On December 16, the US Treasury Department officially labeled Vietnam a currency manipulator after months of investigations stemming mainly from the Southeast Asian state’s large trade surplus with America.
Hanoi has employed macroeconomic methods for the “purposes of preventing effective balance of payments adjustments and gaining unfair competitive advantage in international trade,” the Treasury stated in its semi-annual report submitted to Congress.
The Vietnamese government has acted to gain an“unfair competitive advantage in international trade as well,” the announcement said.
The State Bank of Vietnam, its central bank, has consistently strongly opposed the accusations, while commentators have questioned why in its final month in office the Trump administration would make such a decision that fundamentally goes against America’s broader geopolitical aims.
“Currency manipulation has not been an issue for our membership, and any potential action in the final days of this administration to harm Vietnam’s economy with punitive tariffs will damage the close partnership the two countries have developed,” Adam Sitkoff, the executive director of the American Chamber of Commerce in Hanoi, said in a statement.
The new designation could lead the US to impose punitive measures against Vietnam, although this is unlikely as the decision will fall on the incoming Joe Biden administration, which is unlikely to take such a hard-line stance as the current administration on the issue of currency manipulation and America’s trade deficits.
Biden’s treasury secretary nominee, Janet Yellen, will be expected to lead a review in April, but her past comments reveal that she is far more flexible on other countries using “macroeconomic policy levers, particularly monetary and fiscal policy,” to achieve their economic goals, as Yellen said last year.
If the Treasury’s decision this week is unlikely to lead to any tangible outcome in terms of sanctions, its importance lies more in the symbolism of the announcement.
In this regard, the Treasury has just thrown a major spanner in the works of US foreign policy, which regards Vietnam as an increasingly important ally as Hanoi continues to be the loudest of China’s rival claimants to disputes in the South China Sea.
Defending Vietnam’s claims to several features in these waters has become a primary way for the US to engage in the issue, as well as being a means of demonstrating that Beijing flouts international law and harbors expansionist ambitions.
Indeed, the Trump administration has largely continued the policy of its predecessor, the Barack Obama administration, of strengthening military relations with Vietnam while turning a near-constant blind eye to all of Hanoi’s abuses and flaws.
Two American naval vessels have docked in Vietnam’s harbors since 2017, while Trump has lavished symbolic praise on Vietnam’s communist leaders, with Vietnamese Prime Minister Nguyen Xuan Phuc being the first in Southeast Asia to speak to and then visit Trump after his 2016 victory.
Trump also handpicked Hanoi to host his second-round peace talks with North Korean dictator Kim Jung-un in early 2019, an event where Trump lavished praise on his hosts and which Vietnam used to greatly improve its international reputation.
There was much talk last year that Vietnam and the US would upgrade their relations to “strategic partnership”, although this never went ahead, in part because of the Covid-19 pandemic.
At the same time as exchanging bon mots with Hanoi, Washington has since at least the mid-2000s tacitly accepted that it won’t talk too often or harshly about Vietnam’s dire human rights situation because of geopolitical priorities.
Indeed, several bills put before Congress would have imposed penalties on Vietnam’s leader for their one-party rule and widespread repression, but these have either died in both houses or faced considerable pressure from the executive, especially under the Obama administration, to be dropped.
Yet the symbolism of the Treasury’s announcement this week will not be lost on Vietnam, China or other Southeast Asian states.
For starters, there is confusion in Hanoi over why US officials won’t accept that one of the main reasons why Vietnam’s trade surplus with the US has risen in recent years is because of Washington’s trade war with China, which has resulted in international firms shifting their operations from China to alternative manufacturing hubs like Vietnam.
Vietnam’s trade surplus with the US increased from US$32 billion in 2016 to $38.3 billion in 2017, Trump’s first year in office, then to $39.4 billion in 2018 before ballooning in 2019 to $55.7 billion. The US Treasury said this week that it stood at $58 billion in June 2020.
If the US is serious about “decoupling” or at least reducing its dependence on China-made goods, it will need to import them from elsewhere. Vietnam, with its increasingly robust tech-sector, is a prime candidate.
Granted, Trump reckoned that a trade war with China would persuade US firms to relocate their operations back to America, not to Vietnam, but no serious economist in the Treasury Department could have assumed this would be the case considering the cost differential for labor.
