International Area Review Volume 13, Number 2, Summer 2010

Received: 21 May, 2010 Accepted: 10 June, 2010

Dynamic Patterns of Korea-Vietnam Trade Relations*1

Tran Nhuan Kien**
Thai Nguyen University

Hong Ryul Lee***

Sogang University, Korea

Yoon Heo****
Sogang University, Korea

Abstract
This paper analyzes the dynamic patterns and trends pertaining to bilateral trade between Korea and Vietnam over the past decade. The principal findings of this paper are as follows. First, the commodity trade patterns between Korea and Vietnam have remained virtually unchanged, even though the volume of bilateral trade between the two has expanded significantly over the past decade. Second, Korean exports have been characterized by a high and growing share of intermediate goods, and Korean imports by a high and growing share of consumption goods. Third, the technological level of Koreas exports to Vietnam is much higher than that of Vietnams exports to Korea. Fourth, Vietnams exports are less diverse than Koreas. Fifth, bilateral trade between Korea and Vietnam has been less intense than these countries trade with other countries in recent years. Sixth, Korea-Vietnam bilateral trade has principally been inter-industry trade. Seventh, Vietnam enjoys a comparative advantage largely in either primary products or lowtechnology manufactures, whereas Korea enjoys a comparative advantage primarily in manufactured products and machinery and transport equipment. Finally, the high degree of trade complementarity between Korea and Vietnam makes it plausible that a freer trade agreement may bring about greater benefit for both countries. JEL code: F13, F14, F15 Key Words: intra-industry trade, structure, pattern, Korea, Vietnam

* An earlier version of this paper was presented at the Sogang IIAS Research Series on International Affairs in December 2009. ** Faculty of Economics, Thai Nguyen University of Economics and Business Administration, Vietnam; Email: tnkien@tueba.edu.vn *** Researcher, Institute of International and Area Studies, Sogang University, Korea; Email: jamesk7@naver.com. **** Corresponding author, Professor, Graduate School of Intl Studies, Sogang University, Korea; Email: hury@sogang.ac.kr

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. Introduction
The Republic of Korea (hereafter, Korea) and Vietnam have enjoyed a mutual friendship and multifaceted collaboration since the 1992 establishment of formal diplomatic relations. Owing to their historical and cultural similarities, both sides have rapidly formed close and cooperative ties encompassing a broad range of areas including trade, investment, science and technology, and culture, as well as education and training. In particular, bilateral trade relations between Korea and Vietnam have expanded tremendously. Trade between the two countries has increased in both volume and product variety, owing to the establishment and rapid development of institutional and physical infrastructure for bilateral trade relations. As is demonstrated in Table 1, the value of Koreas trade in merchandise with Vietnam totaled US$9.8 billion in 2008, up from only US$0.5 billion in 1992this corresponds to an average annual growth rate of 20.6 percent. During the period spanning 1992-2008, the momentum of bilateral trade had increased steadily, except in 1998 owing to the Asian financial crisis. It is also worth noting that Korea has maintained a trade surplus over Vietnam for the past 20 years. The scale of bilateral trade relations deepened further in 2007, when the KoreaASEAN Free Trade Agreement (merchandise) went into effect. In October 2009, the two countries agreed to upgrade their bilateral relations from a comprehensive relationship to a strategic partnership. Korea and Vietnam also agreed to begin a joint feasibility study regarding a free trade agreement between the two countries. Despite the significant increase in bilateral trade between the two countries, we have been able to find vanishingly few studies focusing on Korea-Vietnam bilateral trade relations in the existing literature. Therefore, the principal objective of this paper was to evaluate the trends in bilateral trade between the two countries in recent years, and to assess some possible implications for their future trade relations. This paper attempts to determine whether the trade relations between the two countries have been more or less intensive or complementary, whether or not there have been changes in trade composition, and which products have dominated the trade and have a tendency to export more to each others market. This paper also attempts to determine whether those products are the ones for which each country enjoys a comparative advantage. By doing so, this paper will analyze the prospects of developing further bilateral cooperation between the two countries. This paper is organized as follows. In section II, the trends and changing patterns of commodity trade between the two are discussed. Sections III and IV

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assess the trade intensity and intra-industry trade between Korea and Vietnam, respectively. Section V attempts to determine whether bilateral trade between Korea and Vietnam is complementary or competitive in nature. Section VI summarizes the principal findings of this study.

II. Korea-Vietnam Bilateral Trade Relations and its Changing Patterns

Bilateral trade between Korea and Vietnam began on a small-scale in the mid1980s, at which time Vietnam adopted the economic reform package referred to as the Doi Moi (1986). Bilateral trade between the two increased significantly in the late 1980s, despite the absence of formal diplomatic ties. As indicated in Table 1, Koreas exports to Vietnam increased from approximately US$35 million to US$199 million from 1986-1991, with an average annual growth rate of 41.7 percent. Koreas imports from Vietnam also increased, albeit by a relatively small amount: an average annual growth rate of 9.3 percent over the same period. However, Korea-Vietnam trade during this period was unstable, particularly with regard to Koreas imports from Vietnam. For instance, Koreas imports from Vietnam dropped sharply in 1987 (39%), then rose to approximately US$42 million in 1989, and again fell in 1990. On the other hand, Korean exports to Vietnam experienced stable growth during this period. Following the normalization of diplomatic relations between the two countries, bilateral trade has stably expanded, except for the period during the Asian financial crisis. In particular, Koreas imports from Vietnam increased more rapidly than Koreas exports to Vietnam. The average annual growth rate of Koreas imports from Vietnam was 25 percent, whereas Korean exports to Vietnam increased by an average growth rate of 19.8 percent per annum during the period from 1992-2008. In terms of volume, however, Koreas exports of merchandise to Vietnam rose from US$0.44 billion to US$7.8 billion, while its merchandise imports from Vietnam increased from US$0.06 billion to US$2.04 billion. As a consequence, Korea has consistently recorded trade surpluses throughout that period. This is particularly true in the 2006-2008 period, during which time Koreas surplus in bilateral trade with Vietnam almost doubled.

