Korean trade — VietEcon

We have talked a number of times about the trade balance between Vietnam and the US (just 2 days ago when talking about the trade visit by Sec. Ross). It seems like most commentators focus exclusively on US and the EU, and their trade with developing countries and China. Of course, the trade deficits/surpluses among these three major economic blocks is very large and extremely important.

But we (and I include myself) forget the importance of south-to-south trade. It turns out that trade with the US and the EU are important, but so is trade within Asia.

Looking at Vietnam, (see the year-to-date data in the chart to the right below), manufacturing imports are very high from China and Korea. The Korean figures are especially interesting, because a bit portion (62%) are computers, mobile phones and machinery. And then Samsung manufactures computers and mobile phones and re-exports them. Samsung makes up 25% of all exports from Vietnam and is the largest company in Vietnam.

Vietnam’s large manufacturing trade deficits with both China and Korea, which add up to USD52bn, vastly outweigh its surplus with the US (USD38bn). Overall Vietnam has a trade surplus, but that’s because of other Western countries and smaller countries around the world. .

YTD through October 2019. Source: Vietnam Customs

Even among ASEAN countries, Vietnam has complex trade relations. Thailand has a massive surplus, with motor vehicles the largest portion (almost 15%), and Indonesia and Malaysia are also big exporters to Vietnam, with coal and oil big pieces. Vietnam’s rice exports drive its trade surplus with the Philippines, while iron and steel are exported to Cambodia. Looking at different sectors probably gives you a better picture of the importance of specific countries on Vietnam’s trade:

Steel companies depend on Cambodia’s purchases
Farmers care about Philippines ability to produce rice for themselves.
VinFast and other Vietnamese car companies are looking to take over Thailand’s role as the Detroit of SE Asia
Any push to purchase LNG must worry Indonesia, which supplies a lot of coal to Vietnam

So the exclusive focus on trade with the US by me is probably mistaken. Even more so as we get more micro.

Also, the flows between ASEAN countries is more “organic” meaning that it is based on consumption in the countries. Whereas, the flows between Vietnam and the West, while larger, could even be considered a pass-through:

Vietnam takes raw materials from China and South Korea, puts them together, and exports the resulting high-end products. For this, Vietnam gets the following benefits:

Employment: The main reason companies are coming to Vietnam is for low-wage labor.
Skills transfer: Despite themselves, these companies also build up the skills of the local workforce. Some of these will be able to use these skills to do their own thing. Although that depends a great deal on the opportunities in the local market - does it make sense to quit your job for Samsung to start your own thing? Only if you think you are going to make more money and/or have a better quality of life.
Infrastructure: I believe this, although not sure it is borne out in the data. The country invests in ports, roads, trains, IT networks, in order to attract these companies. These also help the locals.
Multiplier: All of the Vietnamese businesses supported by these large foreign companies benefit. These are from (low-end) restaurants and barbers to (high-end) parts suppliers, real estate companies.

The downside is that these business may be polluting the country, working people horribly, and putting the country in a hamster wheel, where they have to continue to import in order to export. If it ever reverses quickly (as we have seen with washing machines, for example), Vietnam could be left high and dry.

We will have to see how all of this works out, but I thought it was interesting to think of trade in these ways. Of course, tell me where I’m wrong.