December 15, 2020


By John G. Murphy

The Office of the U.S. Trade Representative in October set in motion a process that could result in the imposition of U.S. tariffs on billions of dollars of imports from Vietnam. The U.S. Chamber of Commerce and other business representatives have argued against the tariff threat, which is tied to the alleged undervaluation of Vietnam’s currency.

Helpfully, the U.S. Department of the Treasury has established clear criteria for evaluating whether a trading partner is engaging in currency policies that maintain an undervalued currency. Treasury is required by law “to monitor the macroeconomic and currency policies of major trading partners … if they trigger certain objective criteria that provide insight into possibly unfair currency practices,” as explained in its most recent report (January 2020) entitled “Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States.”

The report provides valuable insight by clearly establishing what it calls “objective criteria” for assessing whether a country is engaging in possibly unfair currency practices that result in an undervalued currency. This is especially important because U.S. law gives Treasury primacy on these issues.

Applying these criteria to Vietnam is especially helpful. In fact, they demonstrate that Vietnam has not crossed the thresholds Treasury has established for two of the three criteria, and on the third, as explained below, U.S. policies have arguably played as large a role as Vietnam’s. In sum, the proposal to subject goods from Vietnam with tariffs in connection with its currency practices is not supported by Treasury’s three-part test.

To review:

Treasury Threshold 1: Does Vietnam have a current account surplus of at least 2 percent of GDP?

Vietnam’s current account balance has shifted from a surplus of $6.26 billion in Q3 2019 to a deficit of $323 million in Q2 2020 (latest), according to data from the State Bank of Vietnam (the country’s central bank). If the central bank were acting to promote the undervaluation of the currency it issues, those actions would have the effect of pushing this trend in the opposite direction.

The shift in Vietnam’s current account toward a deficit should come as no surprise. The economy is growing rapidly, and Vietnam has seen a huge inflow of foreign direct investment (FDI), some of which is spurred by the U.S. Section 301 tariffs on imports from China and industry efforts to move supply chains out of China. Those FDI inflows—registered in the country’s balance of payments as a capital account surplus—are the mirror image of the country’s current account deficit.

In sum, Vietnam does not meet this threshold for unfair currency practices that result in an undervalued currency: Its current account is in deficit, not surplus.

Treasury Threshold 2: Net purchases of foreign currency totaling at least 2 percent of GDP over 12 months.

On the next criterion—the country’s currency reserves—data from the IMF indicate the country’s foreign exchange reserves reached $84.1 billion in July (latest), an increase of $3 billion from $81.1 billion in January, when the Treasury’s last report was issued. This sum is less than 0.9 percent of Vietnam’s GDP, which the IMF estimates will reach about $340 billion this year.

While these data do not cover a full year, the Treasury’s January report indicated that “Vietnamese authorities have credibly conveyed to Treasury that net purchases of foreign exchange were 0.8 percent of GDP over the four quarters through June 2019.” Adding the IMF’s recent data to the data noted in the Treasury’s January report indicate a moderate trend that does not cross the threshold set by the Treasury.

In sum, Vietnam’s trajectory in the first half of 2020 in terms of net purchases of foreign currency does not meet the Treasury’s threshold for unfair currency practices that result in an undervalued currency.

Treasury Threshold 3: A significant bilateral trade surplus with the United States of at least $20 billion over 12 months

The U.S. goods and services trade deficit with Vietnam was $54.5 billion in 2019, and it has expanded in 2020. While there is an overwhelming consensus among economists that the trade balance with any given country is the wrong yardstick for gauging the possible benefits of that trade relationship, it’s plain that Vietnam meets this threshold set by the Treasury.

However, the growth in the U.S. trade deficit with Vietnam is to a large degree a direct result of the U.S. imposition of Section 301 tariffs on more than $350 billion of goods imports from China. Indeed, many companies have shifted supply chains from China to other countries, including Vietnam, in response to those tariffs on imports from China. Imposing tariffs on imports from Vietnam now would be a peculiar reaction to changing trade patterns that the Trump administration has described in other contexts as evidence of the success of its China policies.

In any event, a single strike is not a strikeout. Perhaps recognizing this, U.S. National Security Adviser Robert O’Brien in a late November visit to Hanoi delivered a different message. According to a report by Bloomberg, he told Vietnamese leaders they must “purchase more US goods such as liquefied natural gas and military equipment in order to avoid punitive American tariffs.”

In sum, Vietnam does not meet the “objective criteria” established in Treasury’s three-part test for assessing whether a country is engaging in unfair currency practices that result in an undervalued currency. It’s time to call off the tariff threat.