What’s going on here?

On December 16, the Treasury issued the Report on Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States. Accordingly, Vietnam was identified as a currency manipulator.

“Forced” criteria

• Criteria include:
  • A trade surplus with the US is over 20 billion USD within 12 months.
  • The current account surplus is more than 2% of GDP within 12 months.
  • The Government has a net inflow of foreign currency in 6 months and this amount accounts for 2% of GDP or more.
• In fact, these criteria are subjective and somewhat “forced” to export-oriented countries like Vietnam.
  • For example, most countries with strong export activities such as China, Germany, Taiwan, Thailand and Vietnam will certainly violate the first two criteria.
  • Only the third criterion can be avoided by interfering in a limited and infrequent manner in the foreign exchange market.
• Therefore, this label could be used by the US as a pawn on its diplomatic chessboard, ready to set it down or lift it at any moment.
  • If Vietnam is strong and big enough and able to give America many other things, the US will not hesitate to remove this label.
  • On the contrary, there will be no rush. This is a legacy that the Trump administration has left behind, and the administration of the new US President will not be in a hurry to remove it without any benefit.

Reasonable given Vietnam’s current context

• In the report, it is stated that Vietnam’s currency was undervalued by about 8% in 2018 and VND would continue to decline in real value by 2% against USD. This is the basis for the US Treasury to propose that Vietnam should allow the local currency to increase in accordance with the real exchange rate. They imply that the State Bank of Vietnam (SBV) is the one who intervenes in the foreign exchange market that has prevented VND from appreciating.
• In response, the SBV affirmed that:
  • The exchange rate management in recent years is to control inflation, stabilize the macro-economy, not to create an unfair competitive advantage in international trade.
  • Foreign currency inflow intervention is to ensure the smooth operation of the foreign currency market in the context of the abundant supply of foreign currencies, contributing to macroeconomic stability and consolidation of the foreign exchange reserves (which are at a low level compared with other countries in the region), to enhance the national financial and monetary security.
• Vietnam’s abundant supply of foreign currencies stems from the fact that
  • our country receives a lot of foreign capital,
  • the overall balance of payments has improved – including support from remittances and export growth.
  • we don’t buy the plentiful supply of foreign currencies, as the appreciation of the domestic currency is contrary to the direction of a stable but slightly weak domestic currency to support exports.

Therefore, buying foreign currencies in Vietnamese conditions is a must in view of macro stability and economic growth with an export-oriented model.

Some solutions?

• Cooperate with the US in some key projects, such as energy, green infrastructure, which Mr. Biden is very interested in.
• Cooperate with other countries to force the US to reconsider that set of criteria. 

Source: Ho Quoc Tuan. (2020). Thao túng tiền tệ: Ngoại giao trừng phạt và lợi ích chiến lược. Đầu tư tài chính. Available at: https://saigondautu.com.vn/tai-chinh/thao-tung-tien-te-ngoai-giao-trung-phat-va-loi-ich-chien-luoc-86761.html [Accessed January 4th, 2021]