No. 2018-28 (May 24, 2018)

Dr. Park Jee-Kwang

Research Fellow, Department of Diplomatic Strategy Studies

The Sejong Institute

jkpark@sejong.org

Many Koreans are unaware of the fact that the trade volume between South Korea and ASEAN member states reached US$149 billion and accounts for 15 percent of South Korea’s exports and 10 percent of South Korea’s imports. This places ASEAN as South Korea’s second largest trade partner after China. In addition, since the THAAD crisis exposed political risks of the Chinese market and South Korea’s exports to China have reached the level of saturation, South Korea has laid eyes on the ASEAN as an alternative partner. The current South Korean administration endeavors to uplift the diplomacy with ASEAN states on par with the diplomatic engagement with the four neighboring powers—namely, the U.S., China, Japan, and Russia.

Regarding the deepened economic relations with ASEAN, several concerns exist. First and foremost, it is unclear whether the growth of ROK-ASEAN trade will continue or be a transient phenomenon elevated by the exponential export of semiconductors to Vietnam.

Another concern is that South Korea’s trade surplus against ASEAN quadrupled rapidly from US$ 9.1 billion in 2010 to US$ 41.4 billion in 2017. In turn, this begs the question on whether the ROK-ASEAN trade has expanded unilaterally in South Korea’s favor.

             However, despite this rapid increase in South Korea’s trade surplus, the South Korea-ASEAN economic relations have shaped to be mutually beneficial. Viewing the case of Vietnam, the country that accounts for 50 percent of South Korea’s exports to ASEAN member states, it is easily perceivable that the South Korea-ASEAN economic relations have advanced to benefit both sides.

According to the 2016 statistics, Vietnam imported US$ 32.4 billion and exported US$ 11.4 billion in relations with South Korea. Therefore, Vietnam recorded a huge trade deficit of US$ 21.3 billion vis-à-vis South Korea. This deficit is mostly attributable to Vietnam’s trade pattern—importing intermediate electronic parts such as semiconductors and re-exporting assembled products to Europe and the U.S.

While most South Koreans still perceive Vietnam as an exporter of labor-intensive goods such as apparel and footwear, in fact, Vietnam’s largest export item is electronic goods. In 2016, 36.1 percent of Vietnam’s exports were electronic products and components. Another noteworthy fact is that Vietnam’s chief import item also is electronic goods—22.8 percent of total import. Electronic goods are both top export and import item for Vietnam since it imports electronic components and parts and assembles them to export to the West. And South Korean corporations are leading this original equipment manufacturer (OEM) model of export. For example, Samsung Electronics has large industrial complexes in Vietnam, employing forty-thousand workers in Bắc Ninh plant and sixty-five thousand workers in Thái Nguyên plant. And the South Korean firm’s manufacturing facilities in Vietnam exported US$ 42.9 billion, accounting for 20 percent of total Vietnam’s exports. Vietnam’s export volume skyrocketed for the last decade, thanks to this surge of exports of electronic goods. As a matter of fact, Vietnam recorded US$ 38.3 billion trade surplus with the U.S. in 2017, putting them in 5th position in terms of trade surplus with the U.S., even US$ 15.4 billion more than that of South Korea which recorded US$ 22.9 billion surplus. And the electronic goods leads Vietnam’s exports to the U.S.—and South Korean multinationals such as Samsung largely contribute to this. Thus, South Korea-Vietnam trade relations could be characterized as mutually beneficial to both countries and particularly helpful to Vietnam.

Furthermore, considering the total balance sheet, South Korea runs a huge deficit in relation with Vietnam, adding the tourism balance and foreign direct investment. South Korea’s direct investment in Vietnam amounted to US$ 7.6 billion in 2016 and 1.11 million Koreans visited Vietnam in the same year. In contrast, Vietnam’s direct investment in South Korea is trivial and only 0.25 million Vietnamese visited South Korea in that same year. Hence, the international balance of payment between the two countries is more sound and balanced than the bilateral trade balance.

Still, it remains uncertain whether the bilateral economic ties could sustain as such in the future. The discourse on ROK-Vietnam relations is concentrated on invigorating the current ROK-ASEAN cooperation and lacks discussions on the shape of future cooperation between the two countries. This is the time to fundamentally ponder on future bilateral relations.

First, Vietnam will not continue to be in the position of an assembly base for electronic goods. The OEM export model is familiar to South Korea. Indeed, this was South Korea’s development strategy in the 1960s and 1970s and that of China since the 1990s. As South Korea did, Vietnam will strive to manufacture finished products and export them through their own technology. In preparation, South Korea should seek other production bases in the future as a long-term plan.

A more urgent issue is that China could emerge as a supply route for electronic parts to Vietnam, replacing South Korea. With the torrent of its low-cost goods, China could penetrate the intermediate electronic goods market in ASEAN countries. It is doubtful whether South Korea has any alternate strategies in response. When Chinese goods flow in, South Korea’s trade surplus vis-à-vis ASEAN member states will plummet and direct investment in Vietnam will also diminish by a large margin. This will speedily undermine South Korea’s hardly-developed relations with Vietnam, as well as ASEAN as a whole.