Experts deny worries over trade deficit towards South Korea

Workers in Doosan Heavy Industries Vietnam (Doosan Vina), a South Korean-invested enterprise in Vietnam (illustration)

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Origins of trade deficit towards South Korea

Since April 2017, South Korea has taken over China to become Vietnam’s biggest import market with $9.3 billion of trade deficit for the first four months of 2017, slightly larger than China in this period. For the first half of 2017, Vietnam’s trade deficit towards South Korea totalled $16 billion, while it was $14.1 billion towards China.

Many think that the leading position of South Korea derives from the huge import volumes of Samsung and LG manufacturing facilities in Vietnam.

In a quarterly meeting, a representative of the Ministry of Industry and Trade (MoIT) confirmed that Vietnam’s huge trade deficit towards South Korea was related to big South Korean enterprises in Vietnam, such as Samsung and LG.

“Samsung and LG’s local factories have imported a large number of machinery, equipment, and materials for their manufacturing activities, leading to the growth of Vietnam’s trade deficit towards South Korea,” the representative said.

Vietnam has been importing from South Korea for a long time, but the import volume has significantly increased since 2008, when Samsung made its first large-scale investment in the country, which resulted in an investment wave from South Korea. Currently, Samsung has invested more than $17 billion in Vietnam and LG over $5 billion.

From early 2017, Samsung Display Vietnam and LG Display Vietnam’s expansion projects have raised the number of imports from South Korea. In addition, according to MoIT, as the Vietnam-South Korea Free Trade Agreement (VKFTA) became effective, duties imposed on components and materials imported from South Korea dropped to zero, while duties on Chinese imports remained, meaning the increase in imports from South Korea is normal.

No concerns over rising trade deficit towards South Korea

There have been some concerns over the rising trade deficit towards South Korea, but Tran Thanh Hai, deputy director of MoIT's Import-Export Department insisted that this rising trade deficit was normal.

The reason is that in the first half of 2017, big South Korean enterprises in Vietnam largely imported machinery and equipment. Besides, the increasing imports of oil and gasoline and textile materials from South Korea were also contributing factors.

According to Dr Nguyen Duc Thanh, head of the Vietnam Institute for Economic and Policy Research, Vietnam’s trade deficits towards China and South Korea are very different. Imports from China are consumer goods, while those from South Korea are materials, machinery, and equipment used for manufacturing. Thus, increasing trade deficit towards South Korea is normal and it should not be much of a worry.

An economist told VIR that as Vietnam is more and more deeply integrated into the world economy, economic performance should be assessed in the global context.

“We have a trade deficit of $16 billion towards South Korea, but we have trade surplus towards other countries,” he said.

The economist took the example of Samsung which may import a lot of materials and components from South Korea to manufacture mobile devices, but exports the finished products all over the world, not only to South Korea.

According to statistics of the General Department of Vietnam Customs, in the first half of 2017, Vietnam exported over $1.7 billion of mobile phones and components to South Korea, while the amount of such exports to the US was worth more than $2 billion.

Moreover, the amount of mobile phones and components to the United Arab Emirates was $1.9 billion, to the UK more than $861 million, to Brazil $408 million, to India more than $240 million, and to Germany $860 million.

Samsung has increased Vietnam’s trade deficit towards South Korea, but at the same time, it contributed more than $40 billion to Vietnam’s export turnover last year. This year, this amount may rise up to $50 billion.

In addition, as the localisation rate of Samsung Electronics Vietnam in the northern province of Bac Ninh and Samsung Electronics Vietnam Thai Nguyen in the northern province of Thai Nguyen has increased to 57 per cent, the added value that Samsung has brought to Vietnam is considerable.

Similarly, LG and other South Korean enterprises in Vietnam may import a large number of materials, machinery, and equipment from South Korea, but they also export to many other countries.

Heavy dependence on a single market is not good, but to accurately assess Vietnam’s trade deficit towards South Korea, the matter should be considered in the global context.

Source: General Department of Vietnam Customs