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Focus: Global Supply Chain and Logistics

Our Weekly Feature Article on Topics Related to Global SupplyChain Logistics

From SCDigest's On-Target e-Magazine

Oct. 6, 2011


Global Supply Chain News: Senate Bill on Yuan Value Said to be Near Passage, Impact Unclear

China Says Passage will be beginning of a Trade War; Global Sourcing Organizations Should begin to Play Out Various Scenarios


SCDigest Editorial Staff


A bill in the Senate that would make it much more likely the US would take retaliatory trade actions against China for alleged undervaluing of its currency was said to be near a vote on Thursday, with passage of the measure appearing to be assured.

SCDigest Says:


Of course, a rise in the value of the Yuan of say 20% would mean that prices from the country would rise by an equivalent amount, all things being equal. However, China and its manufacturers could react by finding ways to lower prices to offset the rise.

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If the measure were to become law, it could set off a trade war between the US and China,with unclear ramifications for the economy, here, there and globally. It appears unlikely the Republican-controlled House will pass a similar measure there, although the Senate bill has some bi-partisan support. If it were to pass both houses, it is not clear whether the Obama administration would sign it in to law.

The crux of the argument is that China has held the value of its Yuan currency artificially low, boosting its powerful export sector, and making imports into China more expensive. Recently, however, China has allowed the Yuan to rise, in part under pressure from complaints from governments and business executives in the US and Europe relative to the Yuan's valuation. It's up about 7% versus the dollar in the past year.

Despite the slow but steady rise in the value of the Yuan in the past two years, many economist and trade experts still say it is not enough, and that the Yuan would need to rise 15-25% or more versus the dollar to be the at the level it would find if the Yuan floated freely on the open market, as all other major currencies do against each other.

Chinese officials in fact have announced plans, somewhat vague, for the Yuan to begin freely trading in global currency markets, with one recently saying that could happen by as early as the end of 2015. However, no specific timetable has been set for this transition.

Others note that rising inflation in China may force the government to revalue its currency regardless to get rising prices under control.

The US Treasury Dept. has frequently stated that the Yuan is undervalued. However, it has yet to say that this cause of this imbalance is Chinese government manipulation of its currency. The Chinese government still largely controls its official exchange rate between the Yuan and the dollar.

The bill would require retaliatory tariffs for nations that are found to have “misaligned” currency, even if Treasury does not find monetary manipulation.

This legislative action is being closely followed in China, where government officials have said the US is unfairly blaming currency issues for America’s economic and job troubles.

An official Chinese statement this week said that the bill was protectionist in nature and violates World Trade Organization (WTO) rules, and that such action was likely to start a trade war.

Nevertheless, the move is likely to gain a decent level of public support, with many seeing massive production outsourcing to China over the past decade as a key factor behind lost jobs here, especially in the manufacturing sector. To the extent that condition is perceived to have been accelerated by China keeping its currency artificially low, the level of public support in the US may be quite strong.

(Global Supply Chain Article Continued Below)




Estimates vary, but at the top of the range some experts have said the artificially low Chinese currency has cost the US as many as 3 million jobs. A recent study by three academic economists concludes that imports from China account for about a quarter of lost U.S. manufacturing jobs from 1990 to 2007, or almost 1 million in total.

The bill had a bit of bi-partisan support in the Senate, which voted to approve moving the bill to a floor vote by a total of 62-38. That included nine Republicans.

“They are abusing their trade,” said Republican Sen. Jeff Sessions of Alabama. “The administration has refused to act. I say Congress can and should act.”

While Speaker of the House John Boehner has said the bill there will not be brought up for a vote, 61 Republican lawmakers have signed on to the measure there, bringing the total of the legislation's supporters to 226, more than enough to win passage in the House.

Of course, a rise in the value of the Yuan of say 20% would mean that prices from the country would rise by an equivalent amount, all things being equal. However, China and its manufacturers could react by finding ways to lower prices to offset the rise.

Also, the impact of a currency rise may not always be one to one, as many of the raw materials and energy China uses in its production are already paid for in dollars.

Many believe that actual US law is unlikely in the end to be effective, but that the threat of such laws combined with pressure applied diplomatically and elsewhere could keep pushing the Yuan higher.

So, it behooves global supply organizations to keep up with developments here, and be proactive on looking at different scenarios that could play out.

What do you think of this proposed law to force the US to react on the currency issue by raising tariffs on Chinese imports? Smart idea, or start of disastrous trade war?

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