IMPO, Manufacturing.Net's partner publication, recently sat down with Josh Green, CEO of Panjiva, to discuss the ongoing tale of China’s yuan, the global pressure to allow the currency to rise in value, and what affect that might have on U.S. manufacturing.
IMPO: Could you provide an overview of what China is doing with their currency, and why?
Green: China has pegged its currency to its specific exchange rate. What this means is that in practical terms, China’s products have been cheaper than they otherwise would be. So your readers probably fall into one of three categories:
If they have been buying products from China, China’s policy has been helpful, because those readers have been able to get lower prices.
Some of your readers are probably exporting products to the rest of the world, and are competing with Chinese manufacturers. Those people have been hurt by China’s currency policy, because relatively speaking, their goods have been more expensive than Chinese goods.
And then there are a set of people who are exporting to China. And there is an argument that demand for those types of products would be higher if Chinese currency changed.
I think if you look on balance for the United States, most businesses are falling into that first category. The biggest impact of China’s currency policy has been to keep prices relatively low for products that are being bought from China. And, frankly, that’s been pretty good for most businesses, and U.S. consumers.
IMPO: The Alliance for American Manufacturing says U.S. manufacturing has lost some 2.4 million jobs due to China’s currency manipulation. Do you think there’s any validity to this number? How did this happen?
Green: There are people who argue that American manufacturers can’t compete with Chinese manufacturers because of China’s currency policy. In my opinion, people who make that argument are half right. They are correct that American manufacturers can’t compete with Chinese manufacturers, but it’s not because of currency policy. The wage rates in China are so much lower than they are in the U.S., that even if there was significant change in Chinese currency, American manufacturers would still be in a position of being uncompetitive.
If you look at the trajectory of American manufacturers over the last several decades -- companies that are trying to compete based on costs, that are producing products that require unskilled labor -- America has become less and less competitive in those areas. And so there’s no question that over the last several decades, a lot of jobs in those low-skill industries have gone elsewhere. But that’s a much bigger-picture story. It is a much more far-reaching trend than simply a product of China’s currency policy.
So if you look at the argument that jobs are being lost because of the currency policy, it’s a really tough argument to make. Realistically, there’s a lot of companies that have been helped by the ability to bring cheap products in from China. New industries have been created in terms of managing the global supply chain, and of course we have as our trading relationship with China has grown, exports have grown as well. I think it’s a stretch of an argument.
There’s no question that some portion of the U.S. manufacturing base who is trying to compete in these low-wage, low-skill industries, those people are unquestionably being hurt by China’s currency policy. But the number of companies that fit into that category is much smaller than the number of companies that have a global supply chain that, in some form or fashion, reach into China -- and those are the companies being helped.
I said there are a small number of companies in the U.S. affected by this in a negative way, there’s a much larger set of companies outside of the U.S. that are affected negatively by China’s currency policy, and those are companies largely in other emerging markets who are trying to compete in these low-skill, low-wage industries. Those are people who are really affected by China’s existing currency policy, and the most likely to benefit if China changes its policy.
IMPO: We’ve heard a lot from President Obama and Treasury Secretary Geithner, who are both pushing for a currency appreciation from China. Is that a good policy for our leaders to be pushing?
Green: The U.S. Treasury was supposed to release a report on April 15th, which named countries that were engaging in exchange rate manipulation. So there was a lot of pressure on the Treasury Department to name China as a country that manipulates currency. But the Treasury Department put off that announcement. In the wake of that, if you look at what top administration officials said, it was interesting because they didn’t talk a lot about how it was really crucial for the U.S. economy that China change its currency policy. In fact, if you look at Geithner’s quotes, there’s a New York Times article where he was said it was most likely to have an impact on emerging market countries. And Christina Romer said more or less the same thing when she was on Meet the Press just after that announcement. If you look at how the administration handled it, they essentially resisted calls in Congress to really push the Chinese hard. And I think that was smart for a couple of reasons:
One, because it’s not clear that whether a change in Chinese currency policy is going to help or hurt the United States. If and when the Chinese change their currency policy, the prices for U.S. businesses importing from China will go up, and prices for consumers are going to go up. That is a certainty that is negative. So it’s not at all clear that [the currency appreciation] a good thing.
