From 2001 to 2011, the percentage of intermediate goods that Vietnam exported to East Asia increased from 20.4 to 34.4 per cent, while the percentage of capital goods increased from 2.3 to 8.6 per cent. This is partly because of Vietnam’s success in attracting FDI from its East Asian neighbours, which in 2013 accounted for over 70 per cent of Vietnam’s FDI inflows.
Most of this investment has gone into Vietnam’s basic materials and electronics industries, which have grown rapidly against the backdrop of the changing structure of East Asian production networks. Previously, East Asian countries like Japan used China and ASEAN as their production base for exports to the United States and Europe. Now they use China as both a production base and a market. ASEAN countries have consequently become a production base for goods exported to China as well as the West. One indication of this is that exports from South Korea, Japan and Taiwan to ASEAN states have mostly been made up of intermediate goods. For example, since the mid-2000s, intermediate goods have made up approximately 80 per cent of South Korean exports to seven major ASEAN countries.
Investment from South Korean electronics giants Samsung and LG is accelerating Vietnam’s participation in the global production network. Unlike FDI in the textile and sewing industry, which has mostly taken the form of CMP (cut, make, pack) or CMT (cut, make, trim), FDI in the electronics sector from major companies has activated intra-firm and inter-firm trades between major production bases within East Asia, and made the accompanied investment with the contractors and business partners. The percentage of parts and components in South Korean exports to Vietnam has increased substantially since Samsung first started production of mobile phones in 2009, growing from 7.2 per cent in 2008 to 31.4 per cent in 2012.
Vietnam’s participation in the East Asian production network will progress even further in the future. And the South Korea–Vietnam FTA currently under negotiation will continue to accelerate Vietnam’s participation in the East Asian production network. To enable South Korea and Vietnam to participate more actively in the East Asian production network, the FTA should look to further facilitate the growth of trade links by reducing service-link costs and maximising location advantages. Further efforts to improve logistical efficiency and the harmonisation of rules of origin are also necessary.
The changing dynamics of the global production network has presented Vietnam with a number of opportunities. The South Korean-Vietnam FTA could significantly help Vietnam to deepen its involvement in the East Asian production base — but only if it really is directed at making bilateral relations more open and comprehensive.
Jaewan Cheong is a Senior Researcher at the Korea Institute for International Economic Policy.
While this welcoming prospect of expanded trades and closeness between S. Korea and Vietnam has economic advantages for both nations, longer geopolitical implication is more significant within the dynamics of Asian theater.
Like S. Korea always faced with destabilizing aggression threat from the North, Vietnam is engaged in the similarly high stake chicken game with China over its sovereignty within and beyond the South China Sea. The required deterrence method for both nations involve maintaining high economic growth, increased military strength and enhanced diplomatic relations throughout Asia.
Recent events indicate that Vietnam is elevating its comprehensive partnership with Japan, not unlike S. Korea is counting on its US treaty trump card if and when hostility escalates. This presents strong motivation for S. Korea to compete and complement Japanese large scale interests in Vietnam beyond just low labor market destination, point of increased trades flow…but into more strategic political integration where long-term leverage with China may also be a bonus.