Washington Presses Vietnam Over Currency Practices

Washington Presses Vietnam Over Currency Practices

Published: April 9th, 2021

America’s Trade Representative to Vietnam, Katherine Tai, held a call this week with Vietnam’s industry minister to press the Southeast Asian country to change its currency practices.

A statement from the USTR said Tai also told her Vietnamese counterpart Tran Tuan Anh that the US also has concerns about its timber practices, which Washington says are illegal.

Vietnam’s Ministry of Industry stated in response that the US and Vietnam are ‘actively cooperating’ to address Washington’s concerns and sustain stable trade relations.

Vietnam says trade between the two countries is expected to exceed USD 100 billion this year, up from USD 90.7 billion in 2020. America is the biggest single customer for Vietnamese exports.

In December, the outgoing Trump administration added Vietnam to its list of “currency manipulator” countries because of its expanding trade surplus with the US, a large worldwide current account surplus, and extensive interventions in currency markets to hold back the valuation of the Vietnamese dong (VND).

In January, the US Trade Representative’s office revealed the outcome of an investigation into Vietnam’s currency practices. It found Hanoi’s currency market interventions were excessive and had the effect of limiting US commercial activity. However, the Biden administration did not follow on with punitive action or retaliatory tariffs.

‘Unusual’ interventions in forex markets

In February, press reports noted that Vietnam’s central bank was actively making moves in foreign exchange markets, using what analysts have described as an ‘unusual method.

In January, the State Bank of Vietnam (SBV) told local banks it would be ending its scheduled purchase greenbacks in the spot market, where the trade typically settles in a few days.

Instead, the SBV offered the local banks an attractive alternative: It would agree to buy dollars at above-market rates and take delivery in July. Meanwhile, the local banks would be free to cancel the agreement by mid-June if market conditions changed sharply.

Senior forex traders told Bloomberg that this approach constituted a new method of intervention not seen previously. Its impact was to put downward pressure on the dong but without money needing to changing hands immediately.

Analysts have suggested the approach would help the SBV avoid US scrutiny over the activity and sidestep any retaliatory trade moves by Washington. One worry is that Vietnam's valuable timber exports to the US could be targeted.

Hanoi maintains that it doesn’t use exchange rates to create an unfair advantage in international trade. The country’s lumber industry trade body has said it will tighten regulations and buy more American timber to re-balance trade and hopefully avoid punitive tariffs.

Trump admin kicked the issue into the long grass

In the final days of the Trump administration, the USTR released results of an investigation into potential currency manipulation by Vietnam’s central bank. It concluded that the SBV had tried to hold back the dong in forex markets but stopped short of imposing new tariffs.

The investigation began in October 2020 and was conducted alongside another investigation looking into Vietnam’s use of lumber harvested using illegal methods. It was notable as it marked the first time Washington had used currency manipulation as the trigger for trade investigation. At the time, the Trump administration cited Section 301 of the 1974 Trade Act, the same legislation used to create the ‘traffic wall’ against Chinese imports.

Since it began, the USTR investigation has faced opposition from US business interests in Vietnam and stoked tensions with a country that grown to become a close trading and diplomatic partner for Washington as America looks to counter Chinese ambitions in the ASEAN region.

Pundits also noted that the Trump administration was willing to risk warming relations between the two countries as part of its overall strategy to push back on any country maintaining a trade deficit with America. Given America’s outsized investments in maintaining ‘world peace’ and the post-Bretton Woods global trade settlement, the White House claimed that America deserved favourable treatment.

However, Trump took no action and left it to the incoming Biden administration to deal with Vietnam's currency and timber trade issues. Despite the pressure this week, the USTR has opted not to take any punitive action and continue dialogue instead. Hanoi said that it welcomed the decision, calling it a happy result of the efforts of the government and businesses from both the USA and Vietnam.

The dong’s performance in currency markets underwhelms

The Vietnamese dong (VND) has been moribund in official spot markets so far this year, posting only a 0.2 per cent gain since the start of January.

In February, The State Bank of Vietnam (SBV) said it would scale back the frequency of its currency market interventions and let the dong’s price move up or down following normal supply and demand signals.

Since the Trump administration branded Hanoi a ‘currency manipulator’ back in December, forex market intervention has become a sensitive political issue for Vietnam, even as it looks for new and novel ways to stop the dong’s price from appreciating too rapidly and negatively impacting exports.

The country has benefited from an explosion of export-led growth, and a higher-value VND could threaten the good times. Appreciation might hurt Vietnamese manufacturers and halt welcome growth in the middle of a pandemic.

Press reports suggested that the SBV had stopped buying greenbacks in the spot market where trades settle rapidly and purchased them instead using contracts with a July delivery date. Analysts have suggested it was a move designed to depress the dong while avoiding traders US scrutiny.

In response, the SBV said it merely shifted to using forward derivatives and included a provision that would let banks cancel them. That way, the rate for VND would remain flexible, supporting more liquidity.

Since the issue arose, Hanoi has repeatedly said that its currency policies are designed to sustain stability, control inflation, and not obtain trade advantage.

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