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Introduction
The United States of America (USA) is a world leading exporter and is generally on the better side of trade deficits with countries, which basically means that in the usual case scenario it exports more than it imports from other countries. But, in this instance, it imports more than it exports by $55.8 billion to Vietnam (Zhou). All countries strive to be at their peak with respect to economic dominance over the world, as it gives them leverage in trade. It helps these countries to have higher bargaining powers while inter-state trade and negotiations take place.
Citing the existence of a trade deficit in itself, prima facie rings a bell of caution, as it would for any country’s economic health. This resulted in the U.S. Trade Representative (USTR), to initiate investigations on Vietnam. It is based on Section 301 of the Trade Act of 1974 for dealing with illegally or unethically harvested or procured timber with the United States. Going a bit deeper in this issue, Vietnam allegedly bought or imported timber from source countries like Cambodia where it was listed to be endangered by the International Union for Conservation of Nature (IUCN) Red list or the trade of timber was not legally authorized for any other reason. It made wood products out of this timber, which mostly included furniture, and exported or sold it off to countries like the United States. This in turn played a role in the increased export of Vietnam and further increasing the trade deficit for the United States. The second and other issue and the more heinous issue concerns itself with respect to currency-undervaluation of the Vietnamese Dong by Vietnam. Undervaluation happens when the currency of a country is shown to be much weaker against the worldwide accepted mark of the US dollar. The State Bank of Vietnam played the role of a facilitator in the process which shall be described later. In other words, the exchange rate tilts towards an increasing value of $1 with respect to the Dong, which as of now is about 23,080 Dong.
Section 301 of the Trade Act, 1974 (United States of America)
Titled as “Relief from Unfair Trade Practices”, Section 301 allows the United States to impose trade sanctions with statutory backing, on countries that engage in acts that are “unjustifiable” or “unreasonable” in terms of trade with the U.S. and may also burden the U.S. internal commerce with the damage it is causing with the lack of sales and in furtherance to that, financial loss. Prior to 1995, this section was heavily used by States to capture the markets of many foreign countries. This abuse of soft power was finally put an end to when the World Trade Organization (WTO) dispute settlement mechanism arose.
The Section has given rise to the right to investigate to USTR on three major grounds. The first ground is the denial of rights under a U.S. trade agreement. The second ground is an action which cannot justify any burden which may be caused upon the commerce of the U.S. and the third is the presence of a discriminatory action burdening the U.S. commerce, where commerce can be defined as the entire ecosystem of goods, services and investments. Sections 302 through 309 describe the procedural requirements and limitations for Section 301 actions.
There arise a host of possibilities and directions which the above-said instance could take. There could be a totally unexpected scenario like the charges of the timber harvesting and currency devaluation being dropped, a negotiated settlement could be facilitated wherein Vietnam ceases the faulty practice and compensates for the damage done. WTO dispute settlement mechanism could be used to impose requisite tariffs. Out of the deciding factors, the diplomatic relationship between the two countries weighs to be the most contentious and important one.
Vietnam’s Illegal Timber Trade
In 2019, Vietnam exported $9.5 billion worth of timber to other countries, out of which 45% was to the USA, its biggest buyer, which helped it to make its place at the third position in the list of the largest timber exporters to the United States. It is important to note here that both U.S.A. and Vietnam are a part of the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES) which makes them bound to make sure that they are not involved in any of such illegal harvesting, procuring or buying of timber. It is also against the essence of cross-border competition laws, with respect to the trade since it falls to be unfair upon the domestic harvesters of timber, those who procure and sell it through legal means. Such illegal practices give Vietnam an unfair advantage which is not only illegal but also against the principles of equity. The presence of the leverage mentioned above is there because when Vietnam buys the illegal timber in bulk, it is not only the bulk factor which reduces its price per unit, but also the factoring in of the prohibition on the sale of the timber by organisations like IUCN which reduces the price, since the risk arises more at the end of Vietnam and rather than that of the seller.
