LOOKING BACK VIETNAM’S EXPORTS TO KOREA AFTER 5 YEARS

OF IMPLEMENTATION OF VKFTA
Authors: Nguyen Phuong Anh
Dinh Thao Van
Dang Quang Binh
Dao Thuy Linh
Until this day, Vietnam has signed and enforced 13 free trade agreements (FTA)
with approximately 50 different countries and territories from over the world. The
implementation of the FTAs - including the Vietnam-Korea Free Trade Agreement
(VKFTA) - has been making potential impacts on Vietnam’s economic growth,
presenting the nation’s businesses with both new opportunities and challenges. The
objectives of this paper are to provide a comprehensive assessment of the impacts
of VKFTA on Vietnam’s exports to the Republic of Korea (hereafter Korea) for the
past 5 years (since the implementation of the Agreement), and suggest some
recommendations for the Vietnamese government in the upcoming time.
Key words: ASEAN-Korea Free Trade Agreement (AKFTA), Free Trade
Agreement (FTA), Vietnam – Korea Free Trade Agreement (VKFTA)
1.     Introduction
In December 1992, Vietnam and Korea officially agreed to a diplomatic relation
with one another. Since then, for over nearly ¼ a century, the alliance between the
two nations has seen monumental progress: It has evolved from “common trade
partners” to “comprehensive partnership” in 2001 and “comprehensive strategic
partnership” in 2009. Now, Korea remains one of Vietnam’s most crucial partners
in various aspects such as commerce, investment, and the providing of official
development finance. In further regards to the Vietnam-Korea relation, Korea is
currently leading in foreign direct investment (FDI), ranking second in official
development assistance (ODA) and third in trade relation between the nations.
Prominently, in the year 2015, the two countries have agreed on the VKFTA. The
commercial partnership has attained outstanding progress since.  
The VKFTA stands as a comprehensive agreement that emphasizes commitment
and the balance of benefits between the two countries. The implementation of the
VKFTA promotes the exportation of Vietnamese specialized goods such as
agriculture products, fisheries, etc., to Korea. However, Vietnamese businesses are
faced with constant challenges in approaching the Korean market due to not fully
understanding how to utilize the opportunities offered by the VKFTA. This paper is
organized as follows. Section 1 provides an overview of VKFTA including
opportunities and challenges for Vietnamese exporters; Section 2 analyses current
situation of Vietnam's exports to Korea and the problems posed by enterprises;
Section 3 focuses on conclusions and recommendations on policy solutions.
2.     Overview of VKFTA - Opportunities and challenges for Vietnamese
exporters  
VKFTA was signed on 5/5/2015 and officially entered into force on 20/12/2015.
Compared to the ASEAN-Korea Free Trade Agreement (AKFTA) (signed in 2006
and entered into force in 2007). In VKFTA, Vietnam and Korea have negotiated
and given each other more incentives in the fields of goods, services, and
investment. VKFTA is a comprehensive free trade agreement with a high level of
commitment and balances the interests of both parties.
The Agreement consists of 17 Chapters, 208 Articles, 15 Annexes, and 1
Implementation Agreement of the Regulation. The main contents of the Agreement
include provisions on trade in goods, trade in services (including
telecommunications services annexes, financial services, the movement of natural
persons), investment, and intellectual property, food and plant health and safety
measures (SPS), rules of origin, customs facilitation, trade remedies, technical
barriers to trade (TBT), electronic commerce, competition, economic, institutional,
and legal cooperation.
Under VKFTA, Korea is more open to Vietnamese products than AKFTA, and as a
result, Vietnamese businesses have more opportunities to access the Korean
market. Combining both VKFTA and AKFTA obligations, Korea eliminated
11,679 tariff lines for Vietnam (accounting for 95.44 percent of the tariff,
equivalent to 97.22 percent of the total import turnover from Vietnam to Korea in
2012). Vietnam abolished 8,521 tariff lines for Korea (accounting for 89.15 percent
of the tariff, equivalent to 92.72 percent of the total import turnover from Korea to
Vietnam in 2012). Under the Agreement, Korea is committed to abolishing import
duties on most of Vietnam's strong export products, and at the same time, Korea is
committed to lowering taxes on input materials, components, and accessories,
replacement parts to facilitate the development of production in Vietnam.
The implementation of the VKFTA provides opportunities for Vietnamese
businesses to access the Korean market, thanks to strong market access
commitments from Korea. Although Korea is a developed market with relatively
high requirements and quality requirements for imported goods, the requirements
for imported goods on that market are generally still lower than in other markets of
Vietnam, such as the EU, the United Stage of America, and Japan. The
implementation of the VKFTA together with other FTAs encourages Vietnam to
reform institutions and policies aimed at creating a favorable business environment
and making effective use of resources, thus improving the competitiveness of
goods.  
In addition, Korea is particularly committed to helping Vietnam develop its
supporting industry, along with regulations on many standards designed to
strengthen and protect investor rights; and the establishment of a dispute settlement
mechanism between the state and investors has created favorable conditions to
attract more Korean investors to Vietnam, contributing to an increase in the value-
added exports. In addition, the implementation of the VKFTA contributes to
improving the import efficiency of the group of raw materials and auxiliary
materials for the main manufacturing and export industries as a result of Vietnam's
commitment to open markets; reducing dependence on imports of certain
traditional markets, contributing to the diversification of the supply of raw
materials, while at the same time complying with the rules of origin of goods in
Vietnam.
In addition to opportunities, the implementation of VKFTA also creates many
challenges for Vietnamese businesses to access the Korean market. Compared to
regional markets such as ASEAN countries (more than 671 million people in 2020)
or China (about 1,400 million people), the Korean market is considered to be
relatively small (only about 51 million people). Meanwhile, requirements for
product quality, food hygiene, and safety standards or technical standards for
imported goods are much higher than those of ASEAN or China.
With a well-established domestic retail market system and a relatively stable
network of supermarkets, it is not easy for Vietnamese enterprises to enter Korean
sales – channels. If they do not have a strategy to know about VKFTA, Korean
market characteristics, and improve product quality, sales services, ... it's difficult
for businesses to penetrate deeper into this market.
Under AKFTA, Vietnamese enterprises face many difficulties when competing
with goods imported from Korea at affordable prices and better quality/designs on
the domestic market. The roadmap for the implementation of the VKFTA and other
FTAs of Vietnam in the coming years, together with the continued opening of more
domestic markets for imports from Korea, will create more competitive pressure
for domestic firms, especially for Vietnamese enterprises that are slow to innovate
in technology and have low management capacity (Table 1).
Table 1: Average tax rates of tariff lines committed cut in FTAs