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Table 1. Koreas Trade with Vietnam, 1986-2008

Year 1986 1987 1988 1989 1990 1991 1986-19911 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 1992-2008
1

Koreas exports Koreas imports Total trade Volume Volume Volume Inc. Rate (%) Inc. Rate (%) Inc. Rate (%) (Mil. $) (Mil. $) (Mil. $) 34.9 131.5 26.4 126.7 61.2 129.4 38.5 61.9 44.9 116.8 198.9 436.2 728.3 1027.4 1351.0 1599.1 1603.1 1361.4 1445.2 1686.0 1731.7 2240.2 2561.2 3255.6 3431.7 3927.5 5760.1 7804.8 10.6 60.5 -27.5 160.2 70.3 41.7 119.2 67.0 41.1 31.5 18.4 0.3 -15.1 6.2 16.7 2.7 29.4 14.3 27.1 5.4 14.5 46.7 35.5 19.8 57.3 90.6 113.8 193.6 232.0 238.6 183.8 264.2 322.4 385.8 470.3 510.7 673.3 694.0 924.9 1391.6 2037.1 16.1 13.9 41.9 33.4 41.2 -39.0 -13.9 202.4 -20.3 23.3 9.3 39.3 58.1 25.5 70.2 19.9 2.8 -22.9 43.7 22.0 19.6 21.9 8.6 31.8 3.1 33.3 50.5 46.4 25.0 493.5 818.9 1141.1 1544.6 1831.2 1841.7 1545.2 1709.4 2008.5 2117.4 2710.5 3071.9 3928.9 4125.7 4852.3 7151.6 9841.9 54.6 75.7 86.8 150.2 240.1 -10.8 38.6 14.6 73.1 59.8 31.4 105.5 65.9 39.4 35.4 18.6 0.6 -16.1 10.6 17.5 5.4 28.0 13.3 27.9 5.0 17.6 47.4 37.6 20.6

1) Average of the period Source: KITA, 2009

Recently, Korea-Vietnam trade has dramatically increased, with growth rates of 47.4 percent and 37.6 percent in 2007 and 2008, respectively. The implementation of the Korea-ASEAN FTA may be one of the factors contributing

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to this significant increase. Nevertheless, Vietnam is not one of Koreas top 10 trading partners, whereas Korea is considered one of Vietnams top 10 trading partners. For example, Korea was Vietnams fourth biggest source of imports and its ninth largest export market during the 2005-2007 period (Kien, 2009). On the other hand, Vietnam was Koreas 12th largest export destination and was ranked 32nd among Koreas import markets in 2007. By way of contrast, other ASEAN countries had higher rankings in Koreas import markets, including Indonesia (9th), Malaysia (12th), Singapore (14th), Thailand (20th), and the Philippines (27th) (KITA, 2009). Table 2. Top 10 Products of Koreas Exports to Vietnam (SITC 3-digit of Rev.2)
1995 Woven man-made fibre fabric (10.1) Polymerization etc. products (6.6) Special textile fabric products (5.8) Lorries, special motor vehicles nes (4.2) Television receivers (4.2) Petroleum products, refined (4.0) Iron, steel universal plate, sheet (3.4) Textile & leather machinery (3.3) Mach.& equipment for special industries (3.3) Cycles, etc. motorized or not (2.8)
Vietnam. Source: Authors calculation based on database of UNSD 2009

2000 Special textile fabric products (8.9) Polymerization etc. products (7.6) Woven man-made fibre fabric (5.8) Petroleum products, refined (4.6) Lorries, special motor vehicles nes (4.4) Leather (4.0) Leather etc. manufactures (3.5) Knitted or crocheted fabrics (3.5) Cycles, etc. motorized or not (2.9) Textile yarn (2.7)

2006 Petroleum products, refined (13.3) Telecommunication equipment parts (7.7) Knitted or crocheted fabrics (6.7) Polymerization etc. products (5.9) Special textile fabric products (4.9) Woven man-made fibre fabric (3.8) Metal structures & parts (2.9) Iron, steel universal plate, sheet (2.7) Textile & leather machinery (2.5) Lorries, special motor vehicles nes (2.4)

Note: Numbers in the parentheses denote the percentage share of the product in Koreas exports to

Regarding commodity trade, Tables 2 and 3 show the top 10 products of Koreas exports to and imports from Vietnam. It has been demonstrated that while the total trade volume between the two increased significantly over the past decade,

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the commodities trade remained virtually unchanged. This shows that Koreas major export items to Vietnam continued to consist of capital goods and raw/subsidiary materials such as machinery, steel/metal products, and industrial textiles, whereas Vietnam has principally exported primary products--such as agricultural and fishery products and consumer textiles--over the past decade. This is a typical inter-industry trade pattern between a developed country and a developing country. In the following sections, the inter-industry trade issue will be addressed in detail. Table 3. Top 10 Products of Koreas Imports from Vietnam (SITC 3-digit of Rev.2)
1995 Coffee and substitutes (17.1) Woven man-made fiber fabric (7.6) Cotton fabrics, woven (7.5) Coal, lignite, and peat (4.8) Travel goods, handbags (4.3) Shell fish fresh, frozen (3.8) Mens outerwear not knitted (3.6) Fruit, preserved, prepared (3.5) Aircraft, etc. (3.5) Headgear, non-textile clothing (3.4)
Vietnam. Source: Authors calculation based on database of UNSD 2009

2000 Shell fish fresh, frozen (12.8) Vegetables, fresh, chilled, frozen (6.7) Mens outerwear nonknitted (6.1) Coffee and substitutes (5.3) Fish etc. prepared, preserved nes (4.5) Fish, fresh, chilled, frozen (4.5) Furniture and parts thereof (4.1) Natural rubber, gums (3.1) Textile yarn (3.1) Headgear, non-textile clothing (3.1)

