Vietnam Could Be Next Target in U.S. Trade Fight. What Investors Need to Know.

Hanoi, Vietnam sees little traffic amid concerns of the spread of Covid-19 in Hanoi.

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The Trump administration may have another country in its sights in trade and currency-related disputes: Vietnam, which has been a beneficiary so far of the U.S.-China trade war.

The administration plans to announce a probe into Vietnam’s currency practices, citing accusations the country has prevented the dong from rising, according to a report by Bloomberg, citing three people familiar with the matter. The administration will reportedly use Section 301 of the 1974 Trade Act—what it used to impose tariffs on China, starting the trade war.

The actions against Vietnam would follow the Commerce and Treasury Department’s findings in August that said the country had manipulated its currency in a trade case involving tires, giving it an unfair advantage. For investors, it’s another thing to monitor to see if it detracts from what has been an otherwise attractive place to hunt.

The backdrop comes as Vietnam has emerged as a beneficiary of U.S.-China trade escalations, with some companies accelerating a shift in production to the small country. Vietnam is now one of the largest U.S. trading partners and has a burgeoning trade surplus. However, the country has a per capita GDP of less than a 10th of the U.S., and past administrations have often cut small and poor countries extra slack, says Marc Chandler, a currency analyst and managing director at Bannockburn Global Forex.

If it seems in the weeds, it is. But the move could have some big ripples. Using the U.S. Treasury’s currency misalignment measure to determine the harm done in a dumping case is “an important precedent,” Chandler says via email.

In a tweet, former Treasury official Mark Sobel, who is now chairman of independent think tank Official Monetary and Financial Institutions Forum, questioned whether currency policy is now being dictated by the Commerce Department and the U.S. Trade Representative, rather than the Treasury Department.

“Is this a train wreck in the making?”he tweeted. When Treasury first brought the currency case in August, Sobel had said it could harm the international monetary system.

The probe could create uncertainty for some of the Asian countries—Vietnam, especially—that have benefited from the U.S.-China trade war with an influx in foreign direct investment. Vietnam has also been a bright spot, one of the countries that has had the best experience getting the pandemic under control.

The trade action though may not deter investors. “Some of this is starting to get tuned out,” says Laura Geritz, founder of Rondure Global, who has long invested in Vietnam. Many large companies are moving in, from the likes of Apple (AAPL) and Alphabet’s Google (GOOGL)—and the country is increasingly a producer for the rest of Asia too.

The country is copying the model of other successful Asian nations as it moves from manufacturing garments and tires to more complex items like electronics and then invests those export receipts into high return on investment projects like roads and education, she says.

“Vietnam has a wonderful, young educated population and improving infrastructure. It is a country on the move, pushing real structural reforms,” Geritz said. “If it were just cheap currency, there are a lot of other places foreign countries could go to produce goods. It has been one of the best on the ground structural stories I have seen.”

Write to Reshma Kapadia at reshma.kapadia@barrons.com