Vietnam: Currency Manipulator or King of Exports?

Forex Hedging | 10 min Read

Uploaded on: 01 February 2021

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Vietnam has currently been put on the list of active currency manipulators by the US Treasury Department in its December 2020 report. This is mainly because Vietnam has been consistently buying up currency to boost exports to the United States at a massive rate.
Vietnam passed all three criteria set by the US Treasury Department as shown below:

Bilateral Trade Surplus$20 billion$58 billion
Current Account Surplus3% of GDP4.6%
Net Purchases of Forex2% of GDP5.1%

A part of this can be attributed to the loss of demand for Chinese goods and services due to COVID-19. There is a lot of dissatisfaction in the developed world with regard to the Chinese handling of the virus. The US imposed tariffs on China, and an all-out trade war is underway. Although the US administration has undergone a change since then with the Biden-Harris presidency, the US stance is unlikely to change. The US views China as a threat to its global technological dominance and the undercutting of goods by China is definitely not going to work anymore.

Meanwhile, factories in Vietnam are still allowed to export to the US, prompting a shift in global manufacturing and supply chains. Companies do not want any part of this trade war, and Vietnam provides cheap labor as well as ease of business to corporates.

Such large FDI transactions in Vietnam led to Dong appreciation. Vietnam has had a massive surge in large scale currency interventions as a response to this rise in demand of its currency. After being added to the currency manipulators List, there is no historical precedent as to what can be done. Ideally, Vietnam will be provided with recommendations on how to resolve these problems of current accounts and forex intervention. Under the law, the U.S. Treasury Department has a year to negotiate, or else they can impose 25% tariffs on goods or impose stricter sanctions as they may deem necessary.

If we look at the political scenario, the Biden administration will not want to impose sanctions on Vietnam. Imposing tariffs would pivot Hanoi towards Beijing, which would not be ideal for USA. Keeping China and Vietnam divided serves US interests, as together they have more bargaining power. Vietnam does not pose any kind of threat to the US anyway, due to the size of the economy.

If we look at this situation from Vietnam’s point of view, not complying with US standards of currency manipulation is definitely a challenge for Vietnam. USA forms a very important market for good produced in Vietnam. Cheap labor is used to produce low-cost consumer goods which are then flooded in American markets. A large chunk of economy is dependent on production of such consumer goods. As is very obvious from the chart below, the US serves as such an important market for Vietnam that it is in its best interest to work together to improve its situation.

Hopefully, this is a one-time intervention owing to Covid-19 and foreign inflows, and Vietnam will work with US Department of Treasury’s suggestions to avoid future conflict

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