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PARK Bun-Soon

Time to Rethink Korea's Vietnam Strategy

PARK Bun-Soon

Aug. 24, 2005

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It's time for the Korean business community to take a new look at Vietnam's economic potential. This is underscored by the fact that Samsung Electronics recently held its regional marketing strategy conference in Vietnam. It was a moment for Samsung to fully appreciate the economic potential of this Southeast Asian nation.

Samsung isn't the only Korean company doing so. Other Korean companies have actively expanded business in Vietnam since the late 1980s, when Hanoi began implementing the policy of Doi Moi or reform, opening up its economy to the outside world. Korean companies are active not only in the labor-intensive area of light industries, but also in infrastructure projects and information and telecommunications.

Vietnam sustains a solid growth on the strength of its natural resources. Today, as a member nation of ASEAN or Association of Southeast Asian Nations, she's one of nations that can critically influence the course of the ASEAN-China free trade agreement or the upcoming Korea-ASEAN free trade agreement. Considering China's emergence as a powerful competitor in the ASEAN markets, it is time for Korean companies and government to rethink their strategy to Vietnam, not only as export market but also as an investment destination.

Vietnam's economic performance in 2005 isn't as brilliant as it was in the previous year. Although export of the crude - one of the three major export items - has been brisk as of late May, the other two items are either slow or outrightly down. Footwear exports grew a meager 4% while textile exports dropped 3%. It's a worrisome sign given the fact that export slump causes recession in the short term, and eventually reduces import demands by increasing trade deficits. In the long run, this worsens the potential growth of the economy.

Vietnam's current account deficits in 2004 were worth 5.7% of its gross domestic product. It was a clear demonstration of the fact that tumbling exports ultimately restrains consumption from growing. For Vietnam to speed up its process of industrialization, it needs to increase imports of capital and intermediate industrial goods in the early stage.

For the time being, securing export competitiveness is a primary concern of Vietnam. Fortunately, the global economic condition today isn't too bad for the country. And it is working hard to improve its overseas image. Vietnamese Prime Minister Phan Van Khai met US President George W. Bush last June for the first time after the end of the Vietnam War. This should help attract more US investment.

Hanoi is also working hard to join the World Trade Organization (WTO). And the United States, faced with growing textile imports from China, supports such effort. Once Vietnam becomes a WTO member, its competitive power in the areas of textile and footwear exports is thus set to improve.

Korea should do well to establish a long-term strategy on Vietnam by considering these factors. Politically, Korea has come to terms with its history of having fought against North Vietnam in the war preceding reunification with the South. Korea's former president Kim Dae Jung used these words to express regret over Korea's role in that unhappy war: "We offer our words of regret over Korea's participation in that unhappy war that caused pains to the people of Vietnam."

He also declared that the ground for friendship has solidified after that sad chapter in their relations. Today, Vietnam takes the biggest amount of Korea's investment in the ASEAN. Vietnam desperately needs more foreign investment, so there isn't any obstacle on the way to Korea's increased investment. The main economic problem lies in lopsided trade. According to Hanoi's figures, Korea's exports of durable and industrial intermediate goods totaled US$3.7 billion in 2004. By contrast, Korea's imports of agricultural and fishery products from Vietnam were worth just US$600 million.

With Vietnam's trade deficits from Korea running to US$3.1 billion a year, or 47% of its total trade deficits worth US$6.6 billion, Seoul was Hanoi's biggest source of trade imbalance. Needless to say, this ought to be a serious worry for Vietnam, and as for Korea, a source of concern as it adversely affects the bilateral economic relations. On top of this, some Vietnamese leaders are becoming concerned over what they regard as an excessive inflow of Korea's pop culture.

If Korea wants to carry on as Vietnam's friend and continue expanding economic cooperation, it must first help Vietnam achieve economic growth. Investment should be raised to strengthen her fundamentals and be focused on the areas that need it most. Wherever necessary, Korea should encourage Vietnamese suppliers to increase their supply of parts and components.

At the same time, Korea needs to diversify imports from Vietnam to beyond agricultural and fishery products. It may also reinforce this cooperation with more development aid funds so Vietnam can offset its big trade imbalance with Korea.

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