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TPP collapse deals blow to S. Korea

Nov 27. 2016
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SOUTH KOREAN companies that were looking forward to Vietnam’s ratification of the Trans-Pacific Partnership (TPP) must now be deeply disappointed. In fact, many will be in mourning.

South Korea is Vietnam’s largest provider of foreign direct investment (FDI), and Vietnam was poised to be one of the biggest winners from the US-led trade deal involving 12 Pacific Rim nations.

But US President-elect Donald Trump, in a video message on November 21, announced that the United States would quit negotiations for the TPP on his first day in the White House when he takes office in January.

Even though South Korea was not among its 12 member countries, the deal’s failure is yet another hit for Korean industry and companies that have been struggling to maintain growth amid declining entrepreneurship and innovation.

South Korea’s largest business conglomerates, its famous chaebol, are long-term investors in Vietnam. They have been attracted to the country by low wages and the possibility of freer trade with Asean members and TPP countries.

However, the government of Vietnam has announced that it will delay ratification of the TPP, taking a wait-and-see approach. Indeed, Vietnam’s decisions first to join the deal and then to delay ratification gave South Korean businesses a roller-coaster ride.

In response to that delay, a lot of companies rescheduled their investments, said Kim Bu-heung, leader of the international cooperation team at the Korea Federation of Textile Industries (KOFOTI) in Hanoi.

Smaller companies stopped investing immediately, Kim said. “After seeing the TPP document last year, Korean garment companies have paused [their] investments and rethought investing in Vietnam. Now there is a definite stop.”

South Korean groups Samsung and LG have both invested heavily in the country, the latter with a US$1.5-billion factory that would see it shift production away from Thailand to Vietnam.

The Trang Due Industrial Park in Haiphong, northeastern Vietnam, is filled with Korean companies. Samsung has three factories in Vietnam that cost some $7 billion. Hyosung Group is pouring in $995 million and is launching a $660 million yarn-manufacturing facility.

The chaebol started investing in the Southeast Asian country in the early 1990s, when Vietnam launched a programme of economic reform. Since then, South Korea’s government and companies have been involved in 5,453 investment projects in Vietnam and the country has emerged as the new manufacturing base for many Korean conglomerates.

The total investment capital from South Korea into Vietnam is more than $50 billion, making it the largest foreign investor in Vietnam.

“South Korea is still the biggest FDI investor in Vietnam. What drives the investment is Vietnam’s cheap labour compared [with] China and its fast-developing infrastructure,” said William Nguyen, a researcher at the Hanoi branch of the Korea International Trade Association (KITA).

There were two waves of investment among South Korean companies in Vietnam. The earliest investments were in labour-intensive industries in which Vietnam, with its low wages, had a competitive advantage. At the top of the list were textiles.

Since 2005, South Korean enterprises have steadily shifted their investment to manufacturing and electronics, considered the second wave of investment.

Companies in both waves were poised to benefit from the TPP, so the scuppering of the deal is a significant blow.

The TPP would have facilitated exports to the US and the European Union, so South Korean businesses were looking forward to it, said Nguyen. “Exports from [Vietnam] to the TPP would have been easier.” 

The hope for many was that the deal’s ratification would give the economy of Vietnam a boost and, in turn, a shot in the arm to the many South Korean businesses operating there.

On November 17, at the country’s National Assembly, Vietnamese Prime Minister Nguyen Xuan Phuc said: “The United States has announced it is suspending the submission of the TPP to the [Congress], so there are not sufficient conditions for Vietnam to submit its proposal for ratification.”

Even so, many larger and older South Korean companies will continue to benefit from their links to Vietnam.

KOFOTI’s Kim said many Korean companies had invested in Vietnam for a long time. They had purchased land at a very good price, so even without the TPP, “these long-standing South Korean companies aren’t too damaged”.

The 12 TPP member countries reached agreement in October 2015 after seven years of negotiations. Vietnam was one of the strongest supporters of the trade pact that was also expected to include Japan, Malaysia, Singapore, Brunei, Australia and New Zealand. On the other side of the Pacific were Canada, the US, Mexico, Peru and Chile.

South Korea was not a member, but the government had expressed interest in joining eventually and was poised to benefit from the deal through its free-trade agreement with Vietnam.South Korea, through its companies present in Vietnam, would also have gained access to preferential treatment in the other 11 TPP markets. This was particularly true for garment companies.

As the world’s fourth-largest garment exporter, Vietnam was expected to be one of the biggest winners from the trade pact, gaining preferential access to much larger markets.In the first 10 months of this year, Vietnamese textile and garment export revenues increased 4.8 per cent year on year to $23.3 billion, according to Vinatex, the Vietnam National Textile and Garment Group.

Other countries in the region with large textile industries raised concerns that Vietnam would enjoy disproportionate benefits from the TPP.

The pact would have eliminated some 18,000 tariffs among the 12 participating countries and could have given Vietnam’s gross domestic product an 11-per-cent boost by 2025, equivalent to roughly $36 billion, according to Eurasia Group. Apparel and footwear, the country’s largest exports, could have seen gains of 50 per cent.

Now, however, South Korean garment companies that were hoping to access TPP member countries via Vietnam have been left in the lurch.

“The South Korean government also said it would join the TPP,” Kim said. “A lot of South Korean companies started to set up [garment] manufacturers before last year.”

These companies have lost the prospect of easier access to that giant TPP market. But also, the pact’s member countries would have enjoyed zero-tariff policies – so South Korea could have benefited through its trade and operations in Vietnam.

“Businesses from other countries have been investing in garments also to prepare for the TPP. The garment industry would have been much more open after TPP,” said KITA’s Nguyen.

On its own, the current FTA between South Korea and Vietnam does not pack as much punch as it would have with Vietnam as a member of a ratified TPP. Still, it might be enough to help some of Korea’s struggling companies.

The bilateral FTA took effect last December and cuts tariffs on South Korean fabrics and textiles to 12 per cent, with plans to eliminate them fully over three years.

Ultimately, Nguyen expects South Korean companies will still enjoy a profitable relationship with Vietnam.

A Vietnamese government report notes that South Korea has been the biggest source of investments in Vietnam this year, at $4.88 billion. That is a sizeable portion of Vietnam’s total FDI of $12.7 billion in the first 10 months of 2016, a 7.6-per-cent rise year on year.


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