The Trump administration has launched an investigation into Vietnam's trade practices, accusing the country of currency practices and invoking the same trade law that the United States uses to impose sweeping tariffs on Chinese imports.

 

The office of the US trade representative said it would investigate Vietnam's "conduct, policies and practices that may contribute to the undervaluation of its currency and the resulting harm to US businesses".

On the evening of October 2, the Office of the United States Trade Representative (USTR) formally announced that it is launching a Section 301 investigation into Vietnam's timber and exchange-rate policies.

Following a directive from U.S. President Donald Trump, the U.S. Trade Representative will investigate Vietnam's import and use of "illegally harvested or illegally traded" timber, as well as practices, policies and practices that could devalue Vietnam's currency and harm U.S. businesses.

 

U.S. Trade Representative Robert Lighthizer said Vietnam's practice of turning illegal timber into wood products and exporting them to the U.S. market has damaged the business environment and is "unfair" to American workers and companies who play by the rules and use legally harvested wood.

The U.S. trade representative's office didn't say which specific currency manipulation practices it would investigate, but when the Treasury Department looked into the ride-tire case, it said the State Bank of Vietnam was driving down its exchange rate by buying $22 billion in reserves.

Such actions can devalue a country's currency, making its goods cheaper on the international market.

The U.S. Treasury Department says Vietnam's currency is undervalued by 4.7 percent.

 

USTR invoked its authority under Section 301 of the 1974 Trade Act -- the same legal justification that allows the Trump administration to impose tariffs on about $370 billion a year of imports from China, the main tool the United States has used in a Trade standoff with China that has been going on for more than two years.

Before approving tariffs, the United States must conduct an investigation, give the public time to comment and write a report, a process that can take months.

In the case of China, it took more than six months for the investigation to complete its report and another three months for the tariffs to go into effect.

That means the decision on whether to press ahead with tariffs on Vietnam could fall to whoever wins the U.S. presidential election in November.

However, the investigation into currency practices could affect many goods exported from Vietnam to the United States.

Responding to an earlier trade court case, Vietnam's minister of trade and industry, Tran Choon Young, rejected claims that Vietnam had devalued its currency.

In a letter filed as part of the case, he said Vietnam had simply pursued normal monetary policies that were "not designed to create a competitive advantage for exports."

 

Three criteria for the US to be a "currency manipulator"

 

Currency manipulation, as it is commonly understood, is when a country keeps its currency artificially low to make its goods cheaper relative to others.

"Currency manipulators" create more jobs and enjoy higher GDP at the expense of other countries.

 

For a long time, the United States has been identified as a "currency manipulator" by its Ministry of Finance, which mainly defines its trade surplus with the United States, current account surplus and foreign exchange intervention.

The U.S. Treasury Department publishes a semi-annual International Monetary and Exchange Rate Policy Report, which provides an assessment of the exchange rates of major trading partners and then identifies countries as "currency manipulators."

Thereafter, the US Congress adopted a resolution to impose a series of punitive measures, such as imposing high tariffs, on "currency manipulators".

According to the Economic and Exchange Rate Policies of Major US Trading Partners issued by the US Treasury Department in 2018, the US defines a "currency manipulator" as the following criteria: First, a country's trade surplus with the US exceeds $20 billion;

Second, the country's current account surplus accounted for more than 2% of GDP; third, it carried out continuous unilateral intervention in the foreign exchange market, purchasing foreign exchange for more than 2% of GDP in more than 6 out of the last 12 months.

If an economy meets two of these criteria, it will be placed on the exchange-rate policy watch list.

But an economy that does not meet two of these criteria will be included if the U.S. 's trade deficit with it accounts for a large percentage of the overall U.S. trade deficit.

 

What are the consequences of being labeled a "currency manipulator"?

 

Consequence Historically, the United States has not taken extreme sanctions against countries listed as "currency manipulators", but has basically negotiated with relevant countries to promote their exchange rate appreciation or exchange rate reform within the framework stipulated in the Act.

For example, after South Korea was included in the "exchange rate manipulation country", the won gradually appreciated against the US dollar. From November 1988 to the end of April 1989, the won appreciated by more than 5%.

The growth rate of South Korea's total exports, especially exports to the United States, has declined sharply, and the trade balance with the United States has declined sharply.

At the same time, the current account deteriorated, with the surplus shrinking by 68 per cent in 1989 from a year earlier and turning into a deficit in 1990.

In 1990, the United States removed it from the "currency manipulator".

