Section 301 Investigations: Vietnam’s Timber Trade and Currency Practices

Section 301 Investigations: Vietnam’s Timber Trade and Currency Practices

Updated December 10, 2020
Section 301 Investigations: Vietnam’s Timber Trade and
Currency Practices
On October 2, 2020, the U.S. Trade Representative (USTR)
trade practices and “unfair” export competitiveness, which
announced that it had initiated two separate investigations
they claim is afforded by purposeful currency
—pursuant to Section 301 of the Trade Act of 1974—with
undervaluation. Others contend that other factors have
respect to Vietnam’s trade with the United States. The
driven recent changes in the sourcing of U.S. imports. For
USTR will review Vietnam’s importation of timber that
example, some manufacturing companies have relocated
may have been illegally harvested or traded, used as inputs
production from other countries in Asia to Vietnam to take
for its manufacturing of timber products, and subsequently
advantage of lower costs and to avoid Section 301 tariffs on
exported to the United States. The agency will also review,
U.S. imports from China.
in consultation with the Treasury Department, any practices
Import and Use of Illegal Timber
that may have contributed to the alleged undervaluation of
During the past decade, Vietnam has become one of the
Vietnam’s currency and thus may have impaired the
world’s largest exporting countries of timber and timber
competitiveness of U.S. products (by making them more
products, with exports valued at $9.5 billion in 2019. As a
expensive to foreign buyers). The USTR has requested
processing hub, Vietnam heavily relies on imports of timber
consultations with the government of Vietnam, sought
harvested in other countries, particularly for the
public comments on the investigations, and will hold virtual
manufacturing and export of high-end products, such as
public hearings on December 28 and 29, 2020.
wooden furniture. According to the USTR, a significant
Overview of Section 301
portion of the timber inputs used in these products may
Title III of the Trade Act of 1974 (Sections 301-310,
have been illegally harvested or traded. The agency further
codified at 19 U.S.C. §§2411-2420), titled “Relief from
asserts that some of that timber may be from species listed
Unfair Trade Practices,” is collectively referred to as
under the Convention on International Trade in Endangered
“Section 301.” It grants the USTR a range of
Species of Wild Fauna and Flora (CITES). As parties to the
responsibilities and authorities to impose trade sanctions on
Convention, both the United States and Vietnam are bound
foreign countries that violate U.S. trade agreements or
by CITES provisions designed to curb illegal timber trade.
engage in acts that are “unjustifiable,” “unreasonable,” or
“discriminatory” and burden U.S. commerce.
Figure 1. U.S. Imports from Vietnam
Prior to 1995,
the United States used Section 301 to unilaterally pressure
other countries to eliminate trade barriers and open their
markets to U.S. exports. The creation of an enforceable
dispute settlement mechanism in the World Trade
Organization (WTO), strongly supported by the United
States at the time, significantly reduced the use of Section
301. While the United States retains the flexibility to seek
recourse for foreign unfair trade practices in the WTO or
under Section 301, a determination to bypass WTO dispute
settlement and impose retaliatory measures (if any) in
response to a Section 301 investigation may be challenged
at the WTO. (For more detail, see CRS In Focus IF11346,
Section 301 of the Trade Act of 1974.)
Since 2017, the USTR has launched Section 301