2006 Shell fish fresh, frozen (12.9) Textile yarn (9.2) Footwear (8.0) Furniture and parts thereof (6.2) Natural rubber, gums (5.3) Coffee and substitutes (5.2) Fish etc. prepared, preserved nes (4.6) Coal, lignite, and peat (4.5) Fish, fresh, chilled, frozen (4.1) Womens outerwear nonknitted (2.8)

Note: Numbers in parentheses denote the percentage share of the product in Koreas exports to

The top 10 products exported from Korea to Vietnam totaled US$2.1 billion in 2006, accounting for nearly 53 percent of the total value of all Korea-Vietnam exports. When the changes in major export products from Korea to Vietnam over time are examined, it becomes clear that the technology level of these products has

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increased. For example, telecommunication equipment parts replaced leather and leather manufactured goods as the major export items from Korea to Vietnam. Regarding Korean imports from Vietnam, the top 10 products accounted for approximately 63 percent of the total Korean imports. This indicates that Vietnams exports to Korea were less diversified than those of Korea. Another major change in Koreas exports to Vietnam is that import substitution by Vietnam for its imports from Korea has made progress in low technology goods, most notably fabric products. For example, woven man-made fiber fabric ranked first among the top 10 products exported from Korea to Vietnam, but its ranking fell to third in 2000, and fell further in 2006, to sixth. This can be explained either by Vietnam having upgraded its production capacity for these products, or by Vietnam having begun to import these goods from cheaper sources, such as China. Another explanation might be that Koreas comparative advantage in this product group has deteriorated over the past decade (see Table 12). Table 4. Koreas Exports to Vietnam by Stage of Production (unit: percent)
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Primary goods Intermediate goods Semi-finished goods Parts & components Final goods Capital goods Consumption goods 0.3 0.4 0.7 1.0 0.4 0.4 0.3 0.3 0.4 0.5 0.6 0.6 68.2 70.8 79.2 77.7 79.8 74.5 68.5 68.3 65.2 68.8 67.2 70.4 63.4 63.9 72.0 71.2 72.6 66.6 60.6 59.8 56.7 59.0 58.4 62.2 4.8 7.0 7.2 6.5 7.2 7.9 8.0 8.5 8.5 9.8 8.8 8.2 31.5 28.7 20.2 21.3 19.8 25.1 31.1 31.4 34.4 30.7 32.2 29.0 15.8 14.1 11.1 11.9 9.3 15.6 14.7 9.0 9.4 15.0 21.7 21.9 25.0 22.0 23.9 21.2 9.5 9.4 8.7 8.3 7.7 10.5 10.1 9.4

Source: Authors calculation based on database of UNSD 2009, using classification of Gaulier, Lemoine, and Kesenci, 2005.

The structure of commodity trade between Korea and Vietnam becomes more apparent when bilateral trade is classified in terms of stage of production. One of the most transparent patterns of trade between the two is the high share of intermediate goods in Korean exports and of final goods in Korean imports. In Koreas exports of intermediate products to Vietnam, the share of semi-finished products accounted for a sizeable share, which hovered around 60 percent. On the import side, Koreas imports of consumption goods from Vietnam increased

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significantly, from 37.8 percent to 51.9 percent, during 1995-2006, principally at the expense of primary goods. For Vietnam, the high share of semi-finished goods in Vietnams imports and of consumption goods in Vietnams exports reflects a deepening bilateral trade and cooperation in investments between Korea and Vietnam, in which Vietnam is in charge of the final process in the entire value-chain of production. It can be asserted that this pattern may be the consequence of the increase in foreign direct investment (FDI) inflows from Korea to Vietnam, because Vietnam offers an abundance of low-cost labor and land, as well as favorable governmental policies. This also implies that Vietnams exports are relatively low in terms of added value, as assembly is the primary final process in Vietnamese production. Table 5. Koreas Imports from Vietnam by Stage of Production (unit: percent)
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Primary goods Intermediate goods Semi-finished goods Parts & components Final goods Capital goods Consumption goods 32.6 28.3 24.2 38.7 27.6 18.8 19.0 14.8 18.3 27.3 19.0 20.3 25.0 26.4 24.2 26.3 30.7 27.0 20.9 22.8 21.5 20.6 22.5 22.1 22.0 22.2 18.4 25.1 25.1 22.4 15.1 11.3 15.7 17.1 19.5 20.4 3.0 4.7 4.2 6.6 5.8 8.3 1.2 5.3 5.6 4.4 4.6 4.6 5.7 6.4 11.5 5.8 8.1 7.2 3.5 6.8 2.9 6.4 1.7 5.7 42.5 45.4 51.6 35.0 41.7 54.2 60.1 62.4 60.1 52.2 58.5 57.6 37.8 38.7 43.4 29.7 37.3 49.6 53.7 54.3 53.0 45.4 52.2 51.9

Source: Authors calculation based on database of UNSD 2009, using classifications of Gaulier, Lemoine, and Kesenci, 2005.

