International marketing strategies and applications

China's Currency Case Study

The decision in July, 2005 to index the yuan to an index of foreign currencies has proven to be more problematic than many had originally anticipated, causing the cost advantages of Chinese manufacturing to become even more pronounced (Lo, 2007). Combined with the dominance of China in manufacturing, distribution and retailing industries and their growing dominance in manufacturing supply chains (Taj, 2008), the re-indexing of the yuan to an index of currencies relative to staying indexed only to the dollar has actually increased global inflation. U.S. lawmakers are concerned, and leaning towards protectionism in the case study, which is a dangerous strategy when one considers the balance of trade is in that nations' favor today (Hu, Su, Chen, 2008). The case study concludes with a discussion of the Baucus-Grassley Bill which seeks to legislate what many had hoped the re-indexing of the currencies would achieve in a free market. The re-indexing of the yuan and its immediate increase in value by 2.1% and the fact that the U.S. is currently running an even larger deficit that the $200 billion mentioned in 2006 today shows that the Chinese economy is much more robust than had been attributed just to its currency valuations (Hale, Hale, 2008). The case concludes with the options open to the U.S. And the potential filing of complaints with the World Trade Organization (WTO) and the completion of the Baucus-Grassley Bill that will impose terms on Chinese trade to in effect deliver the results the yuan re-indexing was thought to be able to accomplish. The case shows how uncertain indexing currencies can be in high growth economies.

Questions:

1. Consumer goods including shoes and electronics represent about 80% of U.S. imports from China. American consumers have saved an estimated $600 billion over the last 10 years by buying inexpensive Chinese goods. If the Chinese government re-evaluates the yuan by 20% or more and the American consumers pay higher prices, is this a desirable outcome?

Simply put, no, it is not. There are much broader issues than just the prices American consumers are paying for shoes and electronics. What must be taken into account are the supply chains for these products and those in just as critical of industries as consumer apparels, electronics and textiles. Consider industrial manufacturing, investments in R&D centers in China by Cisco, Microsoft and others, and also the development of entirely new approaches to distributed manufacturing that don't have just Chinese implications. These developments have global implications for manufacturing efficiency and performance. China's approach to manufacturing has shown that lean production and sourcing strategies can work even in a nation not as highly automated and integrated with technology as the U.S. (Taj, 2008). China's emergence as a global manufacturing center would be seriously impacted by a 20% increase in prices based on the re-evaluation of the yuan. The Chinese government must also look not only at its own revenue gains but those from other nations as well. Seeking out a more equitable and market-based approach is going to result in lower prices for consumers not only in the U.S. But globally. Second, it will ensure that the speed and efficiency of the Chinese supply chains continue to fuel the rapid GDP and GNP growth the country continues to experience as a result of rapid global expansion (Hu, Su, Chen, 2008).

2. Protectionist sentiments in the U.S. are fueled by the argument that China is to blame for the flood of imports, the giant U.S. current account deficit, and the downward pressure on wages in some industries. Do you agree?

No, I do not agree with protectionist sentiments regarding these factors. The U.S. trade deficit and downward pressure on wages in many industries is more a factor of the Chinese manufacturing sector being more aggressive in lean manufacturing and efficiency practices (Taj, 2008) than any other factor. To demonize China is to miss the point of what it means to be in a market-driven global economy. Only after nearly going bankrupt and needing huge federal assistance programs are American automakers finally building small cars. Like a drug they were addicted to, American auto manufacturers could forever build larger cars and trucks, even originating Sport utility Vehicles (SUVs) as a category, and never pay attention to fuel economy or cost of ownership. With GM nearly bankrupt it looks as if their SUV addiction is finally being broken. But it took a full-scale intervention, the magnitude the U.S. has not seen since the Great Depression, to wake these companies up and make them market-driven. Is China to blame because GM refused to pay attention to the need to be more environmentally focused in their product designs? No. The free fall of American wages in the auto industry rest squarely in the ands of the CEOs of those companies who completely missed market signals telling them to change. Second, on the issue of apparel and electronics manufacturers in the U.S. being driven to cut prices by Wal-Mart and leading in turn to that retailer being demonized are also inaccurate. Wal-mart is not a government administration, it is not part of a bail-out program. It is a business that must stay profitable for well over 100,000 people to keep their jobs. They are a profit-making entity. Suppliers who hope to sell through Wal-mart realize they are the low-price leader. This is not news to anyone who lives in the U.S., where their ads on television continually. Manufacturers and suppliers who choose to sell to Wal-mart have got to expect price pressure. It is a choice they make. Wal-Mart can find lower prices to source their products in China, and that is their choice. To become protectionist over these dynamics is to perpetuate the mindset of the CEOs of American automakers who nearly cratered that industry in the U.S. yet to see this as a call to be more competitive on a global scale is to get the point. The U.S. has to quite being such a nanny to these corporations who refuse to see that they must change -- sometimes radically -- to survive.