FTA Average Average Average Average

export tax export tax export tax export tax
rate in 2019 rate in 2020 rate in 2021 rate in 2022

ASEAN 0,07% 0,06% 0,05% 0,04%

ACFTA 3,6% 2,98% 2,98% 2,98%

AKFTA 5,9% 5,9% 4,6% 4,6%

AANZFTA 3,0% 3,0% 3,0% 2,0%

AIFTA 3,2% 2,9% 2,8% 1,9%

VCFTA 6,8% 6,1% 5,1% 4,4%

VKFTA 4,39% 4,36% 3,78% 3,75%

EVFTA 2,8% 1,8% 1,42% 1,1%

CPTPP 9,1% 7,7% 6,3% 4,8%

FTA 1/4/2018- 1/4/2019- 1/4/2020- 1/4/2021-

31/3/2019 31/3/2020 31/3/2021 31/3/2022

AJCEP 4,2% 3,7% 3,3% 2,7%

VJEPA 3,69% 2,35% 2,16% 1,99%

Source: The Ministry of Finance

3.     Current situation of Vietnam's exports to Korea and the problems posed
by enterprises
After more than 5 years in effect, VKFTA has contributed to the promotion of two-
way trade relations between Vietnam and Korea. Korea is currently Vietnam's
third-largest trading partner (after China and the United States), expected to reach
USD 65.1 billion by the end of 2020, accounting for 12.35% of total turnover
import and export of the country.
Vietnam's export turnover to Korea increased rapidly from USD 4.71 million in
2013 to USD 8.93 million in 2015 (before the implementation of the VKFTA) and
continued to rise to USD 19.72 million in 2019. Due to the impact of the Covid-19
epidemic, Vietnam's export turnover in 2020 to Korea decreased slightly compared
to 2019 but is still estimated to reach USD 19.70 million (more than 2 times
compared to 2015). Vietnam's merchandise exports to Korea increased by an
average of 17.13 percent per year over the 2016-2020 period, and imports are
estimated to increase by 10.5 percent over the same period (Table 2).
    Note (*): Estimation of the Ministry of Industry and Trade
Source:  Department of International Relations - VCCI (2020)
Figure 1: Vietnam – Korea Export turnover period 2011-2020
The Figure 1 above shows that Vietnam's trade balance with Korea is always high-
value and tends to increase along with the implementation of the VKFTA roadmap.
One of the main reasons for this situation is that Vietnamese companies do not
fully understand VKFTA, so they do not know how to take advantage of the
opportunities offered by this Agreement, while Korean enterprises have prepared
the conditions very well to take full advantage of preferential enforcement of the
Agreement.
Items that Vietnam and Korea have committed to lower taxes on VKFTA have high
growth in export turnover. In Vietnam, there are seafood products, textiles, wood
products, and wood products, shoes of all kinds, fibers, fibers of all kinds,
vegetables. Computers, electronic products and components for Korea; raw
materials for textiles, leather, and shoes; electrical wires and cables (Ministry of
Industry and Trade, 2020). However, Vietnamese goods exported to Korea are still
mainly labor-intensive, subcontracted, and low-value goods. Meanwhile, Vietnam's
main imports from Korea are mainly raw materials, machinery, and equipment for
production... It has great value (Figure 2 and Figure 3). Large import value from
Korea is mainly machinery products, components, and equipment that serve
investment projects of Korean companies in Vietnam such as L&G, Samsung,
Posco,…because Vietnam’s supporting industries provide not enough raw materials
for production       
      
