US Launches Investigation into Currency Manipulation by Vietnam

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US Launches Investigation into Currency Manipulation by Vietnam

Targeting Vietnam will be counter-productive to Washington’s broader strategic objectives in Southeast Asia.

US Launches Investigation into Currency Manipulation by Vietnam
Credit: Flickr/ILO Asia-Pacific

On October 2, the United States government announced that it is opening an investigation into possible currency manipulation by the government of Vietnam. According to a statement from the office of the U.S. Trade Representative (USTR), Washington will “investigate Vietnam’s acts, policies, and practices that may contribute to the undervaluation of its currency and the resultant harm caused to U.S. commerce.” The USTR also announced a probe into Vietnam’s import and use of illegally harvested timber.

The inquiry, which is authorized under Section 301 of the 1974 Trade Act, comes after the U.S. Department of Treasury concluded in August that Vietnam had manipulated its currency in at least one case involving the export of light vehicle tires. Treasury informed the U.S. Commerce Department that that Vietnam’s currency was undervalued in 2019 by around 4.7 percent against the dollar due in part to government intervention.

The pending action against Vietnam stems from the Trump administration’s mercantilist allergy to any nation that happens to enjoy a large trade surplus with the U.S., i.e. any that exports more goods to the U.S. than it imports. The value of a nation’s currency is an important variable in this equation, given that a weaker local currency makes its exports relatively less expensive for American buyers, while making it more expensive for Vietnam to purchase goods from the U.S. Vietnam has had the fourth-highest trade surplus with the U.S. this year, after China, Mexico and Switzerland. The goods-trade deficit reached $34.8 billion as of July.

The Trump administration has long viewed Vietnam as a potential currency manipulator, prompting various concessions by the Vietnamese government. In January, Vietnam was one of 10 nations that the Treasury Department placed on a watch list for currency manipulation. Vietnam’s trade surplus with the U.S. has risen steadily since Trump took office, rising from $38.3 billion in 2017 to $39.4 billion in 2018 to $55.7 billion last year, according to U.S. Treasury data.

The currency investigation, which the USTR statement made clear had been instigated “at the direction of President Donald J. Trump,” could conceivably result in the imposition of tariffs on Vietnam’s exports to the U.S., or other forms of economic sanction. But these types of currency investigations usually take some time, so any tariff hike is unlikely to happen before the end of the year.

Whatever the result, the investigation is likely to be counterproductive to Washington’s broader desire for closer relations with Hanoi. Over the past decade, the two nations have become increasingly close strategic partners, united by common concerns about Chinese ambitions in the region, particularly its aggressive push into the South China Sea.

Indeed, as others have pointed out, the ballooning Vietnamese trade surplus is a side-effect of the Trump administration’s trade war with China, which, as intended, has prompted a number American manufacturers to relocate their operations from the country. Vietnam has been an attractive alternative destination, given its skilled workforce, low labor costs and proximity to China. Attempts to depress China’s trade surplus with the U.S. have thus helped inflate Vietnam’s.

While the strategic alignment between the U.S. and Vietnam militates against the imposition on harsh sanctions on Vietnam if it is found guilty of manipulating its currency, it is hard to see how this move serves Washington’s wider strategic goals in Southeast Asia. The Trump administration’s game of trade surplus whack-a-mole is just the latest instance of its self-defeating unilateralism, which alienates the very partners it should be seeking to court.