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Challenges in taking advantage of opportunities from the FTAs – Part 2: The Vietnam-Korea FTA: A 'stepping stone' to boost the trade deficit?

Soaring of the trade deficit

The VKFTA was officially signed on 5/5/2015 and came into effect on 20/12/2015. The signing of the VKFTA has created many changes, rapidly increasing the bilateral trade.

According to the statistics of the General Department of Customs, the export turnover has increased continuously after the VKFTA, from 36.55 billion USD in 2015 to 43.57 billion in 2016. In 2017, the exchange of goods between the two countries reached 61.56 billion USD, a sharp increase of 41.3% in comparison to 2016, and became the highest increase recorded in recent years. Of the total 61.56 billion USD, the imports of goods originating in Korea reached 46.73 billion USD, up 45.3%. This is also the highest increase in imports ever. This is mainly due to the sharp increase in imports of key products such as computers, electronic products and components, mobile phones and components, machinery, equipment and accessories…

The remarkable point in trade relations between Vietnam and Korea in recent years is that Vietnam always imported a surplus from Korea. According to the data of the General Department of Customs, during the period 2013-2016, Vietnam imported surplus from Korea with trade deficits of 14.9 billion USD, 14.62 billion USD, 18.71 billion USD and 20.76 billion USD respectively. By 2017, the balance of trade between the two countries fell into an imbalance with a deficit of 31.9 billion USD inclined to Vietnam, the trade deficit rate was 68%. In comparison with the total value of Vietnam's exports to Korea in 2016, this deficit was two times higher.

By mid-2017, when the trade deficit from Korea had increased rapidly, Dr. Le Quoc Phuong, former deputy director of the Vietnam Industry and Trade Information Center (Ministry of Industry and Trade), expressed concern that many Vietnamese companies failed to take advantage of the VKFTA. South Korea opened the way for Vietnamese goods in accordance with the commitments, but Vietnam export to Korea was not much compared with the import figure. At that time, Dr. Le Quoc Phuong pointed out that with the rapid growth of import, Korea will soon become the No. 1 import market of Vietnam. At the present time, the VKFTA has made Korea become a "hit" in the market of Vietnam's trade deficit. The statistics from the General Department of Customs showed that in the first six months of 2018, Vietnam had the largest trade deficit from Korea with more than 13.9 billion USD, higher than the figure of 13.5 billion USD of the deficit from China.

Mr. Le An Hai, deputy chief of the Ministry of Industry and Trade, former deputy director of the Asia-Africa Department (Ministry of Industry and Trade), stated: Although Vietnam is in a trade deficit from South Korea, the Vietnam's imports are mainly machinery and equipment for production. Moreover, the goods structure of export and import between Vietnam and Korea is complementary to each other, without direct competition. However, Mr. Hai also said that the utilization of the VKFTA preferences of Vietnamese enterprises is quite high compared to the other FTAs but still lower than Korean companies as well as the expectation of the two sides. As for reason, Mr. Hai stated that the VKFTA is one of the new-generation FTAs, besides tariff reduction, there are strict provisions related to technical standards, origin, intellectual property… Consequently, Vietnamese enterprises have not adapted to meet the conditions for preferential treatment. In addition, in fact, many enterprises have not actively studied information about the VKFTA as well as the benefits of tariff reduction, leading to the abandonment of the legitimate incentives.

Increasing the initiative of businesses

Specific mention of the using rate of preference certificates of origin (C/O) for export goods to Korea, according to the data of the Import-Export Department and the Department of E-commerce and Digital Economy (Ministry of Industry and Trade), in the first half of this year, for the C/O with AK and VK form, the export to South Korea reached 28% preferential rate. Korean FDI enterprises in Vietnam imported raw materials from Korea to be cumulated to the next stage of production in Vietnam, then it is easy to obtain the C/O for final products to export back to Korea.

