Punishment diplomacy and strategic benefits

Saigon Investment
(Saigon Investment) - On December 16, the US Department of Finance issued the report "Macroeconomic policy and foreign exchange of major trading partners of the United States". According to this report, Vietnam, along with Switzerland, was identified by the US Treasury as "currency manipulators" under The Omnibus Foreign Trade and Competitiveness Act of 1988.

Illustrative photo.

Illustrative photo.

In fact, this is not a new issue but has been warned since 2019. And in the third quarter of this year, according to the currency manipulation signals monitoring page of Tracking Currency Manipulation, Vietnam is one of the "top" countries in terms of currency manipulation signals according to the standards of the US Department of Finance (Saigon Investment, issued on August 31, has a series of articles on this issue: "Vietnam is on the watch list of currency manipulation - Must accept and careful").

An imposing criterion

For those watching this issue, this is a "Good or Bad " story. Why do we say that?

First look at the set of criteria the US Treasury Department uses to evaluate an economy with currency manipulation or not. The current set of criteria of the US Treasury Department includes: First, a trade surplus with the US is over USD 20 billion within 12 months. Second, the current account surplus was more than 2% of GDP within 12 months. Third, the Government regularly intervenes in the foreign exchange market, of which there are 6 months of net foreign currency buying (within 12 months of evaluation) and this net buying amount accounts for 2% of GDP or more.

In fact, these are subjective criteria and somewhat "force" export-oriented countries like Vietnam. For example, most countries and territories 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. In the past, Taiwan had been wise to use a range of derivatives to buy foreign exchange, and sought to balance its forex position over a number of months to seem like it was not net buyers for that month. But in this new report, the derivative transactions have been "noticed" and careful by the US side.

Thus, with such an imposing set of criteria, the United States has actually "gathered" its major trading partners on a watchlist and the countries on this list could be "labeled" currency manipulation at any time only needs to meet 3 criteria. If they are not being labeled as currency manipulators, they were also put on a "black list" to monitor currency manipulation (apart from Vietnam and Switzerland being "labeled", there are 10 other economies on the "black list", including China). In 2019, China was labeled currency manipulation, but then in early 2020 was removed from this list, as the Sino-US was in the process of negotiating a new trade agreement.

Obviously, the choice of labeling US currency manipulation with any country is not purely an objective decision or based on scientific results, but on subjective judgment as well as political negotiations. The US uses this tool as a pawn on its diplomatic chess board, ready to set it down or lift it at any moment.

Therefore, if we are strong enough, the position is large enough, and can give America many other things, the US will not hesitate to remove this currency manipulation identity. On the contrary, they will not be in hurry. 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.

This is plausible in the Vietnamese context

Back to the report of the US Treasury Department. In this report, according to the effective real exchange rate, the US side cited IMF's result that Vietnam's currency was undervalued by about 8% according to the assessment of 2018, and said that in 2020, VND continue to reduce real price by 2% against USD. This is the basis for the US Department of Finance to propose that Vietnam should allow the domestic currency to increase according to the real exchange rate. They imply that it is the State Bank of Vietnam (SBV) interventions in the foreign exchange market that have prevented VND from appreciating.

The US also requested Vietnam to regularly publish data on the intervention in the foreign exchange market. In this report, they note that Vietnam does not publish data on foreign exchange interventions like some other countries, but the SBV has provided "reliable information" on the amount of foreign exchange interventions in the most 4 recent quarters was USD 16.8 billion, equivalent to 5.1% of GDP, which is much higher than the target of 2% of the US.

Responding to the US point of view, the State Bank affirmed that the exchange rate management in recent years is to perform the tasks of the State Bank of Vietnam to control inflation, stabilize the macro-economy, not in order to create an unfair advantage in international trade competition.

Regarding the foreign exchange intervention, the State Bank said that buying foreign currency to intervene in the past time to ensure the smooth operation of the foreign exchange market in the context of an abundant supply of foreign currencies, contributing to stabilizing the macro-economy, and at the same time strengthening the State's foreign exchange reserves, which are at a low level compared with other countries in the region, to enhance the national financial and monetary security.

In other words, macro stability and strengthening foreign exchange reserves are the reasons for the SBV's intervention. This is plausible in the Vietnamese context. But it also shows a problem, which I temporarily call "The victor's curse" with Vietnam.

Vietnam has an abundant supply of foreign currencies, stemming from the fact that our country receives a lot of foreign capital, the balance of payments have improved - including support from remittances and export growth. The plentiful supply of foreign currencies without buying, the appreciation of the domestic currency is contrary to the direction of a stable but slightly weak domestic currency to support exports for many years. Therefore, buying foreign currencies in Vietnamese conditions is a must if there is continued to have a view of macro stability and economic growth with an export-oriented model.

This economic model has brought about positive GDP growth and stable foreign currency supply over the past few years, there is no shortage of dollars and a hoarding of dollars. But in return, its price is the regular purchase of foreign currency to stabilize the exchange rate, to prevent the VND from appreciating strongly when the foreign currency supply suddenly increases strongly in the seasonal market.

How to solve?

Every success has is own price. Having understood the source of the problem then we must find a way to deal with the problem.

First of all, it is important to realize that the economic model based on foreign capital has its downside, but we cannot help attracting because Vietnam is in need of capital. Vietnam has a trade surplus with the US but also faces trade deficits from many other partners such as China, so Vietnam still needs to increase its competitiveness. It is also necessary to limit the appreciation of the local currency too strongly (in the current context, just do not devalue intentionally, because it will be too obvious and easy to be responded by trading partners, furthermore can create unnecessary macro instability). Then we should try to protect the role of macroeconomic stability of the SBV and not overcame the SBV if it is necessary to buy foreign currencies.

If you choose to do that, will Vietnam offend America?

So we must see how much can we please the United States? If Vietnam can cooperate with the US in some key projects such as energy projects, building green infrastructure, what Mr. Biden is very concerned about. That is also a goodwill. On the other hand, not only Vietnam, many countacy and are more or less dissatisfied with the set of criteria that the US side uses to identify currency manipulation. So why do not we join with other countries to force the US to reconsider that set of criteria? The Biden-era America probably won't be a pervasive trade warfare powerhouse anymore. They need to strengthen strategic relationships. Then let's join with many countries to show America: they should not offend the majority of countries, especially those with strategic interests to them.

In other words, only when Vietnam grows itself and knows how to join with many other countries, we will not be punished individually by the US.

Dr. HO QUOC TUAN Lecturer at Bristol University, UK

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