Designating Vietnam as a currency manipulator: Mnuchin's sound and fury
In an act of political vandalism, outgoing Treasury Secretary Steven Mnuchin has declared Vietnam a “currency manipulator.” Yet any gain from roiling the diplomatic waters would appear to be negligible: As a result of this public designation, Treasury pledges now to "commence enhanced bilateral engagement with Vietnam .” To quote Shakespeare, this is sound and fury signifying nothing.
The Treasury action is a product of the Omnibus Trade and Competitiveness Act of 1988. The legislation was an attempt by a restive Congress, concerned about chronic US trade deficits and perceived inaction by the Reagan administration, to force executive branch action. The law requires Treasury to make periodic reports to Congress identifying countries manipulating their exchange rates to gain unfair advantage in international trade and artificially boost exports and to specify actions undertaken to rectify the situation. The law was updated in 2015.
During the intervening three decades, Treasury has been a reluctant participant, only ever identifying a handful of countries as currency manipulators. The report in which Vietnam and Switzerland are targeted was due in October 2020. The announcement one day after the Electoral College confirmed Joe Biden as the president-elect is, well, suspicious.
The concept of currency manipulation itself is a slippery one on which there is no professional consensus. Economists, most prominently my colleagues Fred Bergsten and Joseph Gagnon, have attempted to distinguish analytically between cases in which countries engage in a reasonable level of currency market intervention (to stabilize the currency or smooth currency movements) and more questionable attempts to maintain undervalued currencies. The statistical models used to determine what is reasonable and what is not are imprecise. As my colleague Jason Furman observes, recent analyses by the International Monetary Fund suggest a reduction in any exchange rate misalignment and an attenuation of Vietnam’s current account surplus over the past year. And even Gagnon, who defines the aggressive bound of rationality on the issue of currency manipulation, believes Treasury got it wrong on the Vietnam designation.
So what is going on? One unintended consequence of the Trump administration’s trade war with China has been the relocation of production from China to Vietnam. The country is receiving foreign direct investment, much of it in assembly operations. Both imports and exports are rising and its overall surplus declining. But its bilateral surplus with the United States is rising, as imports that the United States previously sourced from China are now coming from Vietnam. Analytically, bilateral deficits are irrelevant, but the 2015 revision of the law includes them as a key criterion for Treasury in making its judgement. And that rising bilateral deficit is a cardinal sin in the eyes of the Trump administration.
Why should we care? From an economics standpoint, this is a sideshow: As Furman has pointed out, the Vietnamese economy is roughly 1 percent the size of the US economy and nothing that happens on the Vietnamese dong front will have a material impact on US macroeconomic performance.
Diplomatically, this is an own goal. When the Trump administration rolled out its “Indo-Pacific” strategy in 2017, the stated goal was to promote collective security through bilateral and regional alliances, in part to balance a rising China. Vietnam ought to be at the center of this effort: It is a natural strategic rival to China, and the rapprochement between the United States and Vietnam in the decades following the Vietnam War has been one of Washington’s most notable diplomatic achievements of the last half century. The United States encouraged Vietnamese entry into the Association of Southeast Asian Nations (ASEAN) and the Asia-Pacific Economic Cooperation (APEC) group and participation in the Trans-Pacific Partnership (TPP) before the United States withdrew from that effort. All of these developments are to be applauded. (Ironically, had the United States not withdrawn from the TPP, it would have been able to address its exchange rate concerns with Vietnam through that pact.)
Recently, Vietnam was one of 15 Asian countries joining together to form the Regional Comprehensive Economic Partnership (RCEP). As a common member of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)—the successor to TPP—it is at the center of Asian trade developments.
Apart from the desirability of maintaining good diplomatic relations with Vietnam for their own sake, in an environment where the United States is worried about possible Chinese destabilization or coercion of regional allies, Vietnam is a linchpin that Washington should be courting, not publicly humiliating so that it can “commence enhanced bilateral engagement.” In principle, the designation as a “currency manipulator” could be a step toward the imposition of countervailing duties on imports from Vietnam, but that outcome is highly unlikely: As my colleagues Furman and Gagnon point out, Treasury’s case against Vietnam is weak, and there is no evidence of buy-in from the incoming Biden administration, which will be left to clean up the mess. This is a road to nowhere.
The Treasury action is mistimed and self-defeating. It does diplomatic damage with little prospect of payoff to the US economy. It appears to resemble cogent policy less than “a tale Told by an idiot, full of sound and fury, Signifying nothing.”