                  

      
Year 2015                                                          Year 2020
Source: Department of International Relations- VCCI (2016 & 2020)  
Figure 2: Vietnam’s main exports Vietnam to Korea in 2015 and 2020

      
            Year 2015   Year 2020
Source: Department of International Relations- VCCI (2016 & 2020)  
Figure 3: Vietnam’s main imports Vietnam to Korea in 2015 and 2020
3.3. Conclusions and recommendations on policy solutions
Korea is a highly attractive export partner of Vietnam, thanks to its market size,
bilateral trade, and as a result of the FTA between Vietnam and Korea.
In order to help enterprises know how to take advantage of opportunities, thus
reducing obstacles when introducing FTAs in general and VKFTA in particular in
the future, the following solutions need to be introduced synchronously by the
state. Here are some suggestions:
It is important to continue updating and refining the legal and policy framework in
order to fully enforce the VKFTA commitments under the roadmap, in compliance
with the requirements and competitiveness of Vietnamese enterprises. This
adjustment process must ensure uniformity, transparency and equal treatment
between the types of enterprises in order to establish increasingly favorable
conditions for the export and commercial development of enterprises.
Renovate and encourage correspondence in a variety of formats (newspapers,
conferences, workshops, blogs, government departments, divisions, ect) on
commitments and the roadmap for the implementation of commitments of Vietnam
in VKFTA for enterprises. In particular, the Ministry of Industry and Trade needs
to introduce the VKFTA Handbook more broadly by organizing training courses
directly to enterprises (classified by industries and business sectors). Specifically,
they know how to take advantage of opportunities and mitigate negative impacts of
VKFTA on exports.
It is important to have specific incentives, and preferential policies and
mechanisms, and to establish favorable conditions for Korean enterprises to invest
in new technologies in key export advantage industries from Vietnam to Korea in
the period 2021-2030. The successful implementation of this policy framework,
together with the opening of Vietnam's VKFTA market, would contribute to
exploiting the new wave of Korean investment in Vietnam, generating spillovers
for Vietnamese businesses, participating in the global supply chain and increasing
the value added exports.
Establish mechanisms and policies to enable enterprises to invest in the renovation
of machinery, facilities, technology and manufacturing processes to meet the
quality and requirements of the Korean industries. At the same time encourage
enterprises to promote research and development, the application of science and
new technology, particularly high technology, advanced governance in the
direction of the industrial revolution 4.0l.
Finally, support enterprises with knowledge and forecasting of the Korean market,
as well as support for the export of products to that market; providing intelligence
advice and legal assistance to enterprises in the analysis process and in the
execution of export activities. In addition, foreign direct investment firms are
encouraged to partner with domestic companies in the production and exports.
References
1. Department of International Relations - VCCI (2016), Korean Market
Profile 2016, https://vcci.com.vn/uploads/HSTT_Han_Quoc_05.2016.pdf
2. Department of International Relations - VCCI (2020), Korean Market
Profile 2020, https://vcci.com.vn/uploads/HSTT_Han_Quoc_05.2016.pdf
3. VCCI (2019), Free Trade Agreement between the Government of the
Socialist Republic of Vietnam and Government of the Republic of Korea,
Accessed 11/1/2019,  https://wtocenter.vn/upload/files/fta/174-ftas-
concluded/189-vietnam---south-/237-full text/Loi%20van%20Hiep%20dinh
%20tieng%20Anh.pdf
4. Ministry of Industry & Trade (2020), Discussion between the Minister of
Industry and Trade, and Korean Enterprises, held in Hanoi on 26/11/2020.