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Is South Korea Overly Dependent on Exports to Vietnam?

As Vietnam, South Korea’s third-largest export market, faces an economic downturn, Korean companies are taking direct hits. Critiques are emerging about the urgent need for countermeasures, as Vietnam accounts for half of the exports to the Association of Southeast Asian Nations (ASEAN).

According to the Korea Customs Service, exports to Vietnam have been declining by double digits for seven consecutive months from November last year to May this year. While exports to China fell by 4.4% last year, exports to Vietnam increased by 7.5%. However, this year, the situation has worsened. Exports to Vietnam in the first four months plummeted by 26.3% compared to the same period last year, and exports to China decreased by 29%.

Vietnam is the third-largest export market for Korea after China and the United States. Last year, it was the country with the largest trade surplus (US$34.3 billion), but it was pushed to second place after the United States (US$7.2 billion) in the first quarter of this year.

The slump in exports to Vietnam is largely due to two factors. First, the global economic downturn negatively impacted the Vietnamese economy, which functions as a production base. Exports from Korean companies sending semiconductors and other intermediate goods to Vietnam also declined significantly, for the same reason as the slump in exports to China.

The sluggish recovery of Korean companies that have entered Vietnam and suffered a blow to their operations due to the COVID-19 pandemic also led to a decline in exports.

From the first half of 2020, Vietnam has maintained a strong COVID-19 lockdown policy. Textiles, clothing, and other consumer goods piled up in factories. Stocks of goods exported to the United States and European countries were not depleted, worsening the operational conditions of companies producing goods in Vietnam.

Vietnam is more of a production factory than a consumer market. Last year, intermediate goods accounted for 88.8% of Korea’s exports to Vietnam. These intermediate goods are then used in the production of finished goods in Vietnam, which are exported to the U.S. and Europe.

Experts say that Vietnam is an irreplaceable production factory. Kwak Seong-il, director of economic security strategy at the Korea Institute for International Economic Policy (KIEP), explained, “Cambodia and Laos have too little working-age population, Myanmar is politically unstable, Indonesia is an island nation with insufficient infrastructure, and Thailand has relatively high per capita income, so labor costs are expensive compared to Vietnam.”

However, while Vietnam is attractive as a world factory, there is a problem that damages are fully passed on when the Vietnamese economy deteriorates due to such reasons. The World Bank recently projected Vietnam’s economic growth rate this year at 6.0%, down from the previous projection of 6.3%. The Purchasing Managers’ Index (PMI) for Vietnam’s manufacturing sector remained below 50 from February to May this year, excluding February. A PMI below 50 means that the manufacturing industry is in a downturn.

Analysts argue that it is premature to elevate Vietnam as a consumer market rather than a production factory. Vietnam’s per capita gross national income (GNI) is US$3,560, and the proportion of consumer goods in Vietnam’s exports last year was only 4.2%. Director Kwak stated, “If Vietnam’s per capita income exceeds $10,000, it will be a market worth targeting for our consumer goods, but in the current situation, our products are too expensive and of too high quality to be consumed in that country. The cost of developing new products suitable for the Vietnamese market is even greater.”

There are arguments that while maintaining the status of an intermediate goods exporting country, diversification is necessary within ASEAN countries.

Chu Mun-gab, director of economic policy at the Korea Federation of SMEs, stated, “It is important for our companies not to go ‘all-in’ in Vietnam, learning from the difficulties they faced when heavily dependent on China,” and added, “The trade structure is similar to that with China, where the proportion of intermediate goods exports is high, so there is a need for long-term preparation.”

President Yoon Suk-yeol is visiting Vietnam as a state guest for three days from June 22. A 205-member economic delegation will accompany the state visit, which is the largest scale since the Yoon administration was launched.

There are suggestions to strengthen trust between the leaders during the visit. The newly replaced Vietnamese President Vo Van Thuong is known to have chosen a pragmatic line that is neither pro-American nor pro-Chinese. Director Kwak said, “The new president may be pro-Vietnam enough to turn away any company if it is determined that it is not in Vietnam’s interest,” and added, “In such a situation, it is most important to create a relationship that pursues mutual benefits at any time.”

Source : Business Korea