from Follow the Money

Vietnam Looks To Be Winning Trump's Trade War

Vietnam's exports to the U.S. are growing fast.   It also runs an overall current account surplus. If it has resumed purchasing dollars in the foreign exchange market to keep its currency from appreciating, it may soon be a test case for Trump's policy toward countries that intervene to maintain an undervalued currency.

May 27, 2019

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I think I now understand why there is an intense debate going on inside the Trump Administration over Vietnam’s currency practices.

The Trump administration cares about the bilateral trade balance. And the bilateral deficit with Vietnam is rising fast.

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Vietnam

China

U.S. Trade Deficit

Vietnam, like China, exports a lot of manufactures to the United States—and guess what, some exports have surged in the first quarter. Steve Johnson of the Financial Times has a lot of useful detail.

U.S. Trade Balance with Vietnam (t4q, usd billions)

Wonder why?

Vietnam, like China really doesn’t import very many manufactures from the United States. That’s partially a function of the fact that the value added in Vietnam is often low, and thus Vietnam cannot afford a lot of top of the line U.S. capital goods (yet). But it is also a function of the fact that many of the global value chains that generate large (often offshore) profits for U.S. firms don’t give rise to that much U.S. production these days. There just isn’t much sign that the Asian value chains stretch back to include U.S. factories and workers. Fabless semiconductor firms that design chips likely export their designs to a low tax jurisdiction before they license their designs to an Asian contract manufacturer. The rise in Vietnam's exports hasn't been associated with a commensurate rise in exports from the United States to Vietnam.

U.S. Trade in manufactures with Vietnam (share of US gdp)

Vietnam, like China back in the early 2000s, has a more or less fixed exchange rate. Most fixed exchange rate require a bit of intervention. And in the Vietnam's case, it generally has been intervening to hold Vietnam’s currency down, though the amount of intervention needed varies depending on the global environment.

I still wouldn’t name Vietnam a currency manipulator right now.

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Vietnam

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U.S. Trade Deficit

The (delayed) foreign exchange report covers the second half of 2018, and that’s the one period in the last few years when Vietnam's central bank doesn't appear to have been all that active in the foreign currency market.

Vietnam Total FX Reserves

Vietnam could have been named in 2017 or in early 2018. And it likely can be named later in 2019. I can see why Treasury wants more information about the central bank's activity in the market earlier this year.

I just don’t see the case for naming Vietnam a manipulator right now, as Vietnam doesn't seem to have needed to intervene in the second half of 2018. That's when Trump’s trade action against China pushed all floating (cough, managed floats) Asian exchange rates down, and reduced appreciation pressure on Asia’s most heavily managed currencies (Singapore, Thailand and Vietnam and perhaps Taiwan).

There also is another complication.

The Vietnamese can argue that their growing trade surplus was, in some sense, made in America.  The recent jump in its surplus (and the surplus of many other East Asian economies) is almost certainly the consequence of Trump's tariffs on China.

US Bilateral Balance in Manufactures (t4q sums, usd billions)

Vietnam is increasingly the final assembly point in the Asian electronics supply chain.  That, in a sense, does make Vietnam the new China.   The U.S. will naturally run a large bilateral deficit with the final point in the Asian supply chain, even if the bulk of the manufacturing value-added comes from elsewhere.

But in a deeper sense there isn’t really a new China.

China simply operates on a different scale.  Vietnam’s export growth looks impressive in isolation, but U.S. imports from Vietnam are still a small fraction of what the U.S. imports from China.

U.S. Trade in Manufactures with China and Vietnam (share of U.S. GDP)

There really is a China shock in the data—a roughly 1 percentage point of GDP rise in the net trade deficit in manufactures vis a vis China, and vis a vis all of Asia—from 2002 to 2006.*

U.S. Trade Deficit in Manufactures with East Asia (sign reversed, t4q sums, share of us gdp)

Right now,  though, there is just a modest reallocation of U.S. end demand away from China to a few Asian economies…

u.s. trade blance with selected asian economies ( trailing 12 M sums, usd billions)

 

* The chart above clearly shows that China’s growing exports after its WTO accession in 2002 were not just a reallocation away from other Asian economies.  U.S. import and exports from Asia did both fell after the dot-com bubble burst in 2000. But the impact of the .com bust is already out of the data by the time China joins the WTO. And from 2002 on the overall manufacturing trade deficit with China and with “manufacturing” Asia was rising in tandem. There also was no explosion in U.S. services exports during the peak of the China shock (the rise in the manufacturing deficit from 2002 to 2006)–the growth in services came later, after the dollar’s 2005-07 depreciation started to have more of an impact.

(The China shock for agriculture and energy producers was positive, so I focused on the manufacturing data).

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