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