[Post-China Vietnam] ⑤ "Increase ASEAN Trade Using Vietnam as a Hub"

Gwak Seong-il, Director of the Economic Security Strategy Office at the Korea Institute for International Economic Policy. Photo by Yoon Dong-joo doso7@

"Vietnam is an alternative rather than a substitute for China. Amid the global supply chain restructuring, South Korea needs to diversify its cooperation with Vietnam. Trade should be expanded not only among Korean companies but also with local enterprises. Vietnam should be used as a hub to increase trade with surrounding ASEAN countries and build supply chains."

On the 11th, Gwak Seong-il, Director of the Economic Security Strategy Office at the Korea Institute for International Economic Policy (KIEP), emphasized in an interview with Asia Economy near Gwanghwamun, Seoul, that Vietnam could be a strategic choice for South Korea, which needs alternative markets amid the US-China conflict. Director Gwak stated, "Vietnam has a high degree of openness, and among developing countries, it is a member of the most Free Trade Agreements (FTAs), the Regional Comprehensive Economic Partnership (RCEP), and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), making it a market favorable for overseas exports," adding, "It also has the advantage of significant market expansion potential through agreements such as the European Union (EU)-Vietnam FTA." He suggested that if relations with China are not easily resolved, it is necessary to target the Chinese market through indirect exports via Vietnam.

Below is a Q&A with Director Gwak.

- Vietnam is expected to surpass a population of 100 million by the end of this month. Can Vietnam rise as a post-China?

▲ Although Vietnam's wage growth rate has recently increased, Korean companies are not leaving Vietnam. There was a time when Myanmar and Cambodia were preferred, especially for textile factories, but their populations are only about 54 million and 17 million respectively, and they face limitations due to a small workforce. Some companies are quickly turning their attention to the African market, which offers cheap labor and tax benefits when exporting products to major advanced countries like the US, but geographical distance is a challenge. Vietnam has a significant geographical advantage as it is close to China and South Korea, making it easy to procure Korean and Chinese parts. It also has relatively young and inexpensive labor. In terms of absolute market size, it is difficult for Vietnam to replace China. South Korea has produced and exported products in the huge Chinese market with 1.4 billion people and rapidly increasing income, but now it needs another base to replace China. Moreover, if products are made in China, they must target the Chinese market, but since the 2016 THAAD (Terminal High Altitude Area Defense) incident, China has not had favorable feelings toward South Korean products. If relations with China are not easily resolved, it is necessary to target the Chinese market through indirect exports via Vietnam.

- Vietnam became South Korea's largest trade surplus country last year. Will this trend continue this year?

▲ South Korea is the largest investor in Vietnam. Korean investing companies bring many Korean parts to Vietnam. Intermediate goods account for nearly 90% of exports to Vietnam. On the other hand, China has been pursuing a dual circulation strategy since 2020, gradually building an independent domestic supply chain. Dual circulation consists of domestic circulation and international circulation, and it is a strategy for China to grow based on expanding domestic demand amid prolonged global economic downturn and prolonged trade disputes with the US, increasing external uncertainties. Domestic circulation aims to build an independent domestic supply chain that can reduce import dependence from the supply side. As US-China conflicts intensify, domestic circulation is emphasized, and China is moving toward a strategy of doing everything internally, making Korean intermediate goods unnecessary. This is a fatal blow to us. Originally, the global value chain (GVC) requires producing goods where they can be made cheapest and exporting them, but due to US-China conflicts, despite inefficiencies, markets that can stably procure intermediate goods are sought. In this regard, Vietnam is a buffer zone between the US and China. Since the 2008 global financial crisis, the market where Korean companies from large corporations to SMEs have actively entered is Vietnam. Korean companies have established production networks and created an ecosystem. Trade among our companies has formed, and those companies buy intermediate and capital goods from Korea, generating a surplus. However, this year, due to the global economic slowdown, demand is decreasing, and the surplus is expected to shrink.

- What specifically is the reason for the decrease in the trade surplus with Vietnam this year?

▲ It is semiconductors. Last year, the price of semiconductors was $5,246 per kg, but as of February this year, it is only $4,004 per kg. Semiconductors are the largest import to Vietnam, but prices have fallen. Due to the global economic recession and IT sector downturn, demand has decreased, causing prices to drop and quantities to decline, creating a dual problem. The biggest contributors to last year's surplus with Vietnam were semiconductors, flat panel displays, and sensors, but exports of both are decreasing. For South Korea's exports to increase, Vietnam's exports must increase, but Vietnam's exports decreased in the first quarter of this year, making the situation difficult. The reduction in exports from Vietnam, a global production base, suggests that global exports will struggle for some time. Due to the global economic downturn this year, even Vietnam's exports are decreasing, making it difficult to record the same surplus in trade with Vietnam as last year.

Gwak Seong-il, Director of the Economic Security Strategy Office at the Korea Institute for International Economic Policy. Photo by Yoon Dong-joo doso7@

- With a trade deficit with China and declining exports to Vietnam, alternatives are urgently needed.

▲ Looking at the export growth rates of major export items to Vietnam in January-February this year, semiconductors, which have the largest share, recorded -35.2%, and flat panel displays and sensors recorded -32.3%. Semiconductors, displays, and wireless communication devices all saw significant export declines in January-February this year. There is currently no clear answer. Last year's trade surplus with Vietnam was $34.25 billion (about 43 trillion won), making Vietnam the largest trade surplus country for South Korea for the first time. However, it is overly optimistic to expect the same situation to continue. The government must not be complacent with the current situation in Korea-Vietnam trade and must establish specific strategies to prepare for potentially difficult export markets ahead.

- Last year marked the 30th anniversary of Korea-Vietnam diplomatic relations. It seems improvements are needed in the future direction of Korea-Vietnam cooperation.

▲ Vietnam is becoming a battleground for global companies, but labor costs are rising, and there is a shortage of skilled personnel. Skilled workers and middle managers are being poached by other companies. In semiconductors, Vietnamese companies are not participating in the supply chain and are currently focused on post-processing, which requires cheap labor. Vietnam strongly hopes to attract the semiconductor industry, but the international situation where most countries want to have semiconductor factories domestically is also a variable. To maintain a solid relationship with Vietnam, diversification of cooperation is necessary. Trade should be expanded not only among Korean companies but also with local enterprises. Vietnam should be used as a hub to increase trade with surrounding ASEAN countries and build supply chains. In addition to economic cooperation, active two-way cultural exchanges that strengthen social and cultural cooperation should be promoted. Among the countries of origin of parents in multicultural families in Korea, Vietnam accounts for the highest proportion, so the government should pay attention to enabling the second generation to serve as a bridge in Korea-Vietnam relations.