Vietnam May Be Too Successful for Its Own Good

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What's the difference between China and Vietnam? Vietnam is smaller and can be reprimanded with fewer consequences.

That's one way of looking at the U.S. Treasury’s decision Wednesday to brand Vietnam a currency manipulator for the first time. (So was Switzerland.) The label was meted out in the Trump administration’s final review of exchange-rate policies of major U.S. trading partners. China, often the focus of Trump’s ire and a perennial candidate for sin-binning by Treasury for the way the yuan is managed, was kept on the watch list, a lesser demerit that can ultimately lead to a nation being assigned to manipulator status. 

Admitting Vietnam to the club shouldn’t be a shock. The country had been on the watch list, meaning it showed some of the criteria Treasury uses to assess whether currencies are being steered for the purpose of gaining a trade advantage. Graduating to manipulator isn’t a five-alarm fire; the process of consultation required means there’s a way to go before anything punitive happens.

It does put the place on notice that some things have to change over time. The alternative is to risk Treasury’s persistent displeasure. Few states are powerful enough to take that chance indefinitely. Vietnam pushed back Thursday, saying that it’s not out to unfairly grab exports and runs its currency in line with broader goals, such as controlling inflation and macro-economic stability. 

Once on the watch list, it might not take much to push you over the line. It’s long been an article of faith in Washington that there’s more to the process than economics. When I worked in Washington for a decade until 2015, the focus was always whether China would get the scarlet M painted on its back. Its repeated ability to escape was put down to strategic and economic heft. The idea was that successive administrations wanted to engage with China and nudge it along the path to reform, rather than take out a cudgel.

The funny part was that being called a manipulator didn’t of itself do anything except get a country bad publicity and possibly presage cooler ties with the U.S. in general. Like most norms, Trump threw that practice out — to a degree. It took a while for his Treasury to call China a manipulator, and only then after relations seriously deteriorated. When Trump wanted to dial things down, China came off the list. It’s ultimately too big to fail, completely. 

The designation itself doesn’t cost a country anything, except perhaps some small market fluctuations. The law does require the administration to engage in talks to address the perceived exchange-rate imbalance. Penalties including exclusion from U.S. government contracts could be applied after a year, unless the label is removed. That will be Joe Biden’s call and depend in large part on where he wants to take relations with Vietnam specifically, and Asia more broadly. In recent years, ties with Hanoi have been cordial. Trump met North Korean leader Kim Jong Un there and praised Vietnam as a model. 

The broader lesson for Hanoi is that being friendly with the U.S. and cool toward Beijing isn’t enough to keep you in good graces. 

In some ways, Vietnam may have been too successful at opening its economy. The Communist leaders largely followed the same playbook as China — opening to foreign investment in manufacturing, making cheapish stuff for U.S. markets and lifting prosperity for its citizens. In the process, its trade surplus with the U.S. swelled dramatically. Often touted as a trade-war winner, the past year has been replete with anecdotes about firms shifting facilities out of China into Vietnam — not the same as back to the U.S., one of Trump’s goals.

It’s worth asking how Hanoi escaped the manipulator label so long. Cordial relations with Washington notwithstanding, Vietnam resembles China in important respects. As I have written, both are Communist-led states that manage their exchange rates, churn out goods for American markets and have kept sensitive areas of the economy off limits to foreigners. Vietnam is just much smaller. It’s also a key country to keep friendly as the U.S. tries to balance China’s increasingly assertive military presence in the South China Sea.  

Lest Vietnam feel too badly, it’s worth looking at who Treasury is monitoring for manipulation: Japan, South Korea, Germany, Italy, Singapore and Malaysia, along with China. Taiwan, Thailand and India were added Tuesday. There’s some good company on that list. 

This isn’t the end of the world for Vietnam. All the same, the government might want to play down the idea of being a “trade war winner.” Too many people might hear. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.

©2020 Bloomberg L.P.

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