Aug 07, 2019 / 16:56

How can Vietnam avoid being labeled currency manipulator?

Vietnam should remain cautious to avoid being dragged into a currency war, if any, and refrain from devaluing the local currency.

As Vietnam has been included in the US watchlist of currency practices, a group of researchers has recommended three steps for the country to avoid being named as currency manipulator by the US Treasury. 
 
Illustrative photo.
Illustrative photo.
The US uses three criteria to determine if a country is a currency manipulator. Besides the current account surplus criterion, two other criteria are a bilateral goods trade surplus with the US of at least US$20 billion; and intervention in the foreign-exchange market that exceeds at least 2% of GDP.

Vietnam has met two of the three criteria, having a trade surplus with the US that has risen over the last decade to reach nearly US$40 billion in 2018, twice the threshold of US$20 billion. Vietnam’s current account balance has also been rising over the last decade, reaching a surplus of more than 5% of the GDP in the four quarters through June 2018, more than double the threshold of 2%, the US Treasury said.

This context poses risk for Vietnam in the next review of the US Treasury, scheduled to be in upcoming September, said banking expert Can Van Luc and a number of researchers. They recommended three steps to take. 

Firstly, they suggested Vietnam maintain a frequent communication channel with the US, in which the State Bank of Vietnam (SBV) and other government agencies should explain issues regarding the country’s exchange rate and trade policies to the US Treasury. 

Secondly, Vietnam is expected to pursue a flexible and active exchange rate policy, avoiding direct and unilateral intervention into the foreign-exchange market as stipulated by Treasury's third criteria. 

In this context, there should be a balance between selling and buying foreign currency. Vietnamese authorities are advised to explain to the US side that Vietnam’s management of the exchange rate policy is the reflection of the actual practices of the domestic and international markets, and based on the characteristics of Vietnam’s economy. 

It is, therefore, not Vietnam’s intention to create unfair trade benefits.

More importantly, Luc said Vietnam should remain cautious to avoid being dragged into a currency war, if any, and refrain from devaluing the local currency. 

Thirdly, Vietnam’s authorities have to strictly deal with trade fraud activities and investment meant to dodge US tariffs, as the country has been labelled as trade abuser by US President Donald Trump. 

Luc referred to the US Commerce Department’s decision to impose 456% import duties on Vietnamese steel imports using substrate from South Korea and Taiwan as a warning sign.