The US Treasury Department’s designation of Vietnam as a currency manipulator reflects President Trump’s push to punish countries that have trade surpluses against the US. However, the move is likely to start a new phase of negotiations to avoid harm to both countries’ strategic interests.
By Umair Jamal
The US Treasury Department has declared Vietnam a currency manipulator, accusing the country of intervening in foreign exchange markets to limit the rise of its currency against the dollar to gain a trade advantage on American exports.
In its semi-annual report to US Congress, the Treasury Department also reviewed the monetary policies of other US trade partners and found that only Vietnam and Switzerland met the criteria for currency manipulation.
The development could have implications for both countries if the US decides to implement penalties that come with the designation.
Has Vietnam been manipulating currency to benefit its exports?
Vietnam has been on the radar of the US for currency manipulation for some time. In May 2019, the US placed Vietnam on its currency manipulation watch list, flagging Vietnam’s trade surplus vis-à-vis the US as an issue. Another US Treasury report in January 2020 placed 10 countries, including Vietnam, on its monitoring list.
In its latest report, the Treasury Department noted that Vietnam “conducted large-scale and protracted intervention, much more than in previous periods, to prevent appreciation of the dong.” The report alleged that Vietnam has been intervening in currency markets to gain “unfair competitive advantage in international trade.”
To be classified as a manipulator under US law, “countries must at least have a US$20 billion-plus bilateral trade surplus with the United States, foreign currency intervention exceeding 2% of gross domestic product [GDP] and a global current account surplus exceeding 2% of GDP,” as reported by Reuters. The Treasury said that at 5% of GDP, Vietnam’s foreign exchange intervention has far exceeded this criterion.
The Treasury Department’s report alleges that Vietnam increased its intervention in foreign currency markets at the same time that many companies relocated to the country from China to avoid US tariffs. To an extent, the allegations give an impression that Vietnam has deliberately allowed companies to take advantage of its currency policies in order to gain trade advantages against the US.
At this point, it is unclear if Vietnam’s designation as a currency manipulator will lead to US tariffs on Vietnamese goods. The US Treasury Department has said it wants to work with Vietnam to bring its market interventions below manipulation thresholds.
What does Vietnam’s designation as a currency manipulator mean for the country?
Following the announcement from the US, Vietnam’s central bank said that it would work with US authorities to ensure a “harmonious and fair” trade relationship and resolution of the dispute. “Vietnam’s foreign exchange rate policy has for years been managed in a way to contain inflation, ensure macro stability and not to create unfair trade advantage,” the central bank said in a statement.
The development can have serious implications for Vietnam’s economy if the US government follows through with penalties for currency manipulation under US law.
The US could limit access to government procurement contracts and development finance, as well as using institutions like the International Monetary Fund (IMF) to put pressure on Vietnam’s economy. Vietnam’s efforts to attract foreign direct investment may also be impacted.
Reportedly, the US Trade Representative’s office is also carrying out a separate inquiry to determine whether an undervalued Vietnamese dong hurts American businesses. The Treasury’s announcement could influence this inquiry. If this happens during US President Donald Trump’s final days in office, the US may move to place trade tariffs on Vietnam.
President Trump has frequently criticized countries with trade surpluses against the US, often accusing them of deploying weaker currencies to gain trade advantages against American exporters. Ahead of the G20 summit in Japan in 2019, President Trump termed Vietnam the “single worst abuser of everybody.” “A lot of companies are moving to Vietnam, but Vietnam takes advantage of us even worse than China. So there’s a very interesting situation going on there,” Trump said in an interview.
The tensions between the two countries amid a change of government in the US could have implications for America’s Southeast Asia policy. Vietnam is the 13th biggest trading partner of the US and a key player in countering China’s interventionist activities in the South China Sea.
John Goyer, US Chamber of Commerce executive director for Southeast Asia, implied in an interview with Reuters that US punitive tariff action on Vietnam would be strategically self-defeating. “It would send a bad message to Vietnam and it would have a real and consequential impact on the bilateral relationship,” Goyer said. “Rash tariff action will be damaging to the overall relationship,” he added.
President Trump has rolled back duties on China’s exports after a trade agreement with Beijing and Vietnam and the US could reach an agreement on the issue soon.
In the immediate future, the US is unlikely to adopt policy measures against Vietnam. From the US side, “this is perhaps just a little sort of a warning to Vietnam to not enjoy the benefits of supply chain too much,” said Song Seng Wun, an economist associated with the Malaysian bank CIMB.
Rajiv Biswas, a senior regional economist with IHS Markit, a London-based market analysis firm, believes that there will “now be a period where the US will have discussions with Vietnam to try to resolve the situation.”
US Treasury Secretary nominee Janet Yellen could likely change the findings in her first currency report, which is due in April 2021. The administration of incoming president Joe Biden is not likely to press ahead with the outgoing president’s hasty policy approach, which has alienated America’s allies globally.