Second, even to the extent you believe it’s a good thing to change the currency policy, it’s not at all clear that U.S. pressure makes it more like that China is going to change their policy. The bigger of a public issue it becomes, the more likely Chinese leaders are likely to say, “Hey, I can win some political points by standing strong against U.S. pressure.”
And I think that brings up the last point, which is taking a confrontational stance with China on currency, in my opinion, is missing the point, because U.S. companies are largely not competing with Chinese companies anymore. The source of growth for the United States is likely going be selling goods and services to the Chinese consumers. And the key driver of our ability to do that is getting access to Chinese markets, which is not related to Chinese currency. So the more trade disputes we have with China -- the type of trade disputes we could have if we get very confrontational with them -- the less likely we are to get access to their market, which is what we really want.
IMPO: A big effort right now in manufacturing lies on the “re-shoring” effort, as in bringing jobs back to America that would have otherwise been in emerging markets like China. Do you perceive the appreciation of Chinese currency to have any effect on those efforts?
Green: No. I think the most likely short-term impact is essentially rising prices for U.S. importers and consumers. I think the most likely medium-term impact is companies starting to look outside China, but they’re not going to be looking to manufacture in the U.S. The wage rates here are just too high. They’re going to be looking to other low-wage countries.
IMPO: So if you’re talking about a global automaker like GM, they’re going to be thinking about moving pushing things away from China and into India, not back to America.
IMPO: What can manufacturers do to prepare themselves for the appreciation?
Green: My advice is most relevant for companies that have a supply chain that extends to China.
One is that it’s really important to dig in and understand the health of your current Chinese suppliers, because Chinese suppliers are going to be hurt by changes in currency policy -- they’re going to be less competitive in the global marketplace. So a lot of these suppliers will be less profitable, or their business will shrink a little bit, but they’ll be okay. The marginal suppliers in China are not going to survive. It’s really important for you to understand, for your suppliers, which category they’re in. Are they healthy, or are they marginal? Because that is going to tell you how big of a threat changes in currency are to you.
To the extent that you can, start to lock in contracts with your Chinese suppliers, because when the currency changes, it’s going to be a binary situation -- either your suppliers are going to have to bear the costs associated with the change in currency, or you are. If you can lock in contracts now, you’re going to make it more likely that they will bear the costs. That said, you need to keep in mind that asking them to bear the costs is also asking them to bear the risks. If you have a supplier that’s weak, and you lock them into a contract that makes them even weaker, you’re increasing the chances that they go under. So you’ve got to be careful with that strategy.
The third piece of advice is to look beyond China. To the extent that you have significant operations in China, it’s really important to diversify and think about where, in addition to China, you can be.
So number one: Understand your suppliers in China. Understand their financial health. Number two: Lock in contracts where possible. And number three: Start looking for suppliers in new geographies.
IMPO: It sounds like if you don’t have operations in China, there isn’t a whole lot you can do to prepare.
Green: If you don’t have operations in China, this issue is not at the top of your agenda.
IMPO: That’s a good thing for people to hear, because there’s a lot of talk about how this appreciation is going to “revive American manufacturing.”
Josh Green conceived of the Panjiva solution in 2005 after seeing first-hand just how difficult it is to find good overseas suppliers. Josh is a veteran of The Boston Consulting Group and has masters degrees from Harvard's JFK School of Government and Harvard Business School, where he graduated as a Baker Scholar.
Panjiva is an online resource for sourcing executives to gain credible and valuable knowledge about suppliers and manufacturers around the world. For additional information, visit www.panjiva.com