To understand the technological level embodied in Korea-Vietnam bilateral trade, exports and imports are decomposed into four technological categories: resource-based, low-technology, medium-technology, and high-technology (Lall, 2000). Tables 6 and 7 show the growth rates and market shares of Korea-Vietnam trade according to technological level. Several important notions can be gleaned from these results. Overall, Koreas exports to and imports from Vietnam are reflective of normal trade patterns between a developed and a developing country. Almost all Korean exports to Vietnam are manufactured goods, accounting for more than 94% of the total in 2006. Among manufactured goods, exports concentrated on mineral-based products, fashion cluster, and process industries. Exports of high-technology manufactured goods also increased from 8.9 percent to

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12.2 percent of the total, or an average annual growth rate of 13.4 percent over the 1995-2006 period. During that period, the exports of mineral-based manufactures (largely petroleum products) grew at the highest rate, which was approximately 9 percent above the average level. The increasing importance of Vietnams petroleum product imports may be the primary factor to which the countrys rapid industrialization can be attributed. Table 6. Koreas Exports to Vietnam by Technological Level
Export Category Product Name Primary products Manufactured 1. Resource-based Agro-based Mineral-based 2. Low technology Fashion cluster Other products 3. Medium technology Automotive Process Engineering 4. High technology Electronic and electrical Other Total
1

Percentage share in total exports (%) 1995 3.0 97.0 10.1 3.5 6.6 31.2 19.3 11.9 46.7 9.9 22.8 14.0 8.9 7.7 1.2 100.0 2000 2.4 97.6 11.0 3.3 7.7 36.7 27.2 9.5 43.2 10.4 19.9 12.9 6.8 4.7 2.2 100.0 2006 5.8 94.2 17.9 2.3 15.6 32.4 21.9 10.5 31.7 4.0 16.9 10.8 12.2 10.4 1.8 100.0

Growth rate p.a. (%)

1995-2000 2000-2006 1995-2006

-0.7 4.7 6.2 3.1 7.7 8.0 11.9 0.0 2.9 5.6 1.7 2.8 -0.9 -5.5 17.9 4.5

41.6 17.5 30.5 10.7 36.2 15.4 13.3 20.7 11.2 -2.2 14.5 14.1 33.0 38.9 14.4 18.3

16.7 9.9 16.0 6.2 19.0 10.5 11.4 8.9 6.3 1.5 7.2 7.5 13.4 13.1 14.6 10.1

Source: Authors calculation based on database of UNSD 2009

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Table 7. Koreas Imports from Vietnam by Technological Level

Import Category Product Name Primary products Manufactured 1. Resource-based Agro-based Mineral-based 2. Low technology Fashion cluster Other products 3. Medium technology Automotive Process Engineering 4. High technology
Electronic and electrical
1

Percentage share in total imports (%) 1995 41.3 58.7 7.3 6.9 0.4 35.9 32.5 3.3 8.2 0.0 7.7 0.5 7.4 3.9 3.5 100 2000 37.2 62.8 10.6 6.8 3.8 36.7 28.6 8.0 6.4 0.0 2.8 3.5 9.2 9.0 0.3 100 2006 38.2 61.8 10.6 7.4 3.2 39.6 29.4 10.2 5.0 0.1 2.1 2.8 6.5 6.3 0.1 100

Growth rate p.a. (%)

1995-2000 2000-2006 1995-2006

8.4 12.3 19.3 10.3 77.6 11.2 8.0 32.1 5.4 43.6 -9.5 64.0 15.8 30.9 -34.3 10.8

24.2 23.0 23.6 25.6 19.7 25.4 24.2 29.5 17.7 27.5 17.0 18.1 15.0 15.1 10.1 23.5

14.5 15.8 19.3 16.0 40.9 16.3 14.2 27.6 10.3 31.6 2.7 35.0 13.9 20.5 -13.7 15.3

Other Total

Note: 1/ Textile, garment and footwear Source: Authors calculation based on database of UNSD 2009

Considering Vietnams rich natural resource endowments and abundant cheap labor, it would be expected that Koreas imports from Vietnam would concentrate on primary products, resourcebased, and lowtechnology sectors. Indeed, primary products accounted for approximately 38 percent of total imports in 2006, whereas lowtechnology imports accounted for nearly 40 percent of the total. When assessing the change in Koreas imports in accordance with technological level, it can be shown that a structure shift has occurred between primary and manufactured products. That is, the share of primary products declines over time, whereas the share of manufactured goods increases. Among manufactured products, Koreas fashion cluster imports accounted for the largest amount, even though that amount slightly decreased during the 1995-2006 period. In terms of growth rates, the imports of resource-based and low technology manufactures grew faster than the

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average growth rate of total manufactured exports. The increase in the share of manufactured imports can, therefore, be largely explained by the high growth rates of these products. Additionally, the export diversification index is utilized to determine the extent to which the exports are diversified. The export diversification index signals whether the structure of exports by products of a given country differs from the global structure. The existing literature generally agrees that countries with high levels of export diversification particularly in the field of manufacturing should experience a greater positive impact of GDP growth, owing to richer linkages and lower external volatility (Sachs and Warner 1997). The closeness of the index value to unity indicates a more profound difference from the world average. According to Hoekman, Mattoo, and English (2002), the export diversification index (DX) for a country is calculated as follows:

DX

= ( sum h ij h i ) / 2

where hij is the share of commodity i in the total exports of country j, and hi is the share of commodity i in relation to total world exports. Figure 1. Export Diversification Index for Selected Countries in Asia, 19972006
0.80 0.70 0.60 0.50 0.40 0.30 0.20 0.10 0.00
China 1997 Korea Indonesia 1999 2001 Malaysia 2002 Philippines Singapore 2003 2004 2005 2006 Thailand Vietnam

Source: Authors calculation from UNCTAD, 2009

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The results demonstrate that Vietnams exports were less diversified than Koreas. In fact, Vietnam evidenced the highest concentration among the selected countries, as is shown in Figure 1. However, the export diversification index of Vietnam was reduced from 0.68 to 0.62 over the decade, particularly in the period between 2004 and 2006. Korea, Thailand, and China are among the most diversified of their exports, reflecting their ability to cope with both global market price changes and potential pressures due to protectionism.