Issues to be Investigated in the Illegal Timber Case
In order to bring some clarity into the particularities of this issue, the UTSR has decided to investigate three major points; the first being the legality of the timber products being imported with respect to the domestic and international laws and the agreements and treatise dealing with import, procurement, export and processing of timber and its products. The source country of Vietnam in this particular case is Cambodia. The second major point pertains to the administration and other respective domestic departments of Vietnam and whether or not they were inefficient in their dealing, checking and verifying of the sources of their procured timber. It is to pin-point the liability of checking and investigating as per the domestic code of conduct of the country with respect to the certification of timber and the body authorized to conduct due diligence on the legality of the timber and its sources. The third and the final issue which will be explored is pertaining to the impact analysis of this exercise of illegal harvesting and procurement with respect to the proportion of timber exported to the State, the deteriorating effect it has had on the domestic commerce and the timber market of the United States along with the recourse which can be taken by the United States in order to restore and resume the regular working of its domestic timber market.
Devaluation of Currency
The State Bank of Vietnam (SBV) is also under the clutches of investigation as of now for playing a part in the deliberate devaluation of the currency. The undermining is also under Section 301 of the Trade Act of 1974. It has been alleged that the SBV has been intervening in the currency stabilization process of buying and selling currencies in exchanges. This deliberate manipulation results in the decrease of value of the Dong, which keeps Vietnam at an advantageous position, unlike the usual course. This is because it helps them to sell the goods at a more subsidized price when it is converted to the US Dollar. These prices are competitively lower than the market price, and Vietnam can obviously afford these prices because of two reasons. Firstly, because the high amount of buyers or the high volume of output sold covers losses due to lower unit prices. Secondly, the lower prices at which Vietnam bought these products due to their illegal nature. For Vietnam, this forms a conducive process for pocketing down the profits formed because of the two reasons above, which are in reality not only putting in jeopardy the environment but also poaching upon livelihoods of legitimate timber dealers in the United States. In 2019, Vietnam had net purchases of foreign exchange, totalling to $22 billion, and a large current account surplus of 5% of gross domestic product (GDP), indicators that, as per some economists, show a one-sided currency manipulation.
Conclusion
Irrespective of the proceeds of the investigation, the strategic relationship and the common ‘friendship’ between the two countries which arose due to the Chinese expansions shall prevail to continue for it is a necessity and a situation wherein both the parties need each other. The U.S. needs Vietnam to maintain its influence in the Asian region and Vietnam in turn, can be protected by the U.S. This also stands true for the recent change in the U.S. Presidency since the nature of the external threats does not seem to change much. Even though tariffs seem like a plausible expectation in terms of its probability, it is sure to cause disgruntlement in the general public and traders of Vietnam due to the fear of being targeted for something which was done by their governments and something in which they had no role in, i.e., timber harvesting and currency devaluation. It also remains to be seen if this can result in some sort of retaliatory action from Vietnam.
References
Congressional Research Service. "Section 301 Investigations: Vietnam's Timber Trade and Currency Practices". Congressional Research Service Report: IF11683. [online]. 10 December 2020. [10 January 2021]. Available from: <https://crsreports.congress.gov/product/pdf/IF/IF11683>.
Horvath, Jennifer. "China… Vietnam…What’s Next?". Braumiller Law Group PLLC. [online]. 12 December 2020. [10 January 2021]. Available from: <https://www.braumillerlaw.com/china-vietnam-ustr-investigation/?utm_source=rss&utm_medium=rss&utm_campaign=china-vietnam-ustr-investigation>.
Mills, Richard. "USTR Releases Reports Emphasizing Enforcement Priorities: Executive Summary." Office of the United States Trade Representative. [online]. 2020. [10 January 2021]. Available from: <https://ustr.gov/archive/Document_Library/Press_Releases/2001/April/USTR_Releases_Reports_Emphasizing_Enforcement_Priorities_Executive_Summary.html>.
Poling, Gregory et al. "Vietnam Currency Investigation: Strategy and Policy Implications." Center for Strategic & International Studies. [online]. 02 November 2020. [10 January 2021]. Available from: <https://www.csis.org/analysis/vietnam-currency-investigation-strategy-and-policy-implications>.
Office of the United States Trade Representative. "USTR Initiates Vietnam Section 301 Investigation." Office of the United States Trade Representative. [online]. 2020. [10 January 2021]. Available from: <https://ustr.gov/about-us/policy-offices/press-office/press-releases/2020/october/ustr-initiates-vietnam-section-301-investigation>.
Zhou, Cissy. "US Trade Deficit: Vietnam Balloons Record High". South China Morning Post. [online]. 2020. [10 January 2021]. Available from: <https://www.scmp.com/economy/global-economy/article/3104734/us-trade-deficit-vietnam-balloons-record-high-trump>.
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