Recently, many regional and international news agencies simultaneously reported on the US determination of Vietnam’s “currency manipulation” at the same time commenting on the consequences and impacts on the market and bilateral trade, as well as predictions about Washington’s next move.
What will the consequences be?
This US move will not lead to specific “consequences” immediately, but it may escalate tensions and affect the market in the short term.
By law, the US government will have to negotiate with trading partners to resolve the issue of exchange rate imbalances. After 1 year, Washington may impose trade penalties if the decision to label currency manipulation is not removed. Therefore, the countries identified as “currency manipulators” will have to initiate negotiations with the US and possibly with the participation of the International Monetary Fund (IMF). If the Treasury Department’s concerns are not addressed, the US could impose a range of sanctions, including tariff sanctions. Some businesspeople worry that President Donald Trump will quickly take measures to tax imposition.
Will Vietnam really “manipulate its currency“?
The US Trade Representative (USTR) last October established an investigation process that could lead to the US imposing tariffs on billions of dollars of goods imported from Vietnam, but the US Chamber of Commerce and its business representatives warned of the consequences of imposing taxes on the bilateral relationship.
In a necessary move, the US Treasury Department has set up clear “objective criteria” to evaluate whether a trading partner is manipulating currency or not. This is particularly important because US law gives the Department of the Treasury a high priority over these matters. It is particularly useful to apply these criteria to the case of Vietnam. In fact, Vietnam did not violate 2 out of 3 criteria set by the US Treasury Department.
Criterion 1: Does Vietnam have a current account surplus of at least 2% of GDP?
According to data from the State Bank of Vietnam, Vietnam’s current account balance has shifted from a surplus of $6.26 billion in the third quarter of 2019 to a deficit of $323 million in the second quarter of 2020 (according to the latest updates). If Vietnam does act to undervalue the local currency, it will go in the opposite direction.
The change in Vietnam’s current account deficit is not surprising. The economy is growing fast and Vietnam has received a huge inflow of foreign direct investment (FDI), partly due to the imposition of tariffs on imports from China by the US and efforts to move the supply chain out of China. FDI inflows – considered the capital account surplus in the national balance of payments – are a mirror image of the country’s current account deficit.
In short, Vietnam did not violate the current account criterion because its current account is in deficit, not surplus.
Criterion 2: Net purchase of foreign currencies with a total value of at least equal to 2% of GDP in 12 months.
For the above criterion, the International Monetary Fund (IMF) said that Vietnam’s foreign exchange reserves reached $84.1 billion in July 2019 (the latest data), up to $3 billion from $81.1 billion in January 2019. This is lower than 0.9% of Vietnam’s GDP, which the IMF estimates will reach about $340 billion in 2020.
Although these data are not for the whole of 2020, a report by the US Treasury Department in January said: “The Vietnamese authorities have reliably communicated to the US Treasury Department that buying net foreign exchange was 0.8% of GDP in the 4 quarters as of June 2019.” The fact that the US Treasury Department added IMF data to its report in January showed that Vietnam did not exceed the threshold set by the ministry regarding net buying of foreign currencies.
In short, Vietnam’s net buying foreign currency trajectory in the first half of 2020 did not violate the US Treasury Department’s criteria for unfair monetary behavior leading to undervalued currency.
Criterion 3: Having a bilateral trade surplus with the US of at least $20 billion in 12 months.
The US trade deficit in goods and services with Vietnam is $54.5 billion in 2019 and will continue to grow in 2020. Although economists view the trade balance as an inaccurate measure to assess commercial interests in a relationship, clearly Vietnam violates this criterion of the US Department of Finance.
Still, the massive increase in the US trade deficit with Vietnam was a direct result of the US imposing tariffs on more than $350 billion of goods imported from China. Indeed, many companies have shifted their supply chains from China to other countries, including Vietnam, to avoid tariffs on imports from China.
During his visit to Vietnam last November, US National Security Advisor Robert O’Brien recommended that Vietnam “buy more US goods such as liquefied natural gas and military equipment to avoid US tax sanctions.”