III. Trade Intensity of Korea-Vietnam Bilateral Trade

The intensity of trade can be either the export intensity or the import intensity. The trade intensity index (TII) is employed in this paper to assess the strength of bilateral trade between Korea and Vietnam over time. The export (import) intensity of country i with country j is computed as follows:

TII

i j

T ij / T iw T
jw

/T

ww

Where: Tij is the country is total exports (imports) to (from) country j Tiw is country is total exports (imports) to (from) the world Tjw is the country js total imports (exports) from (to) the world Tww is the worlds total exports (imports). A value of TIIij that is greater (less) than unity has been interpreted as reflective of larger (smaller) than expected trade flows between two countries vis-vis the rest of the world. Table 8 shows the results of export and import intensity between Korea and Vietnam together with each countrys export and import share in the other country for the 1991-2007 period. Table 8 shows that Vietnams share in Koreas exports increased from 0.28 percent in 1991 to 1.55 percent in 2007, whereas its share in Koreas imports rose as well, albeit from a relatively small base. On the other hand, Koreas share in Vietnams exports fluctuated during that period, although it increased slightly from 2.34 percent in 1991 to 2.58 percent in 2007. With regard to Koreas share in Vietnams imports, it rose from 6.13 percent in 1991 to 15 percent in 1995, and then decreased gradually to 8.51 percent in 2007.

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Table 8. Trade interdependency between Vietnam and Korea: share (%) and trade intensity
1991 1993 1995 1997 1999 2001 2003 2005 2007 Vietnam's share in Korea's exports Vietnam's share in Korea's imports Korea's share in Vietnam's exports Korea's share in Vietnam's imports 0.28 0.85 1.03 1.11 1.00 1.15 1.30 1.21 1.55 0.05 0.11 0.14 0.16 0.22 0.27 0.28 0.27 0.39 2.34 3.33 4.19 4.40 2.77 2.70 2.44 2.05 2.58 6.13 12.27 15.00 13.17 12.65 11.63 10.40 9.78 8.51 Koreas export intensity with Vietnam 5.15 6.18 5.26 5.22 4.99 4.74 4.20 3.64 3.61 Koreas import intensity with Vietnam 1.04 1.09 1.19 0.93 1.12 1.18 1.00 0.83 1.09 Vietnams export intensity with Korea 1.15 1.69 1.78 1.95 1.45 1.28 1.12 0.90 1.08 Vietnams import intensity with Korea 3.27 6.03 6.52 5.81 5.09 4.64 3.93 3.43 3.05
Source: Authors calculation based on database of UNSD 2009.

As noted above, the trade intensity index can be used to determine whether trade between the two countries has increased more or less rapidly than their respective trade with the rest of the world. As is shown in Table 8, Koreas export intensity with Vietnam was extremely high during the 1991-2007 period, even though it decreased gradually over time. This shows that the growth rate of Koreas exports to Vietnam was higher than that to the rest of the world during that period. On the other hand, Koreas import intensity remained low and tended to decrease in recent years, thereby implying that Vietnam was not a principal source of imports for Korea. Vietnams import intensity with Korea increased from 3.27 in 1991 to 6.52 in 1995, and then declined to 3.05 in 2007. This indicates that Vietnams imports from Korea were greater than its imports from the rest of the world. Vietnams export intensity with Korea also increased during the 1990s, but began to decline in the early 2000s. Overall, the bilateral trade between Korea and Vietnam has been less intense than the respective trade of Korea and Vietnam with other countries in recent years.

IV. Intra-industry in Korea-Vietnam Bilateral Trade

The intraindustry trade (IIT) index is used in this study to evaluate changes in the trade structure between Korea and Vietnam at the sectoral level. The IIT is commonly measured by the GrubelLloyd index, which is based on commodity

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group trade, as classified by standard international trade classifications. The intra industry trade index is defined as follows: X i M i IITi = 1 X i + M i where Xi and Mi are Koreas exports to and imports from Vietnam of commodity i, respectively, over a given time period. The index value ranges between zero and onea zero is interpreted as complete interindustry trade, whereas a one would denote a completely intraindustry trade pattern. In order to gain an overall understanding of the degree of intra-industry trade in Korea-Vietnam bilateral trade, we summarized the distribution of the IIT index in Table 9 over a 3-year period. We determined that the composition of Korea-Vietnam bilateral trade has principally been inter-industry in nature. This suggests that economies of scale between the two countries are not being exploited. The results demonstrate that there are only small numbers of product groups that evidenced high intra-industry trade. In 1995, for example, approximately 90 percent of the 189 total product groups fell within an IIT index range of 0.00 to 0.25 (low intra-industry trade). This is reasonable, since Korea and Vietnam are not developed to a similar degreewhich would be expected to result in similar demand patterns within both countries. In recent years, the degree of intra-industry trade in Korea-Vietnam bilateral trade has increased gradually. The share of high IIT index levels (from 0.75 to 1.00) increased from 1.6 percent in 1995 to 8.5 percent in 2006, whereas the share of low IIT index levels declined gradually, to approximately 75%, in 2006. Table 9. Distribution of IIT Index of Korea-Vietnam Trade, 19952006
IIT Band 1995 Number of Percent product groups 89.9 4.2 4.2 1.6 100 203 2000 2006 Number of Number of Percent Percent product groups product groups 167 13 15 8 82.3 6.4 7.4 3.9 100 213 160 18 17 18 75.1 8.5 8.0 8.5 100

0.00 < 170 0.25 0.25 < 8 0.50 0.50 < 8 0.75 0.75 3 1.00 1 Total 189

Note: 1/ the actual number of product groups traded between Korea and Vietnam at the three digit of SITC (total 266 product groups). Source: Authors calculation based on the UNSD 2009 database

