Vietnam’s widened trade deficit with RoK: no worries

These days, LG Display Vietnam is boosting recruitment for its US$1.5 billion plant in the northern city of Haiphong, producing OLED products for mobile phones, smart watches, TVs, and tablets. The firm is in need of thousands more employees, such as engineers, security men, mechanics, accountants, interpreters, and technicians.

LG Display is one of the few enterprises to have contributed the most to the economy in this year’s first three months and beyond. Specifically, in just the first two months of 2018, LG Display’s increased production and exports generated revenues of VND49.3 trillion (US$2.24 billion), which is 2.2 times higher than that of the same period last year. The firm earned an average of US$1.12 billion each month, according to the General Statistics Office (GSO).

Though the official March figures remain undisclosed, if LG Display’s performance continues as it did in January and February, the figure may rise to US$3.36 billion for the whole quarter.

In another case, Samsung Display Vietnam has been boosting production, with a two-month revenue of VND49.3 trillion (US$2.24 billion) which is 2.2 times higher than that of 2017’s first two months.

According to the General Statistics Office (GSO), LG and Samsung have made remarkable contributions to Vietnam’s trade deficit over the first three months of the year and this situation is expected to continue in the coming months.

GSO reported that in this year’s first quarter, Vietnam suffered from a US$7.6 billion trade deficit from RoK, up from the US$6.3 billion deficit recorded over the same period last year.

Of this figure, Vietnam’s imports of electronics products from RoK witnessed the strongest rise. Notably, over the first quarter of 2018, Vietnam’s import turnover of electronics, laptops, and related spare parts skyrocketed 52.8% year-on-year – far higher than the 16.1% increase in last year’s corresponding period, and the import turnover of mobile phones and their spare parts climbed 13.6% year-on-year, lower than the 20.9% expansion in last year’s first quarter.

Last year, Vietnam saw a trade deficit of about US$31.8 billion with RoK, up 53.4% from the US$20.8 billion deficit of 2016. In 2015, the figure stood at US$18.7 billion.

However, according to the Korea Chamber of Business in Vietnam’s (KorCham), the trade deficit presents a grey area for Vietnam, as many RoK firms have been boosting their investment and exports to Vietnam, while increasing imports of machinery, equipment, and materials to serve their production in the country.

“Many are worried about the strong rise in Vietnam’s trade deficit with RoK. However, they shouldn’t be, and should understand that Vietnam’s imports from RoK are largely conducted by RoK firms in Vietnam – mostly Samsung and LG. They largely import machinery, equipment, and materials for production, and then export products from Vietnam to foreign markets,” KorCham’s vice chairman Hong Sun explained.

Samsung’s export turnover sat at about US$51 billion last year, accounting for more than 25% of Vietnam’s total export turnover of US$214 billion. Samsung also holds 95% of the total export turnover of RoK firms in Vietnam.

“Meanwhile, Vietnam’s exports to RoK, mostly end-products and consumer goods, have increased rapidly by more than 31% in 2017, against last year’s 28% rise,” Sun said. “Thus I would affirm that firms from both countries are doing well to take advantage of the Korea-Vietnam Free Trade Agreement (KVFTA) and other trade pacts between RoK and ASEAN.”

These pacts include a goods trade agreement which took effect in 2007, a service and commercial deal which came into force in 2009, and an investment co-operation agreement made valid in 2009. These pacts have created the ASEAN-Korea Free Trade Area (AKFTA).

According to KorCham, the most important thing now is for the two countries to boost their exports to each other’s markets. Thus during the Korea-Vietnam Summit on November 11, 2017 in the central city of Da Nang on the sidelines of the 2017 APEC Economic Leaders’ Week, RoK President Moon Jae-in and Vietnamese President Tran Dai Quang vowed to boost the countries’ bilateral trade to more than US$100 billion in 2020, from the former target of US$70 billion as set by the two countries in 2013.

According to Vietnam’s Ministry of Finance, by 2018, 86% of the import tariff lines under AKFTA will be reduced to 0%, from their current average of 50%.

Under KVFTA’s commitments, Vietnam will completely remove its import duties on 89.9% of all products from RoK over a 15-year period.

For example, Vietnam will remove its 30 and 20 per cent tariffs imposed on RoK air conditioners and rice cookers, respectively, over the next 10 years. The average tariffs for foodstuffs and consumer goods will be gradually reduced from the existing 16-17% to 0% over the next five years.

The Korea International Trade Association recently issued a survey on 1,015 RoK small and mid-size export firms. The results showed that more than 33% of respondents said they plan to expand their facilities in Vietnam, followed by China (19%), ASEAN member nations (10.7%), and India (8.3%).