South Korea Draws Vietnam Into Its Orbit

Chart showing value of South Korea's exports to and imports from Vietman, 1991-2019

FOR CHINA’S NEIGHBOURS, trade and investment relations with each other gain importance as Beijing deepens its involvement in regional trade arrangements. Those between South Korea and Vietnam are a case in point.

South Korea is now a larger foreign investor than China in Vietnam. In raw numbers, more South Korean firms do business there than in China, though they are mainly small and medium-sized enterprises.

For the giant South Korean conglomerates, Vietnam has become an important link in their supply chains. Witness that electronic components such as semiconductors and displays accounted for 89% of Vietnam’s exports to South Korea in 2019 (the latest full-year figures available).

The two have different histories with China and some uneasy mutual history dating back to the Vietnam and Korean wars. Trade did not start to blossom until Hanoi and Seoul established diplomatic relations in 1992. As our chart shows, it bloomed after they signed a bilateral trade agreement in 2015.

Vietnam, with an 8.9% share of the total trade (again on the 2019 data), is South Korea’s third-largest trading partner after China (25.1%) and the United States (13.5%). It ranked third as an export market, again behind China and the United States, worth $48.5 billion, and fifth for imports ($21 billion) after China, the United States, Japan and Saudi Arabia.

It is also South Korea’s fastest-growing trade partner, with trade having expanded by half as much again in the three years to 2019. The two nations are looking for bilateral trade to top $100 billion by the year after next.

On the services side, pre-Covid, Vietnam became a major tourist destination for South Koreans, with visitor numbers rivalling those coming from China.

On the investment side, as mentioned above, South Korea is Vietnam’s largest foreign investor. More than 9,000 projects, worth upwards of some $70 billion, account for 18% of Vietnam’s total foreign direct investment (FDI). Like China, Vietnam offers South Korea’s conglomerates political stability, reasonable geographical proximity, cultural familiarities and cheap, educated labour for manufacturing. Samsung, for example, makes a lot of smartphones there.

The country will remain attractive to South Korean investors despite rising costs and the supply chain headaches now being experienced due to Hanoi’s hapless handling of the Delta variant. Vietnam’s growing popularity with foreign investors, including non-South Korean firms looking for supply chain alternatives to China under what is now being called ‘strategic decoupling’, is putting pressure on the country’s rents, ports and infrastructure. Skilled labour is growing harder to hire and consequently and more expensive.

The tension between China and the United States, which is the backdrop to the growing trade and investment relationship (and defence co-operation) between South Korea and Vietnam, means there is always a risk of blowback against US allies. That is more of a concern for South Korea than Vietnam. South Korean firms well remember the state-inspired consumer boycott against them five years ago to express Beijing’s displeasure at Seoul allowing the installation of a US anti-missile system.

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Filed under China-Koreas, China-Vietnam, Trade

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