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Examining intra-industry product groups at the three-digit level, we determined that almost all groups with high intra-industry trade fell within product groups of SITC six, seven, and eight (at the one-digit level), which are manufacturing industries. This is not surprising, since intra-industry trade is of greater importance in manufacturing industries, in which product differentiation and scale economies are more prevalent than in other economic sectors. The highest IIT index in the trade between Korea and Vietnam was for furniture and parts thereof (821) in 1995, pesticide disinfectants (591) in 2000, and optical goods, n.e.s. (884) in 2006. It is worth mentioning that the 10 highest intra-industry trade indices between Korea and Vietnam differed at different times. This indicates that the intra-industry trade between the two has been somewhat precarious. Table 10. Top 10 Products with High Intra-Industry Trade Index between Korea and Vietnam
CodeProduct Name 821 Furniture and parts thereof 666 Pottery 895 Office supplies, n.e.s. 848 Headgear, non-textile clothing 634 Veneers, plywood, etc. 658 Textile articles n.e.s. 667 Pearls, precious semi-precious stones 1995CodeProduct Name 0.99 591 Pesticide disinfectants, 0.91 762 Radio-broadcast receivers 2000CodeProduct Name 0.95 884 Optical goods, n.e.s. 0.94 122 Tobacco manufactured 2006 0.98 0.96

0.77 881 Photo apparatus and equipment n.e.s.0.90 663 Mineral manu-factures, n.e.s0.96 0.75 062 Sugar candy non-chocolate 0.70 971 Gold, non-monetary 0.69 211 Hides, skins, exc. furs, raw 0.68 778 Electrical machinery n.e.s. 0.80 845 Outerwear knit non-elastic 0.96 0.77 696 Cutlery 0.76 628 Rubber articles, n.e.s. 0.76 048 Cereal etc. preparations 0.76 651 Textile yarn 0.94 0.93 0.92 0.86

727 Food processing mac-hines (non-domestic)0.67 897 Gold, silver ware, jewellery 652 Cotton fabrics, woven 679 Iron, steel castings, un-worked 0.64 894 Toys, sporting goods, etc. 0.63 716 Rotating electric plant and parts

0.74 897 Gold, silver ware, jewellery 0.84 0.73 654 Other woven textile fabric 0.83

Note: n.e.s.: not elsewhere specified Source: Authors calculation based on database of UNSD 2009

V. Korea-Vietnam Bilateral Trade: Complementary or Competitive?

There are two key concerns regarding the current bilateral trade situation between Korea and Vietnam: whether Korea-Vietnam bilateral trade is consistent with the comparative advantage principle, and whether Korea-Vietnam trade is complementary or competitive in nature. For these reasons, we calculated and

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compared the revealed comparative advantage indices for Korea-Vietnam trade in 1997 and 2006. The RCA indices for the top 20 Vietnamese products are shown in Table 11. The RCA index is calculated for product groups at the threedigit SITC level, and is ranked by RCA index values in 2006. Overall, Vietnam enjoyed a comparative advantage largely in either primary products or lowtechnology manufactured goods. High-comparative advantage product groups of Vietnam across the time span included rice (042), fresh shellfish, frozen shellfish (036), natural rubber, gums (232), coffee and coffee substitutes (071), spices (075), footwear (851), tea and mate (074), and mens non-knitted outerwear (842). Several product groups evidenced significant increases in comparative advantage over time: pulpwood, chips, woodwaste (246); fish, fresh, chilled or frozen (034); vegetable fiber (265); and furniture and parts thereof (821). Additionally, several product groups acquired comparative advantage during the 1997-2006 period, namely non-knitted undergarments (844); womens non-knitted outerwear (843); knitted non-elastic outerwear (845); steam boilers and auxiliary plants (711); and natural abrasives n.e.s. (277). Table 11. Vietnams Top 20 Products with High RCA Index Values
Code 042 036 232 071 075 851 246 074 265 844 034 842 037 843 322 035 Product name Rice Shellfish fresh, frozen Natural rubber, gums Coffee and coffee substitutes Spices Footwear Pulpwood, chips, woodwaste Tea and mate Vegetable fiber, exc. cotton, jute Under garments non-knitted Fish, fresh, chilled or frozen Mens outerwear non-knitted Fish, etc. prepared, preserved n.e.s. Womens outerwear non-knitted Coal, lignite and peat Fish, salted, dried, smoked 1997 71.174 22.028 21.316 18.721 22.571 13.764 5.359 12.976 4.259 0.000 2.931 12.914 7.255 0.000 3.292 4.394 2006 35.485 25.798 22.814 19.945 19.131 16.028 11.521 10.010 9.997 8.778 8.699 8.473 6.847 5.539 5.336 5.309

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5.146 4.770 3.795 3.767

845 821 711 277

Outerwear knit non-elastic Furniture and parts thereof Steam boilers and auxiliary plant Natural abrasives n.e.s.

0.045 1.023 0.003 0.986

Source: Authors calculation based on database of UNSD 2009

Table 12. Koreas Top 20 Products with High Value of RCA Index
Code 871 793 266 655 511 513 711 764 677 656 233 776 653 724 686 269 674 781 692 778 Product name Optical instruments and apparatus Ships, boats and floating structures Synthetic fibers suitable for spinning Knitted or crocheted fabrics Hydrocarbons n.e.s., derivative Carboxylic acids etc. Steam boilers and auxiliary plant Telecommunications equipment and parts Iron/steel wire Lace, ribbons, tulle, etc. Rubber, synthetic, reclaimed Transistors, valves, etc. Woven man-made fiber fabric Textile & leather machinery and parts Zinc Waste of textile fabrics Iron, steel universal plate, sheet Passenger motor vehicle excluding buses Metal tanks, boxes, etc. Electrical machinery and apparatus 1997 4.031 6.958 7.014 5.483 3.316 2.094 0.322 1.239 2.884 4.555 1.588 3.676 6.831 1.249 0.894 1.446 2.005 1.400 1.266 0.842 2006 9.158 9.068 5.044 4.807 3.778 3.543 2.928 2.887 2.659 2.565 2.550 2.427 2.416 2.250 2.223 2.223 2.209 2.064 2.061 1.975

