Shifts in Vietnam’s trading relationships offer opportunities

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Increased demand for Vietnamese exports abroad and a rise in investment-driven imports has caused substantial change in the country’s trade patterns, something an upcoming trade deal with the EU could alter further.

South Korea becomes Vietnam’s second-largest trading partner

Trade with South Korea reached $29.1bn in the first half of this year, or 14.7% of the total, according to figures released by the General Department of Customs in July. This made the country Vietnam’s largest trading partner after China, overtaking established markets such as the US, the EU and ASEAN.

Outbound shipments from Vietnam to South Korea increased by 28.6% to $6.57bn year-on-year (y-o-y) in that period, with imports up 51.3% at $22.56bn.

An important factor in this shift is Vietnam’s higher imports of equipment and technology. Roughly 65% of shipments from South Korea from January to June were machinery, technology and associated parts, much of which went to support production capacity – particularly Samsung’s investments in Vietnam – rather than consumer demand, Dinh Tuan Minh, CEO of domestic firm Market Intello, told media.

FDI inflows from South Korea reach $5.6bn

This shift may also reflect increased foreign direct investment (FDI) in the Vietnamese economy. In the first seven months of this year South Korean FDI commitments totalled $5.62bn, or 25% of total inflows, according to the Ministry of Planning and Investment.

In terms of total FDI stock, South Korea has invested some $50.5bn in Vietnam since 1988, accounting for 30.8% of total FDI, according to a report from the Korea Trade Investment Promotion Agency released in early June. More than 70% of this has been directed towards the manufacturing sector.

Free trade agreement with EU likely to cause future trade shift

South Korea’s status as Vietnam’s second-largest trading partner, however, could come under pressure in years to come, with the EU set to gain wider access to the local market through a free trade agreement likely to come into force in 2018.

First mooted in 2012, the EU is set to ratify the deal early next year, though the requirement that each member state approve the deal may slow its implementation.

A lowering of tariffs and other trade barriers could expand trade between Vietnam and the EU well beyond the $48bn recorded in 2016.

Under the agreement’s current terms, Vietnam would immediately lift 65% of all import duties on goods from the EU, rising to 99.8% over the next decade. The EU in turn would remove tariffs on 85.6% of Vietnam’s exports to the bloc, rising to 99% within seven years.

By the time the agreement is fully implemented, bilateral trade is expected to more than double to $100bn, offering an incentive to investors in manufacturing, textiles, garments and other segments that already have a strong import profile in the EU.

Growing value in agriculture

The agriculture, fisheries and forestry segments – all traditional foreign currency earners – could be another bright spot for Vietnamese trade in the years to come.

In the year to July these industries collectively posted the strongest export growth of any sector, climbing 14.7% y-o-y to $20.4bn. Farm sales alone rose 18% to $10.89bn, as per data from the Ministry of Agriculture and Rural Development.

Fisheries sales reported $4.31bn in export revenue, just behind forestry products at $4.41bn, while foodstuffs posted a 17.5% y-o-y increase compared to a 10.8% y-o-y rise for wood and wood products.

Tariff-free access to European markets could see export earnings from the primary sector rise further, though competition with other Asian countries and the need to invest in improvements to meet EU health and safety standards could constrain growth.

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