Implications of the US Treasury’s change of heart
Implications of the US Treasury’s change of heart
In the first semi-annual report on macroeconomic and foreign exchange policies of major trading partners of the United States under the Biden administration, the US Treasury Department noted that “there is insufficient evidence” to conclude that Vietnam and Switzerland manipulate their exchange rates to prevent an effective balance of payment adjustments or gain unfair competitive advantage in international trade.
By Ho Quoc Tuan - Senior lecturer University of Bristol
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The conclusion is welcomed by the Vietnamese government and the business community, as the previous label of currency manipulator led to concerns about possible countervailing duties imposed on imported goods from Vietnam.
The new development around the currency manipulation designation has relieved the concerns about any possible additional duties on Vietnam imports to the US for at least six months. However, the US Treasury noted that it will continue to engage with Vietnam and Switzerland to have a more thorough assessment and better determine whether either of these economies intervened in currency markets.
Besides Vietnam, Switzerland, and Taiwan, 11 other markets were included in the monitoring list of currency manipulations, including key trading partners such as China, Japan, and Germany. All these countries were in the December 2020 report.
The widened monitoring list suggests that the Biden administration is not necessarily more lenient on the currency manipulation matters. Instead, it chooses a more prudent and thorough approach by looking into all criteria in both, the 2015 and 1988 acts, and considers the impacts of the pandemic on these economies.
Vietnam may be relieved for six months, but it has to strengthen its relationship with the US and continue a close engagement with the US Treasury to ensure that it is not relabelled as a currency manipulator.
In his analysis at the East Asia Forum, David Dapice, senior economist at the Ash Center of Harvard University, argued that Vietnam’s “main offense was to be in the right place at the right time and to take advantage of global developments in which they have little influence.”
Tran Ngoc Tho, professor of finance at the Ho Chi Minh City University of Economics, suggests that the decision of labelling Vietnam as a currency manipulator was driven by the Trump administration’s frustration about not getting its share in the increasing bilateral trade between the US and Vietnam. However, the latter has little influence on these developments, consistent with Dapice’s own argument.
However, regardless of the true drivers of the trade surplus with the US, the new Vietnamese government under Prime Minister Pham Minh Chinh should be aware that the decision on whether to label a country as currency manipulator is more a political decision than a decision based on thorough economic analysis. Therefore, they need to engage more closely with the US, especially with its Trade Representative Katherine Tai and the Treasury Department under the leadership of Janet Yellen, to maintain a good understanding of Vietnam’s currency practices.
There are three aspects that Vietnam needs to pay close attention to. First is the size and frequency of foreign exchange intervention by the State Bank of Vietnam (SBV), which was closely scrutinised by the US Treasury in their recent report. Second is the undervaluation of the VND as concluded in both the December 2020 and April 2021 foreign exchange policies reports. The US Treasury indicates that it will be “working with Vietnamese authorities to develop a plan with specific actions to address the underlying causes of Vietnam’s currency undervaluation.” The final aspect is the trade surplus with the US, which is at a record high.
On the first and second issues, the SBV has adopted a new mechanism of managing foreign exchange rates, including measures through the new “cancellable forward” contracts. These new measures allow less intervention of the SBV in the foreign exchange market while they can still give credible signals to the foreign exchange market about a desirable level of exchange rates.
This may alleviate future concerns from the US Treasury about the frequency and size of the SBV’s intervention in the foreign exchange market. With the stability of macroeconomic factors and foreign inflows of capital, the SBV can continue to adopt these measures in a foreseeable future.
Regarding the currency undervaluation, the SBV should engage with both the International Monetary Fund and the US Treasury to provide counter evidence regarding the level of the VND’s undervaluation, whose subjective metrics rely on several assumptions and discretionary benchmarks that can be challenged with reasonable arguments.
The final and most important aspect is Vietnam’s sizable surplus in bilateral trade with the US. It is difficult to please a trading partner when you enjoy a much larger share of the trade benefits. A significant part of this surplus is driven by foreign firms, especially Chinese ones, that are using Vietnam as an intermediary to go around US-China trade tensions.
Vietnam does not necessarily benefit much from this behaviour, but it must bear the cost of the additional trade surplus. To enhance the future relationship with the US and gain more sustainable trade benefits, Vietnam should try to address this problem sooner rather than later.
The US Treasury Department’s report suggests that the future relationship between the US and Vietnam is promising. However, the new Vietnamese government should not be complacent and try to capitalise on these positive developments. One of the possible areas for enhancing the relationship and reducing the current account surplus is to cooperate with the US in climate change and renewable energy, both key focuses of the Biden administration, which may lead to more investments and imports from the US in these areas.