Source: Authors calculation based on database of UNSD 2009

Korea, on the other hand, enjoys a comparative advantage primarily in manufactured products and machinery and transport equipment. The main comparative advantage product groups of Korea include optical instruments and apparatus (871); ships, boats, and floating structures (793); synthetic fibers suitable for spinning (266); and knitted or crocheted fabrics (655). More importantly, Korea has been able to increase its comparative advantage in high-technology manufacture

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product groups such as optical instruments and apparatus (871); telecommunications equipment and parts (764); and electrical machinery & apparatus (778). Table 13 demonstrates that the overlap of the RCA index between Korea and Vietnam was not significant. Only four product groups evidenced a comparative advantage in both countries in 1997, which accounted for only 4.41% of total Vietnamese exports and 1.43% percent of total Korean exports. The overlap in RCA index values between Korea and Vietnam increased to 10 product groups in 2006. However, their shares in the total exports of each country were minimal. For Vietnam, the share of products that competed with Korea actually decreased, from 4.41% in 1997 to 4.17% in 2006. Table 13. Overlap of RCA Index between Korea and Vietnam
YearCodeProduct name Vietnam
1

Korea 110.04 164.17 91.81 10.20 4.41 53.01 149.40 686.34 72.32 321.33 79.42 119.67 23.01 128.23 28.41 4.17 1.557 1.063 1.255 4.555 2.928 2.550 1.001 1.439 1.111 1.737 1.885 5.044 2.416 2.659 374.60 417.38 623.26 532.67 1.43 333.30 989.69 2072.09 385.25 1394.71 704.66 1568.69 850.52 2385.48 609.22 3.47

RCA IndexExport value RCA IndexExport value1

037 Fish, etc. prepared, preserved n.e.s. 7.255 1997 831 Travel goods, handbags ,brief-cases 6.630 034 Fish, fresh, chilled or frozen 656 Lace, ribbons, tulle, etc. Share of total exports (%) 711 Steam boilers and auxiliary plant 233 Rubber, synthetic, reclaimed 773 Electrical distributing equipment 612 Leather etc. manufactures 2006 651 Textile yarn 847 Textile clothing accessories n.e.s. 657 Special textile fabric, products 653 Woven man-made fiber fabric 677 Iron/steel wire Share of total exports (%)
Note: export value is in million of U.S. dollar.

2.931 1.383 3.795 3.138 2.702 2.203 2.086 1.596 1.172 1.058 1.011

266 Synthetic fibers suitable for spinning1.112

Source: Authors calculation based on database of UNSD 2009

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According to the results shown in Tables 11, 12, and 13, we determined that the structure of bilateral trade between Korea and Vietnam is complementary rather than competitive, as each country has a very different comparative advantage. Specifically, Korea evidenced a comparative advantage toward manufactured product groups, whereas Vietnam enjoys a comparative advantage in primary product groups. In order to evaluate the potential to expand bilateral trade between Korea and Vietnam, we constructed the trade complementarity index (TCI) for Vietnams major trading partners, including Korea, using data of commodity trades at the threedigit SITC level from 1997 to 2006. The index indicates the degree to which the structures of a countrys imports and exports match. TCI is measured as follows. m ni a nj TCI ij = 1 2 n where mni is the share of goods, n, in total imports of country, i, whereas anj is the share of goods, n, in the total exports of country j. The index equals zero when none of the goods exported by one country is imported by the other, whereas the index equals one when the export and import shares match exactly. The more similar two countries export and import structures are, the closer the value of the TCI is to unity. Therefore, changes in the value of TCI over time can help us understand whether two countries trade profiles are becoming more, or less, compatible. In this study, the TCI was calculated for the 26 main trading partners of Vietnam. Taken together, these countries account for more than 90% of Vietnams total trade. Table 14 shows the results of TCI during the period 19972006. The results of TCI confirm the findings of the study of the RCA index, which demonstrated that bilateral trade between Korea and Vietnam is highly complementary. Among the estimated countries, Vietnam has relatively high TCI values with Japan, the United States, India, South Korea, France, and Spain. This means that Vietnams export structure is compatible with Koreas import structure. Put another way, Vietnams export structure fits well with Koreas import needs. Therefore, Vietnam has a high potential to increase its exports to Korea. On the other hand, low TCI values were found between Vietnam and China, Malaysia, Mexico, and Argentina. This means that Vietnams export structure is not complementary with these countries import structures.

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Table 14. Vietnams Trade Complementarity Index with Major Trading Partners, 19972006
Country Japan United States India South Korea France Spain Italy Netherlands Sweden Denmark Thailand Germany Australia 19972001 0.43 0.38 0.37 0.33 0.33 0.33 0.34 0.34 0.34 0.35 0.30 0.36 0.30 20022006 0.48 0.41 0.39 0.38 0.37 0.37 0.36 0.35 0.35 0.35 0.34 0.34 0.34 Country United Kingdom Canada Brazil Indonesia Hong Kong Switzerland Singapore Philippines China Russia Mexico Malaysia Argentina 19972001 0.34 0.28 0.26 0.24 0.31 0.27 0.27 0.28 0.23 0.26 0.24 0.22 0.23 20022006 0.33 0.32 0.32 0.31 0.30 0.29 0.28 0.27 0.26 0.26 0.25 0.24 0.24

Source: Kien, 2009

VI. Conclusion
The principal objective of this paper was to evaluate current trends in bilateral trade between Korea and Vietnam over the past decade, and to determine the possible implications for their future trade relations. The principal findings of this paper are as follows. First, the commodity trade patterns between Korea and Vietnam remained virtually unchanged, even though bilateral trade between the two has expanded significantly over the past decade. Second, there has been a high and growing share of intermediate goods in Korean exports and of consumption goods in Korean imports. This indicates a deepening in bilateral trade and investment cooperation between Korea and Vietnam, of which Vietnam is in charge of the final process throughout the entire value-chain of production. Third, the technological level embodied in Koreas exports to Vietnam is substantially higher than that of Vietnams exports to Korea. Vietnams exports of primary products to Korea still accounted for a large proportion of its total exports. Fourth, Vietnams exports were less diversified than Koreas. The top 10 export products of Vietnam amounted to approximately 63% of Koreas total imports. Fifth, the

