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Vietnam Today

Chance to deliver

Released at: 08:41, 05/02/2015 2015 - Year Of FTAs

Chance to deliver

The prospects for Vietnamese exports will be huge once the bilateral free trade agreement with South Korea comes into being.

by Do Huong

South Korea and Vietnam have wrapped up negotiations over their bilateral free trade agreement (FTA), cutting tariffs on exports to Vietnam’s third-largest trading partner. South Korea aims to conclude the FTA before the end of the year as it seeks to expand its presence overseas. Vietnam, meanwhile, is seeking to encourage free trade so it can better access large international markets. 

The two sides concluded the deal during a recent meeting between Prime Minister Nguyen Tan Dung and South Korean President Park Geun-hye on the sidelines of the ASEAN-Korea Commemorative Summit in Busan. The two leaders agreed that the FTA is expected to almost triple bilateral trade, to $70 billion by 2020, and also bring the strategic cooperative partnership between the two countries to new level. Vietnam has become South Korea’s 15th FTA partner and the fifth to conclude talks in 2014, following Australia, Canada, China and New Zealand.

The FTA negotiations began in August 2012 but saw delays over issues such as fishery products. While some technical issues remain, the agreement is expected to be signed this year. The two sides agreed on all of the FTA’s 17 chapters, including the trade of goods and services, customs procedures, investment and intellectual property, food hygiene and safety, and rules of origin. It also commits to removing barriers to e-commerce and legal institutions, but rice, a sensitive product for South Korean farmers, was excluded from the deal. 

There is yet to be any detailed information on commodities with tariffs reduced or removed or a schedule of such reductions or removals. In general, however, Vietnam and South Korea will remove import tariffs on more than 90 per cent of all products once the FTA is implemented. Vietnamese enterprises currently enjoy tax incentives when exporting to South Korea as a result of the ASEAN-South Korea FTA. Under the multilateral FTA, at least 90 per cent of taxes on goods from ASEAN to South Korea were brought down to 0 per cent in 2010.

However, South Korea will not open the door wide until 2016 for goods considered sensitive or highly sensitive, when the FTA is expected to remove the tariffs on goods such as farm produce, seafood, and apparel. Experts said that the level of the two sides’ commitment to opening the door is deeper and broader than with the multilateral ASEAN-South Korea FTA.

According to the new deal, the liberalization ratio of South Korea will rise by three percentage points (worth $170 million), to 94.7 per cent from the 91.7 per cent under the ASEAN-South Korea FTA. In terms of item numbers, the liberalization ratio will increase by 495 to 95.4 per cent from 91.3 per cent under the ASEAN-South Korea FTA. According to the Ministry of Industry and Trade (MoIT), highly sensitive products such as honey, garlic and ginger were included, which will create significant competitiveness for Vietnam compared to regional rivals.
However, rice, pepper, and onions - sensitive products for South Korea farmers - were excluded from the deal. The country will grant duty-free status to imports of shrimp up to 15,000 tons, worth $140 million. This is good news for Vietnam’s shrimp producers, seeing them record higher growth in the future. South Korea is currently Vietnam’s fifth-largest importer, behind the US, Japan, the EU and China, and the biggest importer of Vietnamese squid.

Once the bilateral FTA comes into effect, South Korea will cut and reduce import tariffs on key items of Vietnam such as shrimp, fish, tropical fruit, textiles and garments, and mechanical products. Mr. Le An Hai from MoIT said that the FTA will help Vietnamese enterprises have more opportunities to penetrate into South Korea, promote key products, attract more investment in sectors that are not the country’s strengths, and increase the competitiveness of Vietnamese products among regional countries such as Thailand, Indonesia and the Philippines, as well as the world. 

As a result, the rate of liberalization in the Vietnamese market will rise by 6 percentage points (worth $740 million) to 92.2 per cent from 86.2 per cent under the Korea-ASEAN FTA. In terms of item numbers, Vietnam’s trade liberalization ratio jumped from 87 per cent of the ASEAN-Korea FTA to 89.2 per cent by opening up 200 more products. In particular, items that were not subject to market opening, including passenger cars (over 3.0 liters), freight trucks (5-20 tons), automotive parts, cosmetics, and home appliances (refrigerators, washing machines, rice cookers), were liberalized. These were also not opened up in the ASEAN-Korea FTA. South Korean manufacturers producing automobiles, home electronics, and cosmetics will likely benefit as import duties on these items will be reduced under the agreement.

