Vietnam has just struck a deal with the US Treasury Department: we won’t weaken the dong if you remove us from the dreaded list of “currency manipulators”.
It is in fact a bigger victory for Hanoi than the government of Prime Minister Phạm Minh Chính thinks.
The mere presence of Vietnam in the crosshairs of the Treasury is a story in itself. Last December, Donald Trump’s recently defeated White House left many puzzled when it added tiny Vietnam to what is essentially a list of rogue trading nations targeting China.
At the time, Vietnam was receiving huge kudos for winning the outgoing US President’s trade war. All of those corporate tariffs and bans that Trump threw on China didn’t bring factories back to America. A critical mass has simply shifted production to Vietnam. Other than retribution, there is no good explanation for hitting Hanoi, especially during a pandemic.
Now comes a descent, with Vietnam pledging to US officials not to deliberately lower the dong exchange rate to gain a trade advantage. The deal between Treasury Secretary Janet Yellen and State Bank of Vietnam Governor Nguyen Thi Hong, in preparation for months, also means pressure is on Hanoi to deal with its surplus. growing trade with Washington.
It may seem like a victory for Washington. And clearly, the boosters will say Trump brought Hanoi into line. Barely. The real long-term winner is Vietnam. Its economy is now learning to live without the crutch of a stimulating exchange rate, in a way that bodes well for its future. And in a way that is sure to anger Trump supporters.
From Japan to South Korea to China, Asia is full of examples of how low exchange rates can distort incentives and hamper innovation. Developing countries take the engines of growth where they can find them, of course. And for an emerging economy in Southeast Asia operating in the shadow of China, which would not maximize the increase in gross domestic product through exports?
The problem is, cheap currencies are becoming addictive. Japan and Korea, for example, are vastly more developed economies that remain in the grip of export-led growth. The dark side is that corporate and government policies prioritize helping export giants ship ever more goods overseas, not disruption from below.
If you’re wondering why Asia’s No. 2 and No. 4 economies are far below their weight in producing technological “unicorns”, a stubborn focus on exports is a good place to start. This is not the only reason, but the misallocation of attention and resources hurts competitiveness. China is also grappling with this transaction from chimneys to services and innovation.
Yet Vietnam has now decided to overcome its low dependence on currency at an early stage. Any momentum Hanoi gives to initiatives to increase innovation, productivity and successful startups today, as opposed to 10 to 15 years from now, will pay off in the form of millions of well-paying jobs and new wealth. now.
Granted, Treasury handling labels often have little bite. But given how President Joe Biden’s White House keeps the pressure on Beijing, Vietnam would be wise to stay out of harm’s way.
And, frankly, to welcome greater cooperation with the United States, Biden has yet to join the Trans-Pacific Partnership (TPP), which Trump left in 2017. Vietnam is a member, but without the United States, the TPP does not have the scale needed to be a bulwark. against China. Hanoi is expected to join the lobbying efforts for Biden to return to the fold and push Korea, Indonesia and the Philippines to enter the pact.
A rise in the dong would go a long way to increasing Vietnam’s purchasing power and to bringing the whole economy upmarket.
Developing Asia often views rising currencies as a crisis. But a strong exchange rate is, let us remember, a mark of foreign confidence. Over time, this confidence attracts more long-term investment, lowers bond yields, caps inflation, and causes governments to spend more time developing economic games than gambling markets.
On Monday, Yellen suggested it. “I believe that the attention paid by the State Bank of Vietnam to these issues over time will not only address the concerns of the Treasury, but also support the future development of Vietnamese financial markets and improve its macroeconomic and financial resilience,” she declared.
Vietnam, meanwhile, said it had pledged to abide by the rules of the International Monetary Fund “to avoid manipulating its exchange rate in order to prevent an effective balance of payments adjustment or to obtain a unfair competitive advantage ”and promised to“ refrain from any competitive devaluation of the Vietnamese dong. “
This may not be the case in Hanoi today, but it truly is a victory for Vietnam’s trajectory. Not at all what the economics experts at Team Trump envisioned.