largest

foreign investor in Viet Nam The global semiconductor powerhouse

invested $2 billion in Viet Nam last year, raising the investment total

to $20 billion (이 경 민, 2023) This dominance of South Korean

electronics and high-tech products in the Vietnamese market could

lead 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 capitalized

on lower tariff duties under the FTA to boost exports to Viet Nam

while Vietnamese firms have not taken the same step As a result,

Viet Nam’s trade deficit with South Korea has widened sharply To

illustrate, exports from South Korea to Viet Nam in 2017 were $48

billion USD, up to 70 per cent after three years of VKFTA However,

exports from Việt Nam to Korea that year reached only $17 billion

USD, Bark said (Viet NamNews, n.d.) However, Viet Nam and South

Korea have agreed on a scheme to better the quality of economic,

trade, and investment cooperation, with efforts to be made through

devising more favorable policies so as to increase the bilateral trade

turnover to $100 billion this year and $150 billion by 2030 (Viet

NamNet News, n.d.) By taking advantage of VKFTA, the two

economies have agreed to further open up to goods and services

from 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’s

fourth-largest export market, while Viet Nam has become Korea’s

third-largest export market With recent changes in the structure of

comparative advantage, bilateral trade between the two nations

remains a complementary and mutually beneficial relationship

This contributed to the expansion of bilateral trade Viet Nam

still has several prospects to increase its exports to Korea Most

agricultural goods, such as coffee, tea, rubber, cashew nuts, rice,

and so on, have a competitive advantage; yet, only a limited number

of 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 together

to build GVCs for the food and processed agricultural goods

industries, which will serve as a springboard for expanding exports

to Asia-Pacific markets (Nguyễn, 2022) When it joined the AKFTA,

Viet Nam made the greatest use of export incentives, including

specific tariff concessions under the Agreement of up to 70-80% for

items supplied to Korea that fulfill rules of origin criteria As a result,

upon signing the VKFTA Agreement with Korea, Viet Nam intends to

use VKFTA to deliver further benefits to enterprises

As for the import opportunities, Viet Nam is currently importing a

considerable amount of items from Korea Signing VKFTA will raise

revenues for businesses, and consumers will gain more from the

agreement's goal of lowering import duties than AKFTA

In terms of the opportunities for other sectors and industries,

E-commerce is slowly becoming a significant kind of trade The VKFTA

also acknowledges the severity of the situation and commits to

e-commerce activity between the two nations in Article 10 This

provision is unique in that it has never been included in any previous

Vietnamese trade agreement, demonstrating that our government

creates conditions for promoting trade-related e-commerce through

containing a general effort to adopt or promote electronic

signatures, online consumer protection, and paperless commerce

Furthermore, Article 13.2 of the VKFTA regulates specific

business sectors, such as steel and metals, electronics, machinery,

automobiles, petrochemicals, textiles and apparel, footwear, and

logistics, in which Korea and Viet Nam should collaborate to carry

out mutually beneficial activities Besides, South Korean investors

are anticipated to focus their attention more on petrochemicals,

aquaculture, and automobiles in particular

In addition, Korea and Viet Nam agreed to approve the VKFTA’s

incorporation of bilateral cooperation in cultural and entertainment

services, thereby creating favorable conditions for cultural exchange

and the development of entertainment service businesses

entertainment includes music, film and television, publishing and

digital media, radio, and live theater (Viet Nam Investment Review,

2022)