I was going to write about selling alcohol this week, but over the weekend broke news that the Trump administration in the US has initiated a currency manipulation investigation against Vietnam, see article here. While this isn’t something about which to worry terribly much in the hands of a country determined to abide by its international commitments, the Trump administration has demonstrated it does not deem such commitments worthy of fulfillment. As such, I thought it might be worth examining Vietnam’s future if the Trump administration decides that Vietnam has been manipulating its currency.

WHAT IS CURRENCY MANIPULATION?

Currency manipulation occurs when a country, usually under the aegis of a central bank, takes an action to change the value of its currency, usually to devalue it, and such devaluation creates an advantage for that country in international trade. Devaluation is purposeful when the central bank uses its own currency to buy dollars. This decreases the value of the local currency. By decreasing its value, that currency manipulation increases the price of imports and decreases the price of exports, thus making exports for sale in foreign countries, particularly the United States, cheaper and more attractive. The logic is then continued to suggest that these cheaper imports undermine the products of the importing country’s own goods and thus create an imbalance in the trade relationship.

Currency manipulation usually involves United States dollars as the US dollar is considered the primary reserve currency in the world. It may be conducted using other currencies however, if the situation is specific enough. Take the instance of Laos whose currency is pegged to the Thai Baht. It could, conceivably, use Kip to buy Baht and thus devalue its currency for exports to Thailand. This would theoretically impact Thailand’s trade relationship with Laos, but would not go much beyond its borders.

Currency manipulation is not a trade offense such as dumping or subsidies giving rise to internationally recognized remedies. In fact, it is not the subject any existing trade agreements. Currency manipulation is a distinct act and has its own distinct results.

HOW THE U.S. REACTS TO CURRENCY MANIPULATION

As the United States is the largest victim of currency manipulation–because of the US dollars position globally–and because there are no international agreements governing the behaviors of sovereign banks regarding their actions in manipulating their country’s currencies, it is the arbiter of its own response.

  • Every year the US Treasury Department conducts a review of major trading partners to examine its currency behavior. If that behavior is deemed abnormal an investigation may be triggered. The investigation will examine the actions of that trading partner to decide whether to label that country a currency manipulator. If such label is assigned, and only if that label is assigned, the president–through treasury–may take certain actions. Those actions are limited, however, and include:
  • urging the currency manipulator to implement policies to address the causes of the undervaluation of its currency, its significant bilateral trade surplus with the United States, and its material current account surplus, including undervaluation and surpluses relating to exchange rate management;
  • express the concern of the United States with respect to the adverse trade and economic effects of that undervaluation and those surpluses;
  • advise the currency manipulator of the ability of the President to take action under subsection (c), which includes:
    • Prohibiting the United States International Development Finance Corporation from approving any new financing (including any insurance, reinsurance, or guarantee) with respect to a project located in that country on and after such date.
    • Provisionally prohibit the Federal Government from procuring, or entering into any contract for the procurement of, goods or services from that country on and after such date.
    • Instruct the United States Executive Director of the International Monetary Fund to call for additional rigorous surveillance of the macroeconomic and exchange rate policies of that country and, as appropriate, formal consultations on findings of currency manipulation.
    • Instruct the United States Trade Representative to take into account, in consultation with the Secretary, in assessing whether to enter into a bilateral or regional trade agreement with that country; and/or
  • develop a plan with specific actions to address that undervaluation and those surpluses.

These are the only actions provided under US law to the President to take against a country deemed to be a currency manipulator. Therefore, these are the only actions, in theory, that Vietnam need worry about if the United States’s investigation returns such a result.

HOW THE TRUMP ADMINISTRATION IS MANIPULATING THE LAW

Unfortunately for Vietnam, the Trump administration is not abiding by international, nor domestic law. In justifying tariffs against China over the last couple of years, the Trump administration relied on currency manipulation charges. It then turned to section 301 of the Trade Act of 1974 which allows the President to take additional action against a trading partner, regardless of the status of any trade agreement, if the US Trade Representative finds that the act harms US interests under a trade agreement.

The United States is thus required, under its own law, to find a trade agreement which is being violated and, if such violation is not remedied under subsequent agreement with the US, it may impose tariffs on that country’s goods. This is the clause which the United States used to justify its trade war with China, citing violation of intellectual property agreements between the two countries. Because currency manipulation is not a violation of any existing trade agreements, that reason alone is not enough to trigger the tariffs allowed under section 301.

The worry is, though, that if the Trump administration deems Vietnam to be a currency manipulator it will look through Vietnam’s WTO agreements–the only trade agreements extant between the US and Vietnam–and find a violation upon which it can hang the advantage of the United States sufficiently to allow it to impose tariffs. This it will be able to do because Vietnam, inevitably, has violated some terms of its WTO commitments–something which became almost a game for lawyers when Vietnam first joined the WTO, to identify violations–in such a way that the United States can claim harm to its interests.

Thus, the Trump administration will label Vietnam as a currency manipulator–a label for which there is little actual consequence–but then, justify tariffs which it will publicize as because of that manipulation on a minor violation of another agreement. This is what the Trump administration might do.

VIETNAM’S REMEDIES AGAINST U.S. ACTIONS

If the Trump administration takes such actions, Vietnam will be able to make a claim at the World Trade Organization that the United States has violated its WTO commitments. And the WTO will, in turn, agree, as they did with China recently, here. The United States will then appeal the ruling to a tribunal that is already stymied by US refusal to comply. Vietnam, again, might eventually win. If it does, however, because the United States is a 300 kilogram gorilla in a world filled with 20 kilogram test agreements, nothing of much value will happen and the United States will simply ignore the WTO ruling.

Of course, that might all change in November if the Trump administration is voted out of office. Trump’s opponent in the November elections, Joe Biden, is more liberal in many ways, but he has signaled he will not necessarily revoke the tariffs imposed on China, nor many of the other policies of the Trump administration against that country. Whether that will transfer to China’s neighbor is uncertain. What is certain, though, is that Biden is more likely to abide by the US’s international agreements and US law and no proactively seek to impose gerrymandered sanctions on a major trading partner simply because.