Mr. Hai said that the structure of exports and imports between the two countries is not competitive. Vietnam’s exports to South Korea are mainly agricultural and wood products, seafood, textiles and garments, footwear, and furniture. Meanwhile, 95 per cent of Vietnam’s imports from South Korea are materials for production and re-exports to other countries such as the US and the EU. Imports tend to be those that Vietnam hasn’t produced or produce at low quality. 

Even though the bilateral agreement has not been signed, exports to South Korea already show positive signs of change. The seafood industry is expected to earn $1 billion in exports to South Korea by 2017, against turnover in 2014 of $700 million. Among Vietnam’s seafood exports to South Korea, shrimp sales account for the most, at 49 per cent, cuttlefish 26 per cent, and marine finfish 24 per cent. Sales of these three main items saw growth in January-September 2014: shrimp of 85 per cent, cuttlefish 32 per cent, and marine finfish 8 per cent. Total seafood exports to South Korea will see continuous growth in the upcoming months.

The Vietnam Association of Seafood Exporters and Producers (VASEP) said that South Korea is an important market for Vietnam, especially for dried fish. With a market share of 54 per cent, Vietnam was a major supplier of dried fish and ground fish to the country. Vietnamese enterprises are actively improving their facilities to meet market requirements. 

According to Mr. Truong Dinh Hoe, General Secretary of VASEP, Vietnamese enterprises have faced obstacles in antibiotic residue testing, as the permitted level in South Korea is quite low. However, they have made efforts to meet the criteria, he added, and receive up-to-date information on warnings, regulations and standards. The association forecast that seafood exports to South Korea would continue to increase in the future, as Vietnamese products will enjoy tax incentives within the framework of the bilateral FTA. Vietnam is now the third largest supplier to South Korea, behind China and Russia, accounting for 13.2 per cent of total supply. 

Vietnamese seafood enterprises began changing their mindsets in economic integration through improving business capacity and adapting to international requirements. Meanwhile, local enterprises in the agriculture industry such as fruit and vegetables have only changed their mindsets a little. South Korean enterprises say that their market’s consumers favor Vietnamese agricultural products, partly due to competitive prices compared with Thailand and China. However, products lack uniformity, good packaging and quality, so have been unable to meet the huge demand. Agricultural production remains small and scattered, while quality and traceability management scarcely meet the standards imposed by demanding markets. 

Small and medium-sized enterprises generally do not approach South Korean importers directly, so produce products that meet the requirements of their intermediaries. Finding information on the market, determining the tastes of consumers, and staying updated on regulations of and warnings from South Korean agencies have been limited. Large local enterprises penetrating into the market are those that are prepared for reductions in import tariffs in the future, according to the Vietnam Fruit and Vegetables Association. In the first eleven months of 2014, fruit and vegetable export turnover was $53.7 million, an increase of 105.3 per cent compared to the same period of 2013. South Korea is the third largest importer of Vietnamese fruit and vegetables. The association expects growth in South Korea as some enterprises have invested more in processing products in frozen canned form in order to increase product value.

Apart from agriculture, Vietnamese enterprises in the textiles and garment and automobile assembly industries will also benefit from the bilateral FTA. According to Dr. Le Quoc Phuong, Deputy General Director of the Vietnam Industry and Trade Information Center under MoIT, these industries will see tariffs reduced or removed, making them more competitive. Meanwhile, industries such as automobile components, truck production, and retail will face more competitiveness once South Korean enterprises invest in Vietnam in the future. “This will present a challenge for those who lack information about the market and tariffs or depend on government protection and State support,” he said. 

As always, opportunities will accompany the challenges. Vietnamese enterprises need to adapt to new requirements as the country more deeply integrates into the international market.
According to Mr. Vo Tri Thanh, Vice President of the Central Institute for Economic Management (CIEM), trade liberalization is always the game of give and take. Once a bilateral or multilateral FTA comes into effect, Vietnamese enterprises must compete or die. Opening the door wide is aimed at helping Vietnam compete with other countries and bolster its economic growth. This requires local enterprises improve their internal capacity and then win in both the domestic and overseas market.

Both to benefit

Mr. Park Sang Hyup, Director General of the Korea Trade-Investment Promotion Agency (KOTRA), Ho Chi Minh City, tells VET’s Do Huong about expectations for trade and investment between South Korea and Vietnam from the upcoming bilateral free trade agreement.

What do you expect from the Vietnam-South Korea Free Trade Agreement (VKFTA) regarding trade and investment?

