Vietnam is off the hook for currency manipulation. Does it make a difference to Bangladesh?

Just in the past week, Vietnam pledged not to deliberately devalue its currency to gain a competitive advantage in trade, after coming under intense scrutiny from the US Treasury Department.

Earlier on April 16, the US Treasury Department removed Vietnam from the list of currency manipulators, reversing the decision by the Trump administration last December. In the semi-annual report – the first one under the Biden administration – the Treasury reported that Vietnam, Switzerland as well as Taiwan would be kept under enhanced monitoring despite being excluded from the list, thanks to their actions in the recent past. 

While inclusion in the list of currency manipulators does not necessarily warrant any immediate economic sanctions, it does put a dent in the confidence of potential investors as well as importers. On top of that, repeated threats from the US to impose punitive tariffs on imports from Vietnam did not sound promising. 

Thus, the recent exclusion, as well as its pledge to refrain from anti-competitive currency devaluation, should help Vietnam to regain the confidence of US investors as well as importers from Europe, Australia and Canada. Vietnamese entrepreneurs may as well breathe a sigh of relief. 

But what is currency manipulation and why did Vietnam end up being blacklisted by the US for being a currency manipulator?

Basically, the US Treasury identifies countries that engage in anti-competitive practices in the global market, like drastically devaluing their currency to make their exports more attractive compared to other countries. Such practices are problematic from the US perspective because in a bilateral transaction, the higher the exports from Vietnam (or any other country for that matter), the lower it is for the US, resulting in a trade deficit that can adversely affect its industries. 

Does it mean that it will blacklist any country that has a trade surplus with the US? 

Not necessarily.

There are mainly three criteria that determine a country's inclusion in the currency manipulator list. 

Firstly, the bilateral trade surplus with the US has to be more than $20 billion over 12 months.

Secondly, the current account surplus (positive net exports) must be more than 3% of the GDP over 12 months.

Thirdly, net purchases of foreign currency should consist of at least 2% of the GDP over 12 months.

If any country fulfils any two of the three parameters, they will be included in the currency manipulator watchlist for enhanced monitoring. India currently belongs to this category. 

Vietnam, however, satisfied all three criteria in December and therefore, was designated as a currency manipulator. In 2020, Vietnam's purchase of foreign currency was 5% of their GDP while it was 14% for Switzerland. On top of that, Vietnam's good trade surplus was measured at $69.7 billion – far exceeding the threshold level of $20 billion. 

But why do countries manipulate their currencies?

Exports of any country are determined by not only the quality of the products being exported but also the exchange rate, as well as the reserve of foreign currencies. 

Yes, a country's exports would naturally increase if its products are miles ahead in quality, compared to its competitors in the global market. Unfortunately, that is often not the case as competing countries export goods that are rather similar in terms of quality. 

So, what do these countries do? 

They resort to other so-called shady methods to attract imports from the rest of the world. More often than not, the central banks in these countries appreciate their exchange rate (devalue the currency) against the USD. For example, if Bangladesh Bank increases the exchange rate against USD from 85Tk to 90Tk, that means a US importer can buy 90Tk worth of goods instead of 85Tk: a pretty good deal if you are an importer. 

Central Banks can also hold a high amount of foreign reserve (typically held in USD) resulting in a comparatively higher supply of domestic currency compared to USD, resulting in the devaluation of its currency. Either way, exports become cheaper, more competitive and more attractive to foreign importers.

What's next for Vietnam and its competitors?

While recent exclusion from the currency manipulators' list may sound like good news for the Vietnamese economy, it rather has a more bittersweet implication. 

Firstly, despite being excluded, it remained under intense scrutiny for several months until it signed an accord with the US promising to refrain from currency manipulation. 

Secondly, investors in the US may feel more confident in importing products from Vietnam as well as committing to long-term import contracts with Vietnamese companies. Much of the attraction to Vietnam's exports can be attributable to an extremely devalued currency (1 USD= 22,955 Dong) and rather diversified export basket constituting electronics, RMG, machinery, footwear, seafood, steel, crude oil, pepper etc. 

However, given its pledges to the US, it is likely that the Vietnamese government would not be able to depreciate its currency at whim and the Dong may even exhibit appreciating trends. Dong appreciating would increase the cost of importing goods from Vietnam and may make their exports at least marginally less attractive. 

China is one of the main competitors for Vietnam in terms of exports. When the US-China trade war was in full swing, most of the importers shifted from China to Vietnam – partially causing the uncharacteristic boom in its trade surplus. That situation, however, has changed after a deal had been struck between China and the US that excluded China from the currency manipulators' list. 

Vietnam's pledges to refrain from currency manipulation may further aid its competitors to gain some form of competitive advantage in the exports market. However, it is worth mentioning that the potential outcome of these promises made by the Vietnamese government depends on whether it chooses to comply with 'requests' from the US and adjusts its foreign exchange rates in light of the recent developments.

What does it mean for Bangladesh?

Vietnam just dethroned Bangladesh to become the third-largest exporter of ready-made Garments following China and the European Union. Bangladeshi RMG owners have long been complaining about the extremely high exchange rate for Dong and urged the Central Bank to depreciate the value of Taka to gain export competitiveness against Vietnam. Vietnam's recent pledges may bear some good news for them.

But it's also true that Vietnam has a much more diversified exports basket compared to Bangladesh allowing it a competitive edge over Bangladesh. While it is encouraging to see some leashes being put on Vietnam's deliberate devaluation, Bangladesh should also prioritise diversifying its exports basket so that it can compete with other developing countries in the post-LDC era.