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Regional inter-dependence and Vietnam-Korea economic relationship

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The world is changing. Remarkable changes have been witnessed in East Asia where China’s emergence and the increasing bilateral/multilateral free trade agreements are shaping the economic and geopolitics patterns in the region. The facts have made regional countries become more interdependent. The trade and investment relations between any two countries have been no longer independent but influenced by the relations with the third country. This research is designed to investigate the trade and investment dependence of Vietnam on Korea given the increasing intensity of economic integration and more unstable geopolitics in the region. This research is based on network approach to investigate the bilateral trade and investment of Vietnam and Korea. As such, the relations of Vietnam and Korea are analysed taking into account the trade and investment of 13 other countries/group of countries who are large trade and investment partners of both Vietnam and Korea, including the EU, China, Australia, India, Russia, the United State, Japan, Singapore, Thailand, Indonesia, Malaysia, Cambodia, and the Philippines. The trade dependence index of Vietnam is calculated not only based on the trade structure of Vietnam, but also that of Korea as well as the power of Korea in the international market. The comparison of trade dependence by countries and by time gives critical insights about the relations. In addition, the inclusion of geopolitics into spatial gravity model is one of the innovations of this research. It allows to elaborately investigate the influences of the regional geopolitics, particularly the role of China, on the trade and investment of Korea and Vietnam as well as other major partners in the region.
  Vietnam and Korea have more than 20 years of diplomatic relations and remarkable progress has been made in improving and upgrading their ties. The strategic partnership was signed in 2009 in addition to the free trade commitments under framework of ASEAN Korea agreement (AKFTA). As a result, the trade and investment between Vietnam and Korea has increased remarkably. Korea soon becomes the biggest investor in Vietnam and the bilateral trade growth is recorded around more than 25% per year. The Vietnam-Korea Free Trade Agreement (VKFTA) in 2015 puts a cornerstone in the bilateral relation and is expected to potentially and fruitfully bring about benefits to both countries.
  The reason for such expectation is the fact that the VKFTA is more open than the AKFTA which both countries are signatories. It may benefit Vietnamese firms, indeed, both in terms of exporting more agro-products to Korea and importing better quality inputs. It also facilitates restructuring the import market of Vietnam, avoiding heavily dependence on some other markets. From another side, the FTA also facilitates the FDI from Korea because of more open commitments in service and investment. However, for Vietnam, such benefits are conditional. Poor preparation and readiness of both its institution and its domestic enterprises will hinder Vietnam from enjoying its trade with Korea.
  Given a more intensive cooperation, Vietnam is more and more dependent on trade and investment with Korea. The dependence index shows that in overall, Vietnam’s export dependence on Korea is less than other countries but inclines to increase since 2009. The same observation with a higher pace is found for import dependence in particular for auxiliary of garment and textiles, sea transport vehicles, machinery and mechanical appliances. This tendency is believed to continue because the VKFTA has taken into effect since 2015 and the expansion of FDI from Korea flowing to Vietnam will trigger a booming of import by Korean companies in Vietnam particularly the import of spare parts.
  Another note is the trade dependence is intensified over time in line with the expansion of FDI flows from Korea to Vietnam, especially from large corporations because of the shift of investment from China. This led to the argument that FDI is one of factors that make trade dependence increase.
  The FDI from Korea inflow in Vietnam has been also on the rise, largely contributed by the entry of very large firms in electronics and phones. Korea has become the biggest FDI investor in Vietnam that in turn implying an upward tendency of more investment dependence.
  Assessing the trade dependence index with Korea does not mean the dependence is good or bad because the relations between Korea and Vietnam in both economic and political aspects are warm and supportive in recent years as well as there is no territorial issue interrupting such relations. The policy implication of this dependence is different from the dependence of Vietnam on China since there remain the conflicts of sovereignty between China and Vietnam, and trade dependence may be used as an instrument for politics and sovereignty negotiation. Increasing dependence on Korea in terms of both import and export indicates that the two countries have increasingly taken advantage of the signed FTAs. However, the dependence also demonstrates the tightened relations between the two and changes in political, economic and trade situations of Korea may notably affect Vietnam. This is the common trend of integration because of increasing inter-dependence among economies.
  Further investigating the dependence suggest that even for some hypothetically unforeseen cases in which Vietnam would like to reduce such dependence, that the capacity to control international price of Korea is small, hence, Vietnam can proactively optimize the dependence either by diversifying commodities structure exported to Korea as well as diversifying export markets. From this perspective, in the context that Vietnam and Korea are accelerating the negotiation and signing new FTAs with other partners, in the near future, the export dependence of Vietnam on Korea is not a very big concern.
  The findings on the trade pattern using the spatial gravity approach suggested very intuitive evidence on the interdependence among countries. Besides other factors, FTA and geopolitical changes both determined the trade and investment. In addition, trade and investment flows of other countries also affect the trade and investment between any pairs of countries like Korea and Vietnam. The dependence of Vietnam on Korea is no longer only determined by the two countries themselves, but also the involvement of other partners.
  As an example of the advantages of spatial approach, the analysis about trade and investment multipliers indicates that Korea growth affects the trade between Vietnam and Korea, but besides the direct effect, a large part is through the interaction with other trade partners, among that the influence from Japan, China and Singapore is substantial. Similarly, the institutional improvement and wage improvement of China may have critical impact on the trade and investment between Vietnam and Korea as well as other countries in the region. This comes to the forecast that the trade and investment dependence of Vietnam to Korea will be continued, but sensitive to regional geopolitical and macro-economic issues. It implies that the KVFTA does not result in higher export to the Korean market unless supported by some favourable environmental factors such as the stable geopolitics and sound macroeconomics of Vietnam or in the region.
  The warming relationship between Vietnam and Korea is a very good environment for the trade and investment ties between the two which in turn brings about fruitful benefits for both sides. The stable regional geopolitics also plays a role for that. It, therefore, implies that keeping a stable environment in the region is not a duty of a single country or a group of countries but also of any countries  who  have  trade  and  investment  relations  with.  Both the Vietnamese and Korean governments are aware of the issue of stability in the regional geopolitics.
  From the Korean side, the relations with Vietnam bridges the relations to ASEAN. With cheap labour, large consumption market, this area should not be ignored by Korean investors. However, the role of China in this area also should never been neglected. China’s influence in ASEAN is huge, given more and more interdependence among countries and the implementation of AEC, Korean investment in this region is likely to be still slower than that of Japan or China. This issue should receive a noticeable consideration.
  With the increasing dependence and inter-dependence, the Vietnamese government should take advantage of this factor for their re-structuring economy, particularly improving the manufacturing sector toward export oriented strategy. Korea may become a good source of importing materials for exporting to other destinations, particularly the EU markets. EVFTA and VKFTA have generated great opportunities for Vietnam to eliminate the dependence on some traditional markets. In the context that TPP may be re-negotiated or cancelled, the critical improvement of the readiness of both Vietnamese and Korean firms for VKFTA is very necessary and needs to be done as soon as possible.[by KIEP]


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