Once the VKFTA comes into force it will have reciprocal effects on the bilateral trade and investment relationship. Vietnam has been chosen as a production base by numerous global South Korean companies for their export-oriented processing and manufacturing activities and therefore Vietnam annually imports a large volume of production materials and parts from South Korea. It is expected that the gradual reduction and elimination of tariffs levied on materials and parts such as plastic resin, textiles, steel, auto parts and components, will help to boost South Korean exports of materials, parts and semi-finished products to Vietnam and at the same time will help to attract more South Korean direct investment into Vietnam and, consequently, promote the exports of Vietnam-made products to global markets. Thus, the bilateral FTA is believed to be a win-win deal for both countries in view of its positive effects in boosting South Korean exports to Vietnam and boosting Vietnam’s exports to global markets.

In addition, thanks to tariff preferences under the FTA, Vietnam’s domestic market is expected to grow sharply. South Korean exporters should find new business opportunities in Vietnam while Vietnamese consumers will enjoy more choice in high-quality products from South Korea. In particular, South Korean small and medium-sized enterprises will benefit the most from the FTA. The current complicated C/O (Certificate of Origin) registration and issuance procedures have, to some extent, hindered their export activities. Thus, the FTA is expected to facilitate their exports to Vietnam as it will simplify these complicated procedures. 

Regarding Vietnam’s exports to South Korea, the FTA will allow Vietnamese products on sensitive and highly-sensitive lists, such as agricultural and fishery products, to further penetrate into the South Korean market thanks to South Korea’s commitments to more broadly open up its domestic market through larger and faster tariff cuts.

What do you predict the trend of investment from South Korean enterprises into Vietnam will be after the VKFTA is signed? What industries have potential for growth?

Most South Korean investors in Vietnam have poured their money into setting up overseas production bases in order to take full advantage of low production costs. They use equipment and materials imported from South Korea and other countries for their processing and manufacturing here and then export their products back to South Korea or to third countries. In the future, as tariffs will be gradually cut and ultimately removed for the majority of tariff lines of not only industrial equipment, tools and materials but also consumer goods, Vietnam will attract more South Korean investment in the production and trade and services sectors, aiming at Vietnam’s potentially huge domestic market.  

With expanding bilateral trade thanks to the lowering of import taxes, South Korean products are likely to increase their presence in Vietnam and increasingly win the trust and affection of Vietnamese consumers, partly contributing to enlarging and improving Vietnam’s domestic trade and distribution service sector. Hence, starting as a production hub, Vietnam will gradually emerge as a potentially huge consumption market with fast growing purchasing power, which is a prerequisite for Vietnam evolving as an international trade and commerce gateway to neighboring ASEAN members, especially Cambodia and Laos. Small electrical and electronic appliances and fast-moving consumer goods like cosmetics and processed food are among an array of goods that will possibly register robust export growth to Vietnam. As South Korean importers and distribution businesses become more buoyant, distribution and logistics services are expected to attract more South Korean investment.   

What should Vietnam do to improve its business environment to attract more investment from South Korea?

Thanks to commitments made in establishing policies and mechanisms to protect South Korean investors doing business in Vietnam, the FTA is expected to help remove the difficulties they are most likely to encounter, such as the issue of profit remittances, compensation for property damage or destruction in certain circumstances, like expropriation cases, and disputes against the Vietnamese Government. In fact, legal provisions relating to South Korean investment protection have already been stipulated in the multilateral ASEAN-South Korea FTA and the Bilateral Investment Treaty between Vietnam and South Korea (BIT). However, with the VKFTA, investment protection is stipulated in detail and South Korean investors will be protected in a more effective way. 

In the service sector, particularly finance and communications, an Annex to the FTA provides more concrete and transparent stipulations. Appraisal results of an investment project in finance should come within 180 days, in compliance with the principle of rapid administrative processes.
The FTA will apply stricter copyright protection provisions than those stipulated in TRIPS (the Agreement on Trade-Related Aspects of Intellectual Property Rights), helping to lay a firm foundation for effective protection of South Korean investment, which is closely related to creative content and thus intellectual property, facilitating its wider and deeper reach in Vietnam.

In conclusion, the VKFTA will set up a legal framework to enhance bilateral trade and investment cooperation between Vietnam and South Korea. However, whether the FTA will record solid achievements in reality greatly depends on the Vietnamese Government’s administrative implementation capabilities and, in particular, the transparency and consistency of its legal system.

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