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The Vietnam-Korea free trade agreement: What are the challenges and opportunities for businesses in Vietnam?
The Vietnam-Korea free trade agreement came into effect in December 2015 – Suresh G Kumar, Managing Director of TMF Vietnam, examines the multiple tariff incentives, and the business challenges and opportunities it presents for Vietnam.
The Vietnam-Korea free trade agreement (VKFTA) came into effect on 20 December 2015. Among the many FTAs Vietnam has signed in 2015, it is the only significant one that actually came into effect in 2015. With tariffs going down every year from the first year of the VKFTA, the second year of tariff cuts came into effect immediately from 1 January 2016.
The VKFTA aims to increase bilateral trade between the countries to US$70 billion by 2020, as well as to attract Korean investors, their management expertise and technology.
Similar to other agreements signed between Vietnam and other developed countries, the VKFTA promotes investment opportunities, trade and economic growth. It also highlights certain issues that Vietnam needs to address, such as intellectual property rights, competition policy, trade in services, and environmental rules.
South Korea is Vietnam’s largest investor, with US$38 billion in more than 4,200 projects. According to the Foreign Investment Agency (FIA) under the Ministry of Planning and Investment, South Korea had approximately 30% of US$19.3 billion in foreign director investment (FDI) between January and October in 2015. South Korea was also one of Vietnam’s main export partners, with approximately 5.3% of US$6.4 million of exports in the first nine months of 2015.
What does the VKFTA include?
Under the VKFTA, companies from Vietnam and South Korea will benefit from reduced tariffs. South Korea will remove 95% of tariff lines on imports from Vietnam, and Vietnam will eliminate 90% of tariff lines on goods imported from Korea (within 15 years from the effective date of the agreement).
South Korea will open its market for 499 more items from Vietnam including tropical fruits and garlic. It also reduces import duties on key imports from Vietnam such as shrimp, fish, crab, tropical fruits, garment and textiles, and wooden products.
In Vietnam, the VKFTA will help create more than 400,000 employment opportunities as there are nearly 3,000 Korean enterprises operating in the country. In general, FDI companies in Vietnam are leading the import and export trends. According to the Vietnam Customs report, for the 11 month of 2015, exports for FDI companies equated US$101.53 billion – an increase of 18.3% from 2014.
Challenges and opportunities
Companies may need to restructure to improve their competitiveness; to take a more strategic approach and increase their involvement in regional and global production networks. Even if businesses are unwilling or unable to export on their own, they can still act as a supplier to major exporters to capitalise on the VKFTA’s benefits.
Changes in laws and administrative procedures also bring challenges to businesses operating in the country. Vietnamese companies can embrace the opportunities by investing and improving their employees’ skills, such as addressing productivity and language proficiency.
How TMF Group can help
TMF Group understands the rules and regulations, and has local expertise to help companies stay compliant and avoid unexpected costs in doing so. To find out how you can make the most of the opportunities in Vietnam,get in touch with our experts.