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bilateral trade between Korea and Vietnam has been less intense than their respective trade with other countries in recent years. Koreas import intensity and Vietnams export intensity were not as intense as Koreas export intensity and Vietnams import intensity. Sixth, Korea-Vietnam bilateral trade has been primarily inter-industry trade. This indicates that the economies of scale and product differentiation between the two countries are not being fully exploited. Almost all product groups with high intra-industry trade fell within the product groups of manufacturing industries. Seventh, Vietnam enjoyed a comparative advantage largely in either primary products or lowtechnology manufactured goods, whereas Korea enjoys a comparative advantage principally in manufactured products and machinery and transport equipment. As a consequence, the structure of bilateral trade between Korea and Vietnam is complementary, rather than competitive in nature, as each country possesses a very different comparative advantage. This means that Vietnams export structure is compatible with Koreas import structure. Therefore, Vietnam has a great deal of potential to increase its exports to Korea. The high degree of trade complementarity between Korea and Vietnam shows that freer trade between the two is likely to bring about greater benefits for both Korea and Vietnam. Additionally, tariff rates imposed on each others exports have been relatively high recently (see Appendix 1). Therefore, Korea and Vietnam should explore the possibility of negotiating a freer trade agreement in the near future, in order to boost the burgeoning trade relationship between the two countries.

References
Gaulier, Guilaume, F. Lemoine, and U. Kesenci. Chinas Integration in East Asia: Production Sharing, FDI and High-tech Trade, CEPII Working Paper 2005/09 (2005), Paris:Research Center in International Economics. Hoekman, Bernard M., Aaditya Mattoo, and Philip English. Development, Trade and the WTO: A Handbook. Washington, D.C.: World Bank, 2002 Kien, Tran Nhuan. Three Essays on Trade Liberalization and Development in Vietnam, unpublished Ph.D. dissertation, Sogang University, Korea, 2009. KITA. 2009. Trade Statistics by Country. Seoul: Korea International Trade Association. http://global.kita.net/.

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Lall, S. The Technological Structure and Performance of Developing Country Manufactured Exports 198598, Oxford Development Studies 28 (2000), 337369. Sachs, J.D. and A.M. Warner. Fundamental Sources of Longrun Growth, American Economic Review 87, 2 (1997), 18488. United Nations Conference on Trade and Development. 2009. Trade Analysis and Information System (TRAINS). http://r0.unctad.org/trains_new/index.shtm (accessed July 19, 2009). United Nations Statistics Division. 2008. United Nations Commodity Trade Statistics Database. http://comtrade.un.org/db/default.aspx (accessed December 22, 2008).

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Appendix 01. MFN Tariff Rates Classified by Broad Economic Categories (unit: percent)
BEC Code 1 Product Name Korean tariff rates on Vietnam's products Vietnam's tariff rates on Korea's products 1996 2007 1999 2007 Simple Weighted Simple Weighted Simple Weighted Simple Weighted Average Average Average Average Average Average Average Average 60.96 85.06 148.02 65.17 27.48 n/a 27.48 235.2 327.55 436.44 22.64 28.32 n/a 28.32 44.44 85.18 158.68 60.68 21.49 13.09 23.03 27.86 29.88 62.54 17.75 19.58 18.2 19.62 44.04 27.08 2.5 32.0 47.12 16 52.68 31.91 32.61 2.5 36.43 31.89 19.65 36.51 38.66 26.58 10.47 31.77 43.21 19.33 49.59 33.99 29.89 2.72 35.21 35.76 11.53 40.76

Food and beverages 11 Primary 111 Mainly for industry Mainly for 112 household consumption 12 Processed 121 Mainly for industry Mainly for 122 household consumption Industrial supplies not 2 elsewhere specified 21 Primary 22 Processed Fuels and 3 lubricants 31 Primary 32 Processed Capital goods 4 (except transport equip.), parts & acc. Capital goods 41 (except for transport equip.) Parts and 42 accessories Transport equip. & parts and 5 accessories thereof Passenger motor 51 cars 52 Other Parts and 53 accessories Consumer goods 6 not elsewhere specified 61 Durable 62 Semi-durable 63 Non-durable

7.22 4.82 7.54 2.67 3.0 2.0 7.99 8.0 7.97 8.1 10 8.0 7.8 7.98 7.53 8.03 7.96

7.33 5.06 7.92 3.92 4.0 2.0 8.0 8.0 8.0 7.95 10.0 8.0 7.9 8.0 8.0 8.0 8.0

8.45 4.13 8.84 3.24 1.0 5.49 6.14 6.23 6.0 7.67 8.0 8.25 7.35 10.02 5.8 11.17 9.12

10.17 0.82 14.02 2.25 2.1 3.34 5.88 5.73 6.48 7.95 8.0 8.02 7.8 9.41 2.68 11.96 9.48

15.46 5.79 15.71 16.75 n/a 16.75 5.02 5.35 4.29 30.56 60.0 26.46 25.36 34.27 33.33 35.96 32.33

19.57 4.67 19.65 39.4 n/a 39.4 8.87 6.2 12.26 49.09 60.0 55.81 27.38 21.75 38.27 20.57 19.58

12.73 5.1 13.14 8.59 5.0 8.99 5.35 5.87 4.17 26.33 67.83 21.09 24.16 32.89 30.6 35.23 31.3

17.3 4.7 17.41 11.61 5.0 11.61 4.45 3.39 7.88 31.07 59.97 27.72 22.49 29.63 40.74 26.34 28.78

Source: TRAINS 2009