Currency manipulation allegations: What is Vietnam’s choice? Accusing Vietnam of devaluing the currency to create competitive advantages or conduct unfair trade practices is completely inappropriate.
December 16th, the U.S. Department of the Treasury issued a report on “Macroeconomic and foreign exchange policies of major trading partners of the United States”. It accused Vietnam of manipulating the currency under the Trade Facilitation and Enforcement Act 2015 (Act 2015). That accusation will create a basis for the US President to take detrimental measures to Vietnam if Vietnam does not have reasonable responses.
Three criteria to define the “threshold” of the accusation
To be considered as currency manipulation, three criteria must be met: The first criterion is a significant bilateral trade surplus with the United States is one that is at least $20 billion over a 12-month period. The second criterion is a material current account surplus is one that is at least 2% of gross domestic product (GDP) over a 12-month period. The third criterion is persistent, one-sided intervention occurs when net purchases of foreign currency are conducted repeatedly, in at least 6 out of 12 months, and these net purchases total at least 2% of an economy’s GDP over a 12-month period.
Treasury’s goal in establishing these thresholds is to identify where potentially unfair currency practices or excessive external imbalances that could weigh on U.S. growth or harm U.S. workers and businesses may be emerging.
Vietnam met all three criteria under the 2015 Act over the four quarters through June 2020. Specifically, criterion 1, by June 2020, has a surplus of 58 billion USD, criterion 2 is the current account surplus of 4.6% of GDP and the third criterion is the amount of foreign currency purchased 5.1% of GDP (16.8 billion USD) in 4 quarters respectively.
Based on this enhanced analysis criterion, the US Treasury Department will engage in bilateral relations with Vietnam in accordance with the Act to quickly make a specific action plan on the policy to resolve the main causes of currency devaluing of Vietnam.
Under the Act, whether a measure will be applied or not will be based on the calculation and consideration of pros and cons on US interests. However, it is obvious that enterprises and trade, monetary policies of Vietnam will be adversely affected.
The US may force Vietnam to raise the price of the Vietnamese dong, causing the price of exports to rise, reducing the demand for Vietnamese goods overseas. Therefore, the attraction of foreign investment will decrease due to increasing domestic prices, declining cheap labor advantage, and decreasing confidence of investors in Vietnamese policies. Liabilities denominate in VND increased. That will cause difficulties in accounting for businesses while flooding cheap imported goods will push Vietnamese businesses into a difficult situation.
Applications of taxation and non-tariff measures or technical barriers… will possibly happen and the disadvantages, loss of benefit are unavoidable.
Data for calculating criteria is not enough
The criterion of trade surplus between Vietnam and the US only takes into account goods excluding services while the US exports a significant number of services to Vietnam. This was recognized right in the US report.
In fact, many partners have been taken off the list of currency manipulation by including trade in services in the direction of significantly reducing the US deficit. The increase in the proportion of trade in services provided by the US will contribute to minimizing the surplus situation from the Vietnamese side. Moreover, there is a change in Vietnam’s GDP data. After recalculation, GDP announced by the General Statistics Office increased by more than 25% in 2019 compared to currently applied GDP. If a calculation using newly adjusted GDP was applied, the criteria may change significantly.
If the US recognizes just a small adjustment of the calculation results of the Vietnamese side, it will weaken the data from the US Department of Finance report and increase Vietnam’s confidence.
The right choice
Obviously, there are many points that require direct consultation from both sides to get better understanding. The consultation should include successful US investors in Vietnam as well as stakeholders with significant and long-term economic interests in Vietnam to increase sympathy or “soften” the unnecessarily straightforward tension in bilateral relations.
Vietnam is a developing economy that has had many achievements in economic management, successfully implemented both anti-epidemic and economic development. This is the basis to increase the sustainability of the strategic partnership between two countries. Monetary policy of Vietnam aims to stabilize the macro-economy and control inflation, and has no goal of devaluing the currency to create a competitive advantage. In fact, Vietnam has never practiced this behavior. Therefore, it is completely inappropriate to accuse Vietnam of the purpose of devaluing the currency to create competitive advantages or conduct unfair trade practices.
During the Covid-19 pandemic, due to the impact of a supply chain breakdown, a decline in employment in the US, with the US subsidy package, demand for essential goods increased. The US tax policies on imported products from some partners’ makes them change to focus on non-tariff countries, including Vietnam.
This makes the demand for exported goods from Vietnam to the US increase. It is different from the devaluation of the currency to stimulate exports. Same increase in export but different causes. The fact that the export of Vietnamese goods to the US has increased because of the US-China trade war starting in 2018. Moreover, Vietnamese enterprises have a lot of experience. Therefore, if accusing Vietnam of manipulating the currency to increase exports, it is an “unjust” accusation against Vietnam.
Vietnam needs to consult with the US on how to calculate and determine the criteria suitable for Vietnam’s economic context and actual conditions instead of just complying with the formal legal nature – the essence of American business culture.
Therefore, it is necessary to carefully prepare a reliable database to review all the criteria when conducting consultations on the principle of respecting the economic data of Vietnam that has been calculated by international experts, especially the adjusted GDP figures. It is even possible to recalculate the criteria and announce to the US before the consultation in a convincing way to reduce these results so that the consultation is redirected to the correct nature. Besides, it is necessary to clearly and transparently calculate the actual exchange rate targets in order to comply with the provisions of the Act 2015.
Incorporate multiple effects to avoid being labeled currency manipulation
First of all, it is necessary to proactively and actively exploit the diplomatic impact on the very precious foundation of 25 years of normalization and development of the Vietnam-US relations. Vietnam needs to calculate to expand imports of US goods and services in order to narrow the trade surplus from Vietnam.
In addition, Vietnam is a country where many US investors are shifting their investment from China to. Vietnam is a place of great economic benefits to the United States in the long run. Vietnamese enterprises need to joint venture, associate or cooperate with US partners to produce goods for exporting to the US market through the system of traders or importers and US goods distribution networks.
The tightening of the relationship and the interwoven interests will minimize the allegations because once sanctions are applied, it could damage the US investors more. Therefore, promoting US partners to invest in Vietnam of all sizes is necessary.
Adjust the structure of foreign reserves such as stabilizing or reducing reserves in USD and need to increase reserves in other currencies such as: Euro, Yuan, Japanese Yen, SDR, gold or other currencies… to avoid being seen as an excessive monetary market intervention with the dollar. This foreign reserve structure can be flexibly adjusted when necessary to meet the requirements of reserves, stabilize the currency, control inflation…
There is a need for regular and proactive warning mechanisms on monetary allegations to avoid being passive in the face of unexpected situations. It is necessary to build a team of experts, scientists, policy makers, specialized managers with international coordination to monitor and early warn the government of exceeding thresholds.