There is a dangerous fantasy taking hold in Washington: The U.S. can force China to strengthen the Yuan.
Bloomberg Businessweek, 9-23-10
On September 23, the U.S. government demanded that China immediately appreciate the Yuan by 20%; the Chinese refused. Just days later, by a vote of 348 to 79, the U.S. House of Representatives approved legislation to authorize the U.S. Commerce Department to hit countries with "undervalued currencies" with import duties. The bill now moves to the Senate, which could vote on it before the end of this year. If the Senate approves it, the bill would most certainly be signed into law.
Then, on September 26, China fired a not-so-coincidentally timed warning shot across the bow when they announced they were hitting U.S. poultry producers with duties of up to 105% (that three digit number is no misprint).
If cooler heads don't prevail, these could be the opening salvos of a trade war. "Everyone sees a political win in bashing China in an election year," writes Businessweek. If U.S. legislators allow the politics of "look, we did something about the economy!" to drown out careful consideration of the consequences, they will pit themselves against a rigid Chinese government that won't risk the instability that comes with appearing weak to its public.
Hopefully, both sides will slow down and work this out. The Yuan will appreciate on its own over time (see The Exchange Rate below), but forcing the issue for the sake of politics will cause sparks to fly.
So what does this mean to you and the products you import from China?
1. Regardless of what happens in Congress, realize that the slowly appreciating Yuan will eventually put upward pressure on prices.
2. If the bill the lower house just passed makes it through the system, the U.S. government could impose a universal duty rate on all imports from China (perhaps from 10-20%). I have a hard time believing this would happen because it would probably set off a trade war.
3. Will any of this effect where you buy from? In most cases, probably not. One customer for who we recently quoted a product at $5.00 told me he'd gotten prices of $27.00 in the U.S. Businessweek writes: "It's hard to imagine the U.S. would start importing the toys, TVs and underwear that it now imports from China. More than likely it would just pay more for the same items... The last time the Yuan rose in value, by 20 percent from 2005 to 2008, the U.S. trade deficit with China actually grew by about the same percentage."
4. Please consider these issues when quoting product to your customers. If they might place an order months after you quote it, you might calculate your cost a few percentage points higher, just to be safe.
Years ago, a business associate said that in the negotiation process, one can "Bring out the gas can and light the match, but never set the bridge on fire." If I had to guess what will happen, I would say the bill that is currently moving through Congress will either pass or come close to passing, and the U.S. will try to use it as leverage to pressure the Chinese into appreciating the Yuan at a faster rate.
Hopefully, they won't set the bridge on fire.
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October 19, 2007, 11:37:11 PM
