Institute of International Trade and Commerce in Martial Arts, "The Footsteps and Future of Economic Cooperation between Korea and Vietnam" Report
Mutual Investment Increased 145 Times Since Diplomatic Relations in 1992
[Asia Economy Reporter Han Yeju] As South Korea and Vietnam mark the 30th anniversary of diplomatic relations, concerns have been raised about the need to properly respond to expanding corporate risks.
The Korea International Trade Association (KITA) International Trade and Commerce Research Institute released a report on the 19th titled "Commemorating the 30th Anniversary of Korea-Vietnam Diplomatic Relations: The Footsteps and Future of Economic Cooperation between Korea and Vietnam."
Since establishing diplomatic ties in 1992, the trade volume between South Korea and Vietnam has increased 164-fold, and mutual investment has grown 145-fold. As a result, Vietnam has become South Korea's third-largest trading partner after China and the United States, while South Korea has become Vietnam's largest foreign direct investor.
In particular, the continuous increase in South Korean investment in Vietnam and the shift toward high value-added trade items have contributed to the mutually beneficial development of industries and trade between the two countries. South Korean investment in Vietnam has diversified from labor-intensive industries in the past to high value-added sectors such as computers, telecommunications equipment, and distribution industries since the 2010s. In the early years of diplomatic relations, 76.1% of South Korean investment in Vietnam was concentrated in textile manufacturing, and even when including primary metals, clothing accessories, and furniture, investments were limited to only five industries. As of 2021, South Korean investment in Vietnam has expanded to 57 industries, including electronic components, computers, automobiles, as well as services such as finance, insurance, and construction.
Accordingly, the proportion of "high-technology intermediate goods" necessary for local production in South Korea's exports to Vietnam is rapidly increasing, and imports from Vietnam are also shifting from consumer goods to capital goods.
Beyond economic exchanges, human and cultural exchanges between the two countries have also become active. As of October this year, the number of Vietnamese residents in South Korea reached approximately 230,000, making them the second-largest foreign resident group after Chinese nationals (about 240,000). Despite the COVID-19 pandemic in 2020, the number of Vietnamese students and students from multicultural families in South Korea continued to rise. Cultural exchanges centered on the Korean Wave (Hallyu) have expanded, with South Korea ranking first in Vietnam's National Brand Power Index (BPI).
However, risks that could affect the relationship between South Korea and Vietnam are expanding, including intensified U.S.-China conflicts, global supply chain restructuring, and economic recessions caused by high inflation and high interest rates, necessitating appropriate responses.
As Vietnam's trade volume grows rapidly, anti-dumping and countervailing duty investigations by major countries targeting Vietnam are increasing. The number of new trade remedy investigations against Vietnam was about 10 annually in the 2010s but more than doubled to 27 in 2020.
Additionally, Vietnam, which is highly dependent on China, frequently becomes a target for investigations into circumvention of Chinese products by regions such as the United States and the European Union (EU), which are engaged in trade disputes with China. South Korean companies have also been included in such investigations. For example, Korean steel products produced in Vietnam using Korean raw materials and exported to the United States have been subject to circumvention investigations.
Sharp increases in labor costs and rental fees are also burdensome for South Korean companies, and a shortage of skilled labor is reducing the operational efficiency of local factories. Vietnam's minimum wage growth rate averaged 6.0% annually over the past five years as of 2020, ranking fifth highest among 18 Asian countries. Industrial park rental fees in southern Vietnam rose from $109 per square meter in Q4 2020 to $190 per square meter in Q1 2022.
Furthermore, complex liquidation procedures and strict transfer pricing tax systems act as factors that hinder flexible operations of South Korean businesses in Vietnam and increase uncertainty.
An Byeongseon, senior researcher at KITA, stated, "To further develop the Korea-Vietnam economic cooperation model in the future, cooperation to respond to risks surrounding both countries and strengthening collaboration in promising future sectors are necessary." He added, "Considering Vietnam's economic development direction and South Korea's strengths, cooperation in five areas?smart cities, future agriculture and livestock, transportation infrastructure, energy, and culture and entertainment?will be promising."
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