Academic journal article East Asian Economic Review

Potential Economic Impacts of the Vietnam-Korea Free Trade Agreement on Vietnam

Academic journal article East Asian Economic Review

Potential Economic Impacts of the Vietnam-Korea Free Trade Agreement on Vietnam

Article excerpt

I. INTRODUCTION

Vietnam-Korea relations have developed considerably since the establishment of diplomatic ties in 1992. The relationship has been rapidly deepened in all fields such as the political and economic, social and cultural fields and trade and investment, education and people-to-people exchanges. During the short period of two decades, there has been great progress in bilateral trade relations. Trade volume has increased 74-fold from about US$ 500 million in 1992 to US$ 37 billion in 2015. The average annual growth rate of Vietnam's imports from Korea was about 25 percent, whereas Vietnam's exports to Korea increased by nearly 19 percent per annum during this period (Table 1). Korea has been one of Vietnam's top trading partners since 1992; Korea is the second-largest import market and fourth-largest export market for Vietnam, while Vietnam was Korea's fourth-largest export market in 2015. Vietnam is also one of Korea's largest export markets for industrial goods. On the other hand, although Korea's trade share declined, Korea has maintained its position as one of Vietnam's top 10 trading partners for the past 20 years (UNSD, 2016). In an effort to improve on the strategic partnership established between the two countries, the trade ministers of Vietnam and Korea signed a free-trade agreement (FTA) on May 5th, 2015. Both countries hope bilateral trade volume will reach US$70 billion by 2020 (VCCI, 2016).

Vietnam is the most attractive integration partner for East Asian countries such as China, Japan and Korea. Vietnam is a member of ASEAN, and ASEAN has signed trade agreements with China, Korea and Japan. The Vietnam-Korea FTA (VKFTA) is in effect; thus, an evaluation of the potential impacts of the VKFTA is necessary and important for policy implications for both countries.

There are few studies available on the effects of a potential FTA between Vietnam and Korea, because it has only been recently initiated. Previous studies (MUTRAP, 2010; Cheong, 2012) used econometric analysis, mostly the Computable General Equilibrium (CGE) model, to assess the FTA's effects on the economy as a whole, which does not focus on impacts on the industry level. Moreover, the Vietnam-Korea FTA was initiated in the context of the implementation of the ASEAN -Korea FTA (AKFTA). Thus, it is necessary to evaluate the potential impacts of the VKFTA versus the AKFTA.

The objectives of this paper are to provide a comprehensive assessment of the potential economic impacts of the Vietnam-Korea Free Trade Agreement, compare the potential effects of the Vietnam-Korea FTA in the context of the ASEAN-Korea FTA, and suggest policy implications for Vietnam.

The paper is organized as follows. Section 2 provides general information on the background to the trade relationship between Vietnam and Korea. Section 3 analyzes the impact of the Vietnam and Korea FTA on Vietnam's economy including on elements such as: welfare, economic growth, trade, industrial production, and employment. Section 4 compares the potential effects of the Vietnam-Korea FTA in the context of the ASEAN-Korea FTA, focusing on the agricultural sector. Section 5 proposes policy implications and concludes the paper.

II. Vietnam - Korea Trade Relations

Korea has been one of Vietnam's top trading partners since 1992. The share of Vietnam's trade with Korea in Korea's total trade has increased rapidly over the years. On the other hand, though Korea's trade share has declined, Korea has maintained its position as one of Vietnam's top 10 trading partners for the past 20 years. As can be seen from Table 1, except for the period during the Asian financial crisis, the trade volume between the two countries has increased rapidly, at about 19 percent annually on average. The scale of bilateral trade relations further deepened in 2007, when the Korea-ASEAN Free Trade Agreement (merchandise) went into effect. In terms of volume, Vietnam's exports to Korea rose from only US$ 57. …

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