Historically, countries including Germany, Ireland, Italy, Japan, Malaysia, Singapore, South Korea and Vietnam have all been placed on the Treasury Department's watch list of "currency manipulators".

 

Trade friction could escalate U.S. punitive tariffs on Vietnamese imports

 

In this regard, Xinhua News Agency reported that the move may lead to the escalation of trade friction between the United States and Vietnam, so that the United States will impose punitive tariffs on Vietnamese imports.

The Wall Street Journal reported on Tuesday that the US Treasury Department concluded in an August exchange rate review that Vietnam devalued its currency in 2019.

This provides the basis for the US Department of Commerce to levy punitive tariffs on Vietnamese tires in the anti-dumping and countervailing duties investigation on Vietnamese passenger car tires.

Mr Lighthizer said the "unfair" exchange rate would hurt US workers and businesses that compete with Vietnamese goods because they might be "artificially priced lower" because of an undervalued currency.

According to Vietnamese media reports, in the first 9 months of 2020, Vietnam's timber exports reached US $8.97 billion. In addition, Vietnam is also expected to exceed US $12.5 billion in timber exports this year, up 18% year on year.

The United States is one of the largest export destinations for Vietnamese timber.

 

 

Vietnam seeks greater cooperation with the European Union

 

Vietnam's particularly export-oriented economy has been hit hard by the outbreak.

The impact of the outbreak on Vietnam's exports, which began in April, is beginning to be felt.

Vietnam's exports fell 14 per cent in April from a year earlier, following a 12.4 per cent drop in May as the global industrial chain stalled, according to the General Administration of Customs.

Exports recorded 1.5 percent growth in the January-July period of 2020, compared to 8 percent growth last year.

Imports from Vietnam have grown rapidly in recent years, from $14.9 billion a decade ago to $66.6 billion last year, according to the U.S. Department of Commerce.

The pace of exports to the US, currently Vietnam's largest exporter, has slowed in the January-July period of 2020, with exports to the US growing by only 14.6%, half the growth level of 2019.

Vietnam has been a popular destination for manufacturing departing from China in order to avoid tariffs and other tensions between the United States and China, or in search of lower labor costs.

Vietnam has become deeply involved in global supply chains in recent years, with companies such as Intel Corp., Samsung Electronics Co. and LG Electronics Inc. setting up factories in the country and hiring millions of workers, pushing the average annual wage for Vietnamese workers up to about $2,800 from $1,154 in 2008.

Samsung Electronics Vietnam's electronics exports accounted for about 20 percent of Vietnam's total exports in 2019.

Samsung has revised its export forecast for 2020 to $45.5 billion, down $13.5 billion from 2019, according to Vietnam's Ministry of Industry and Trade.

The outbreak is also having an impact on the automotive sector.

The Vietnam Automobile Manufacturers Association (Vama) estimates that the demand for cars in 2020 will fall by 28% year on year. Vietnamese economist Ng Chi Long also said that if the epidemic continues, the demand for cars will remain low, and factories and auto retailers in Quang Nam and Da Nang will be severely affected.

Vama estimates that Vietnam's auto industry will experience negative growth of 15 per cent in 2020.

If the outbreak continues unchecked, car sales will plummet to their lowest level in a decade.

Facing the severe export situation, Vietnam is seeking more export opportunities, and the EU is expected to be a bright spot for Vietnam's export in the future.

Vietnam expects its exports to the EU to increase by 20 percent in 2020 and double by 2025 after the EU-Vietnam trade agreement comes into force.

In addition, wages for skilled workers are expected to rise by 12% and help lift about 800,000 people out of poverty.

The EU-Vietnam trade agreement, which came into force on August 1, is the EU's most comprehensive trade agreement with a developing country.

Tariffs on 99 percent of goods traded between the EU and Vietnam will be phased out over the next 10 years.

European Commission President Michel Van de Leyen expressed confidence that the agreement would be an opportunity for the Vietnamese people to enjoy a more prosperous economy, witness positive changes and improve workers' rights.

EU Trade Commissioner Phil Hogan also believes that the agreement strengthens economic ties between the EU and Southeast Asia, which will contribute to Vietnam's economic recovery after the outbreak.

For the EU, Vietnam is ASEAN's second largest trading partner after Singapore, with bilateral trade in goods worth €45.5 billion in 2019 and in services worth around €4 billion in 2018.

As long as any country receives more and more money from the US market, it will inevitably be suppressed by the US government through various means. Vietnam will be the next key target of China's attack.

Entrepreneurs investing in Vietnam need to do their homework in advance.