US probe into Vietnamese currency masks Trump’s real trade target

Hello from Washington, where we find ourselves amid extraordinary scenes. In the time since our last note from DC, the US president and an entire swath of senior aides and advisers have come down with coronavirus, and Donald Trump has been both hospitalised and then un-hospitalised over a dramatic three days.

On Monday we were treated to Trump’s return to the White House, complete with footage of him triumphantly removing his mask only a few days after receiving a positive coronavirus diagnosis, and by Tuesday he was abruptly announcing that he would walk away from the economic stimulus talks with Democrats on Capitol Hill, triggering an immediate sell-off in US equity markets.

But amid all of that excitement, there has been some trade news too — the US trade representative (USTR) snuck out a notice late on Friday evening announcing that it was weighing tariffs on Vietnam, and that is the subject of our main piece, and our chart of the day. Our person in the news is Art Laffer, the US economist.

‘Almost the single worst abuser of everybody’

Vietnam had been one of the rare beneficiaries of Trump’s trade war with China — until now.

Last Friday, the US administration announced late in the evening that it would launch a section 301 investigation — the same process it used to place tariffs on billions of dollars of Chinese imports into the US — to examine the country’s “unfair currency practices”.

Why might the trade bods of the Trump administration be interested in Vietnam? The administration’s tariffs on China have not done much to persuade companies to move their manufacturing back to the US. Plenty have moved over to Vietnam instead, where they can secure cheap labour.

Apple began producing its wireless earbuds in Vietnam last year, while two of Apple’s largest contractors have also boosted production capacity in the country. Foxconn, the Taiwanese group that assembles iPhones, last year acquired land use rights in Vietnam and has said it plans to shift production out of China to avoid US tariffs. Pegatron, another large Apple contractor, also said it would build capacity in Vietnam. Meanwhile, Nintendo has accelerated a move to boost manufacturing in Vietnam, while clothes and shoes from some of the US’s top brands have long been made there.

In 2019, the US’s trade deficit with Vietnam soared to about $56bn from about $39bn the previous year, indicating a jump in exports to the US, and clearly attracting the attention of the deficit-obsessed Trump.

The US Treasury put Vietnam on a watch list over suspicions it was manipulating the value of its currency © Justin Mott/Bloomberg

The Treasury put Hanoi on a watch list over suspicions that it was manipulating the value of the Vietnamese currency (to help exporters) last year, and Trump lambasted the country as being “almost the single worst abuser of everybody”, although it should be noted that the US Treasury has not actually (yet) declared Vietnam a currency manipulator.

As we’ve argued before in Trade Secrets, economists generally think that trade deficits actually reflect savings and investment and capital flows, rather than trade policy. And as my colleague Alan Beattie has noted, previous US administrations had a more economically sensible line of attack on China than the present one, choosing to focus their complaints on Chinese intervention against the renminbi, which they argued caused the deficit. 

Back then, the US dealt with such currency manipulation through the US Treasury, which would typically designate a country a currency manipulator and then spend a year negotiating with said country while referring the case to the IMF for closer examination. 

Fast forward to the Trump administration. It has decided to deal with its growing trade deficit with Vietnam — which, for the sake of argument, we can hypothetically say might be caused by Vietnamese currency undervaluation. But it still thinks the answer is tariffs. The US has already moved to apply duties on Vietnamese tyres over currency undervaluation, using a rule that came into force in February to link trade enforcement and currency undervaluation.

The inter-agency process here has left people in Washington scratching their heads. Traditionally, the US Treasury is in charge of international financial policy, and it would be it that would decide if another country was intervening in its exchange rate or not. As Mark Sobel, former Treasury official, has pointed out, there are all sorts of reasons that an emerging market currency might be undervalued against the dollar without necessarily indicating government manipulation. It’s also unclear why the USTR would launch an investigation about a month before a presidential election, but perhaps for political reasons it wants to keep looking tough on trade deficits. 

It seems that the current administration is pretty keen to see exchange rates and currency undervaluation primarily through the trade policy lens, with the US Treasury taking a back seat while Robert Lighthizer’s USTR runs the show. Brad Setser, a former Treasury economist, has argued that if the US were really worried about currency manipulation it could grow the funds available to it to buy up the offending country’s currency, thus pushing its price back up (but this would have the serious side effect of perhaps leading to an all-out currency war, so it isn’t a medicine to be taken lightly).

In summary, it’s difficult to see this latest Section 301 investigation as anything other than an assault on companies that insist on using low-cost Asian labour and manufacturing power to create goods for the American consumer, masquerading under the guise of an investigation into an area of financial policy that the USTR does not actually lead on in Washington.

Companies can pull out of China, but now their new safe harbour might get hit. If the US goal was solely to punish China and disrupt its global dominance over supply chains, it might welcome companies moving their manufacturing horsepower to Vietnam.

Now it seems the US is probably the only country truly safe from US import tariffs. As we have written countless times before, it’s not easy to pack up your factory and move it to the US, but the Trump administration seem keen to keep trying until the end. In less than a month, Trump may not be the elected president of the US. If he is re-elected, the clear message is that companies should be looking over their shoulders. For now, companies will wait.

Charted waters

The results of the USTR’s Section 301 investigation into Vietnam could lead to punitive duties being levied on Vietnamese imports to the US, harming any manufacturers who have moved operations to Vietnam to escape facing tariffs on Chinese goods entering the US. US imports of Vietnamese goods have been surging of late, driven by mobile phones and, more recently, furniture.

Person in the news

Art Laffer is best known for his contentious theory that cutting taxes sometimes increases overall tax revenue © Jim Watson/AFP via Getty

Who is it?

Art Laffer, US economist

Why is he in the news?

Laffer, best known for arguing that cutting taxes sometimes increases overall tax revenue, as demonstrated by the so-called “Laffer curve”, has advised a string of mostly Republican US politicians since the 1970s. His theory remains contentious and not widely accepted among economists.

He returns to the news this week after saying that he visited the White House last week to tell Trump not to accept a stimulus package, as reported by the Washington Post.

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Source: Economy - ft.com