China escapes being labeled “currency manipulator”
China, also being “labeled” currency manipulation by Minister of Finance Mnuchin in August 2019 (when US-China trade tensions reached its peak), has been similar to the period 1992-1994, but was “acquitted’ in January 2020 (two days before the world’s two largest economies signed a “Phase 1” trade agreement).
China is the “thorn” in Trump’s eyes and has long been targeted by the US Treasury Department because of the way it manages the yuan. China has repeatedly escaped being labeled a currency manipulator thanks to its economic and strategic power. The reason is that the consecutive US governments want to get involved with China and push it to follow the path of reform instead of confrontation.
This time, China is still not labeled a currency manipulator, although it is still named among the 10 US trading partners that are put on the monetary watchlist. Although China only meets one of the three main criteria to be identified as a currency manipulator, the US still recommends: “The US Department of Finance calls on China to improve transparency in exchange rate management, particularly in relation to official foreign exchange intervention… ”
The US “amnesty” to China may have the effect of encouraging international investors to increase investment in Chinese bonds, which yield higher yields than most comparable markets. In addition, the fact that China “escapes” the currency manipulation mark this time can help US investors to become more confident in buying Chinese assets with high yields.
Is the situation desperate for Vietnam?
In a way, Vietnam may have been too successful in opening up its economy. Vietnamese leaders mainly study the Chinese model, open the door to foreign investment in the manufacturing sector, create cheap things for the US market, and improve the lives of the people. In the process, the trade surplus with the US has grown significantly.
Despite its close relationship with Washington, Vietnam resembles China in many ways. However, Vietnam is much smaller than China. Vietnam is also an important country that the US needs to keep close to while seeking to contain an increasingly assertive China in the South China Sea. If Vietnam feels too bad, it is important to see which countries are being monitored by the US Treasury Department: Japan, South Korea, Germany, Italy, Singapore, and Malaysia are also included in addition to China. Recently, Taiwan, Thailand, and India have been added to the watch list. Therefore, this is not the end of the world for Vietnam.
What can the Biden administration do?
So far, the Biden administration has not made it clear whether to continue the Trump administration’s pressure campaign against Vietnam. However, many progressive labor unions and Democrats favor stiffer trade measures against countries that deliberately devalue their currencies for commercial advantage.
The maintenance or cancellation of the decision labeled currency manipulation will depend on the next decision of the Minister of Finance.
However, Washington quickly removed its currency manipulation mark against China just a few months after identifying Beijing as a “currency manipulator” in August 2019 – just before signing a parallel trade agreement. policy in January 2020 – shows that the Trump administration’s branded move has a dominant political element. As such, it is entirely possible that the US administration may issue another report for the case of Vietnam next year. Bilal Hafeez, CEO of Macro Hive and former chief strategy officer at Nomura Holdings Inc., said: “I don’t think Janet Yellen (who President-elect Joe Biden appointed as Treasury Secretary) will be too loud in terms of monetary policy.”
According to Japan’s Nikkei, the conclusion in the half-year report of the US Treasury Department has been predicted by many foreign exchange analysts, but this issue has not been discussed with the upcoming presidential administration. elected Joe Biden. Treasury candidate Yellen is expected to revise the findings of her first monetary report, scheduled to be released in April 2021. “The Biden administration is not involved in this, it is a decision of the Trump administration,” an American official said.
Win Thin, head of the monetary strategy at long-established BBH bank in New York, said the report was “completely politicized” under Trump. “Every move of the incumbent Finance Minister can be easily reversed when the new Finance Minister takes office,” he stressed.
Many analysts believe that the US Treasury Department “labeling” some economies as currency manipulation is in the intention of President Donald Trump before leaving office in the context of the COVID-19 epidemic. increasing the US deficit with trading partners. While President-elect Joe Biden is expected to be less “stern” on trade matters, the new White House administration may find itself in a political predicament if it immediately stops the sports investigation on currency manipulations – a legacy of the current government.