Vietnam has just made a deal with the US Treasury Department: We will not weaken the dong if you remove us from the dreaded list of “currency manipulators”.
Indeed, it is a bigger victory for Hanoi than Prime Minister Phạm Minh Chinh’s government can imagine.
The very presence of Vietnam in the Treasury crosshair is a story in itself. Last December, Donald Trump’s recently defeated White House stunned many when it added tiny Vietnam to an essentially China-turned list of rogue-trading nations.
At the time, Vietnam received great praise for winning the outgoing US president’s trade war. All of these tariffs and corporate bans Trump thrown China in the way have not brought factories back to America. A critical mass has simply relocated production to Vietnam. Vengeance aside, there’s no good explanation for hitting Hanoi, especially amid a pandemic.
Now a decline is coming with Vietnam pledging US officials not to deliberately lower the dong exchange rate for a trade advantage. The month-long settlement between Treasury Secretary Janet Yellen and Vietnamese state bank governor Nguyen Thi Hong also means Hanoi is under pressure to deal with its skyrocketing trade surplus with Washington.
This may seem like a victory for Washington. And clearly the boosters will say that Trump pulled Hanoi aside. Barely. The real winner Vietnam is long-term. Its economy is now learning to live without the crutch of a stimulating exchange rate – in a way that is good for its future. And in a way that is sure to upset Trump supporters.
From Japan to South Korea to China, Asia is full of examples of how weak exchange rates can distort incentives and hinder innovation. Developing countries naturally pick up engines of growth where they find them. And for a burgeoning economy in Southeast Asia developing in the shadow of China, who wouldn’t maximize GDP growth through exports?
The problem is that cheap currencies are becoming an addiction. Japan and Korea, for example, are infinitely more developed economies that continue to be under the spell export-driven growth. The dark side is that corporate and government policy prefers above all else to help export giants ship more and more goods overseas – rather than disruptions from scratch.
If you’re wondering why Asia’s # 2 and # 4 economies are well below their weight in producing technical “unicorns”, a persistent focus on exports is a good place to start. This is not the only reason, but the misallocation of attention and resources affects competitiveness. China is also struggling with this transaction from chimneys to services to innovation.
But Vietnam has now decided to combat its weak currency addiction early on. Any momentum that Hanoi gives to the steps to increase innovation, productivity and champion startups now as opposed to 10-15 years old will now pay off in the form of millions of well-paying jobs and fresh wealth.
Admittedly, the Treasury Department’s manipulation labels often have little bite. But there the White House of President Joe Biden the Pressure on Beijing, Vietnam would be wise to protect itself from danger.
And frankly, to welcome closer collaboration with the US, Biden has yet to join the Trans-Pacific Partnership (TPP), which Trump left in 2017. Vietnam is a member, but without the US the TPP lacks the scale it needs to be a bulwark against China. Hanoi should join lobbying efforts to get Biden back in the lap and get Korea, Indonesia and the Philippines to join the pact.
A rising dong would do a lot to increase Vietnam’s purchasing power – and bring the entire economy to market.
The development of Asia so often regards rising currencies as a crisis. But a strong exchange rate is a vote of confidence from abroad. Over time, that confidence attracts more long-term investments, lowers bond yields, limits inflation, and forces governments to devote more time to business games than gambling markets.
Yellen suggested that on Monday. “I believe that the State Bank of Vietnam’s attention to these issues over time not only Treasury Department concerns, but will also support the further development of Vietnam’s financial markets and strengthen its macroeconomic and financial resilience, ”she said.
Vietnam said in the meantime that it had committed to the rules of the International Monetary Fund “to avoid manipulating its exchange rate, to prevent an effective balance of payments adjustment or to gain an unfair competitive advantage” and promised to refrain from any competitive devaluation of the Vietnamese dong. ”
It may not feel like that in Hanoi today, but this is a huge asset to Vietnam’s trajectory. Not at all what the economists at Team Trump envisioned.