investigations against China, the European Union (EU),
Source: CRS with data from USITC’s DataWeb.
France, and a group of 10 trading partners. Two
Notes: Not adjusted for inflation. *Calculations do not include wood
investigations have resulted in the USTR imposing tariffs to
pulp, paper and paperboard, and printed books and newspapers.
date: on U.S. imports from China and the EU. The U.S.
The United States is the top market for Vietnam’s exports
action against the EU—unlike that against China—was
of timber and timber-based products (48% of its exports in
based on a WTO dispute in which the USTR anticipated
2019). In announcing the investigation, the USTR noted
being allowed to retaliate.
that “[u]sing illegal timber in wood products exported to the
Section 301 Investigations: Vietnam
U.S. market harms the environment and is unfair to U.S.
The Trump Administration and some Members of Congress
workers and businesses who follow the rules by using
have expressed concern over the rapidly growing U.S.
legally harvested timber.” In 2019, Vietnam was the third
merchandise trade deficit with Vietnam, which reached an
largest supplier of U.S. timber and timber-based product
all-time high of $55.8 billion in 2019 (a 74% increase from
imports, after Canada and China. U.S. imports from
2016). They attributed this trend primarily to Vietnam’s
Vietnam of these products totaled $5.8 billion—of which
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link to page 1 Section 301 Investigations: Vietnam’s Timber Trade and Currency Practices
$3.7 billion accounted for wooden furniture (Figure 1). In
that the systematic undervaluation of the Vietnamese dong
nominal terms, this is up 34% from 2018, and it represents
effectively subsidizes Vietnam’s exports of passenger
a 77% increase from 2016.
vehicles and light truck tires. The investigation utilizes a
recent rule issued by the Commerce Department that allows
In light of these concerns, the USTR aims to address
it to treat currency undervaluation as a type of subsidy
several issues in its investigation, including:
when determining countervailing duties (duties on imports
 Is Vietnam importing illegal timber and are these imports
that benefit from unfair government subsidies).
inconsistent with its domestic laws (e.g., concerning the
As part of Commerce’s investigation, the Treasury
import, processing, and re-export of timber), the laws of
Department reportedly estimated that the dong was
exporting countries, or international agreements and
undervalued by about 4.7% in 2019. The International
commitments? The agency will examine whether timber
Monetary Fund (IMF) estimated that Vietnam’s currency
imported by Vietnam has been harvested against the laws
was undervalued by 8.4% in 2019. Other studies, however,
of source countries, particularly those of Cambodia, and
maintain that Vietnam’s dong is overvalued in terms of real
traded illegally—for example, in violation of log export
effective exchange rate (REER). In November 2020,
bans, CITES, or U.S. wildlife trade laws and regulations.
Commerce announced the imposition of preliminary duties
 Do Vietnamese officials improperly record the origin of
on car and truck tires from Vietnam, citing currency
timber crossing the Cambodia-Vietnam border, facilitate
undervaluation among other reasons.
illegal timber imports, or allow the importation of
At an October 26, 2020 meeting with the Chief Executive
CITES-listed species based on invalid permits? The
Officer of the U.S. International Development Finance
USTR alleges that timber processors in Vietnam may be
Corporation, Vietnam’s Prime Minister Nguyen Xuan Phuc
failing to ensure the lawful origins of the timber they use
downplayed U.S. allegations of currency manipulation,
and that Vietnamese authorities may not be enforcing
asking that President Trump come to “a more objective
import or re-export permit or certification requirements.
assessment of the reality in Vietnam.”
 To what extent are products made in Vietnam from
The Trump Administration in general has taken an assertive
illegal timber, including furniture, imported into the
approach to exchange rate issues, but the invocation of
United States? The agency will seek to determine if
Vietnam’s practices
Section 301 to address Vietnam’s currency practices—
burden or restrict U.S. commerce,
which could potentially impact a much larger swath of
and what actions the United States should take to address
imports from Vietnam than Commerce’s investigation—is
them.
controversial. It is not clear that Section 301 was designed
Currency Valuation
to address currency issues. The Administration is also not
The USTR also opened a separate Section 301 investigation
utilizing congressionally-created processes for addressing
into Vietnam’s currency practices. Vietnam’s central
alleged currency manipulation as specified in the Omnibus
bank—the State Bank of Vietnam (SBV)—manages the
Trade and Competitiveness Act of 1988 (P.L. 100-418) and
value of the Vietnamese currency, the dong. Buying and
the Trade Facilitation and Trade Enforcement Act of 2015
selling currencies (“interventions”) in foreign exchange
(P.L. 114-125). The unilateral approach also eschews
markets can help central banks legitimately stabilize the
multilateral approaches (namely the IMF) and may strain
value of their currencies. However, persistent, one-sided
otherwise good ties with Vietnam.
interventions create concerns that a central bank may be
Outlook
manipulating the value of its currency to gain an unfair
Section 301 investigations generally take months to
trade advantage. In 2019, Vietnam had net purchases of
complete, as the USTR reviews public comments, holds
foreign exchange totaling $22 billion, and a large current
consultations with the foreign government, and reports
account surplus of 5% of gross domestic product (GDP),
findings and recommendations. The determination on
indicators that some economists say indicate one-sided
whether to take action in these cases will likely occur
currency manipulation. However, economists and
during the 117th Congress. Should the USTR determine that
policymakers disagree about what policies constitute unfair
Vietnam’s practices under investigation are unreasonable or
currency practices, how to measure them, and the net trade
discriminatory, actually burden or restrict U.S. commerce,
effects of undervalued currencies.
and are therefore actionable under Section 301, the agency
The USTR currency investigation will focus on (1) whether
could seek to negotiate and enter into a binding agreement
SBV’s interventions in exchange markets contribute to the
with Vietnam. Such an agreement could require Vietnam to
undervaluation of the dong; (2) the specific practices that
address or eliminate the practices or policies under
may contribute to such an undervaluation; (3) the nature
investigation or provide compensation to the United States.
and level of burden or restriction on U.S. commerce caused
Absent mutual resolution, a likely scenario is the imposition
by it; and (4) the actions that the United States should take
of additional tariffs on U.S. imports from Vietnam.
to address Vietnam’s currency practices.
However, if the United States were to impose trade
restrictions, Vietnam could pursue WTO dispute settlement
The Treasury Department first formally raised concerns
about Vietnam’s currency practices in May 2019, when it
or retaliate by targeting U.S. exports.
included Vietnam in its monitoring list of economies whose
Andres B. Schwarzenberg, Analyst in International Trade
currency practices merit close attention. The Treasury
and Finance
Department again listed Vietnam in January 2020. In June
Rebecca M. Nelson, Specialist in International Trade and
2020, the Commerce Department opened an investigation in
Finance
response to a petition filed by United Steelworkers alleging
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Section 301 Investigations: Vietnam’s Timber Trade and Currency Practices

IF11683

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https://crsreports.congress.gov | IF11683 · VERSION 2 · UPDATED