If Vietnam is now at risk of US trade sanctions because of its alleged currency manipulation, there is less reason for investors to move their operations out of China, which remained on the Treasury Department’s currency manipulator “watch list.”
Vietnamese officials say in private that they’ve always been confused about the Trump administration.
Just weeks after lavishing praise on the Vietnamese government amid his North Korea peace talks in early 2019, Trump said during a Fox News interview that Vietnam is the “worst abuser” of US trade, a comment that left Vietnamese diplomats scrambling for clarity from their US counterparts.
After designating Vietnam a currency manipulator this week, Treasury Secretary Steven Mnuchin commented: “The Treasury Department has taken a strong step today to safeguard economic growth and opportunity for American workers and businesses.”
Yet, viewed from Southeast Asia, this looks petty if not misguided. After all, imports from Vietnam made up just 2.7% of America’s total imports in 2019, yet the US was Vietnam’s largest export market. Clearly, then, the consequences of this decision won’t even be felt in the US but will be visceral in Vietnam, if trade sanctions are actually imposed.
From a realpolitik perspective, if Washington is serious about competing for influence with China in places like Southeast Asia, the US government has just shot itself in the foot with this decision, which could have easily been delayed for several more months.
It also sends a signal to America’s other allies that they could be next, with Thailand, Malaysia and Singapore also on the US Treasury’s “monitoring list.” The announcement this week noted that the Singaporean government has intervened in its foreign exchange market in a “sustained, asymmetric manner.”
The announcement will also inevitably be compared with the lack of moral censure coming from Beijing. Indeed, the Chinese government doesn’t brand other states it competes with in export markets as currency manipulators, obviously because Beijing doesn’t want to raise attention about its own manipulation.
The yuan has been allowed to rise strongly against the dollar this year. The US has long been seen as interfering in the domestic affairs of Southeast Asian states by advocating for democracy and human rights. But now it appears that Washington wants another string: how other states should manage their own macroeconomic policy.
It is unlikely that any punitive measures will be taken against Vietnam before the Trump administration leaves office in mid-January, though it now puts pressure on the incoming Biden camp to either reject Vietnam’s designation as a current manipulator or find some way of keeping the designation but not following through with punitive trade countermeasures.
The Biden administration will see eye-to-eye with certain of Trump’s trade policies. In September, Biden’s pick as his secretary of state, Antony Blinken, echoed Trump by vowing to “aggressively enforce American trade laws any time foreign cheating poses a threat to American jobs.”
If Biden’s Treasury Department drops this currency manipulation accusation against Vietnam, it will be harangued by critics in the US as being weak on countries that manipulate their markets to the detriment of American jobs, a charge that Biden will be keen to avoid.
The timing of the designation is clearly awkward in Vietnam, coming just weeks before the Vietnamese Communist Party’s quinquennial National Congress, where the country’s new leaders are selected.
Not everyone within the VCP is enamored by better ties with the US, and some of the more conservative-minded apparatchiks argue for better Party-to-Party ties with Beijing or a far more neutralist stance between the two superpowers.
The news that Vietnam has been branded a currency manipulator will hardly dissuade such opinions, and Trump’s decision may alter the Party’s next five-year plan for foreign policy, which will be announced next month.
Batting in America’s corner is current Prime Minister Nguyen Xuan Phuc, who analysts reckon will either move up to become the next Party chief or State President in January.
America would be well-served if Phuc and his associates are able to take top posts next month. Not only are they friendly to the US, they’re also more in favor of economic liberalization and perhaps further down the road political liberalization. A more open Vietnam is clearly in US interests.
Given that a plenum held this week is likely to decide the question of who occupies the top political posts next month, the Treasury Department’s decision may not affect that outcome. Though this cannot be for certain.
And it may affect the decision of whether Phuc, a trusted interlocutor with the US, moves up to the Party chief post from where he won’t be able to engage in formal discussions with US officials or instead takes the presidency, a head of state post perfectly suited to him engaging in diplomacy.
What is certain is that the currency issue will make Vietnam’s leaders think twice about how much they can trust Washington, both as an economic and strategic partner.