Speaking from the perspective of the voice of businesses, Mr. Nguyen Chanh Phuong, Vice President and General Secretary of the Handicraft and Wood Industry Association of Ho Chi Minh City (HAWA) said: Currently, the export value and utilization rate of incentives from VKFTA are inclined to Korean FDI enterprises, which are investing and manufacturing in Vietnam. This is due to the fact that Korean FDI enterprises understand well the standards and characteristics of furniture in their market. Vietnamese enterprises need time to understand and grasp the tastes of Korean people, and at the same time, they must make efforts to meet the technical standards and origin of goods under the provisions of the FTA to enjoy the preferences.

Many experts assessed that in order to make full use of the VKFTA, while the Korean Government and enterprises are well prepared and have concretized a number of opportunities, the Vietnamese side is quite passive and embarrassed. Accessing to information as well as methods of applying incentives from the VKFTA by Vietnamese enterprises is limited.

Around the story of taking advantage of the VKFTA, Mr. Choi Dae Kyoo, a specialist in customs and tax services (Vietnam-Korea FTA Support Center) said: One of the leading causes for Vietnamese enterprises not to make good use of preferential treatment from the VKFTA is the lack of knowledge about the method of origin management, the classification of the list in the source of raw materials, and the restrictions on the establishment of mutual recognition of the certificates of origin.

According to Mr. Choi Dae Kyoo, enterprises themselves must change, raise the awareness and knowledge of staff, especially the research and development department in accessing the FTA databases. After that, they can take appropriate measures to respond to changes timely to make good use of the FTA.

Mr. Choi Dae Kyoo also emphasized that it is necessary to establish a network of information sharing between inexperienced and experienced enterprises in utilizing the FTA.

Mr. Le An Hai added that in order to reach 100 billion USD for the two-way trade turnover between Vietnam-Korea by 2020, Vietnam will come up with a draft plan for cooperation with Korea to promote exports to this country with key goods such as agricultural and fishery products. In the coming time, Vietnam will also have an action program to help each other, promote import and export in the direction of balance, reduce trade deficit, focus on supporting industries, high technology and consumer goods.

In recent years, mobile phones and components; computers, electronic products and components; textiles… are the main products that Vietnam has exported to Korea. In the opposite direction, the familiar items imported from South Korea include: Computers, electronic products and components; machinery, equipment, tools and spare parts; fabrics; mobile phones and components; Petroleum...

According to the statistics from the General Department of Customs: In 2017, Korea is an important market for key export products of Vietnam such as: Mobile phones and components (reached 3.97 billion USD, up sharply by 45.4% compared to 2016); textiles (reached 2.64 billion USD, up 15.8%); computers, electronic products and components (reached 1.83 billion USD, up 46%)... For import, computers, electronic products and components are the most items imported from South Korea in 2017 with the value of 15.3 billion USD, up 76.7% compared to the previous year and accounted for 32.8% of total import turnover of Vietnam from this country. In addition, machinery, equipment, tools and spare parts; fabrics; mobile phones and components are also items with high import turnover into Vietnam. Generally, the total import value of these 4 leading groups accounted for 68% of the goods originating from Korea to Vietnam in 2017.

In the first eight months of 2018, the goods structure of export and import between Vietnam and Korea has not changed much. For export, of the total export value of 11.9 billion USD, in the top spot are mobile phones and components (over 2.9 billion USD); followed by textiles (over 1.9 billion USD); computers, electronic products and components (over 1.7 billion USD). In addition, the typical export items include: Seafood (over 538.8 million USD); vegetables and fruits (over 76.9 million USD); wood and wood products (over 632.3 million USD); fibers, textile yarns (over 274.5 million USD); Footwear (over 340.8 million USD) ...

For import, of the total import value of over 31.05 billion USD, in the top spot are computers, electronic products and components (over 11.35 billion USD); followed by machinery, equipment, tools, spare parts (over 4.1 billion USD); Mobile phones and components (over 3.45 billion USD); petroleum (over 1.57 billion USD); fabrics (over 1.44 billion USD); plastic products (over 1.14 billion USD); plastic materials (over 1.07 billion USD); other common metals (over 1.02 billion USD).

Source: Customs News