You can’t turn on the TV or read any news article without hearing the controversial debate surrounding the issue about currency valuation. The topic of discussion? That the Chinese government does not permit the RMB to be traded on the World Foreign currency Exchange to ultimately keep the value of the RMB artificially low with the goal of dominating the export market and maintaining a trade imbalance.
During the second term of the George W. Bush administration, the US created a policy of a weak dollar. Just go travel anywhere internationally and you can experience first-hand the effects of the weak dollar policy when you try buying any product or foreign goods. Some may accuse the US doing the same thing as the dollar is at its lowest against the Japanese Yen, the Euro and the Pound, but there is a difference. There is a considerable difference is the impact. We are not selling an augmented amount of goods to China, or increasing our exports. We are not opening new factories or creating private sector jobs. Instead we continue to exceed in our government spending and subsidies, as well as increasing our debt to create employment in the government sectors when it is the private sectors and small-medium businesses that need funding.
Let’s view this from another angle. A weak dollar means an influx in cost for manufacturing products that consist of components from international suppliers. As a result of the cost increase in manufacturing, product prices inflate which means once again that as American consumers, we are picking up the tab whether we are buying foreign or domestic products. To top it off, we are progressively running up the government deficits as well as trading deficits with some of our largest partners.
During my 28 years working for a multi-national Hi-tech company, we bought nearly $8B annually from Chinese suppliers. When I first started a joint venture over in Japan, I could see the threat the currency fluctuation posed for my new business. Having assessed the risk factors I consulted with our Corporate Treasurer to create a strategic plan to grow a competitive advantage and profit margin on currency arbitrage. However, the Treasure disagreed with my plan and explained our corporate policy was to never make services plans, make products, or execute strategies to make a profit on currency. Why you ask? Because currencies are unstable, and rather sold based on currency, products and services should be sold based on performance and innovation. Even with some of these obstacles, America still obtains a great innovative edge over the competition. Just look at Apple, GM and Ford, all three of these companies make products that are in high demand and offer valuable constituents, such as: reliable, fuel efficient cars that can hold their own in a competitive market. With that said, how can we resolve such an issue that is so pervasive and complex?
This question can be answered in a mere three letters: WTO (World Trade Organization). What we need is the WTO and its members to terminate barriers to free trade. Below are some examples that I have observed.
- Every car manufactured and sold outside of China is taxed at 100%. It’s no wonder as to why Chinese prefer to buy vehicles made in China, not because they think Chinese made cars are better, but more so for the reason that they can’t justify in paying such a hefty tax mark up.
- Designer brands, for example, Gucci. We can find Gucci sunglasses for $200. The Cost in China? $1000 for the same product.
- Cosmetics cost 4 times in China then they do in the US.
Keep in mind that these prices have nothing to do with shipping, handling or packaging costs. These are just pure examples of what we call “market protectionism. I think you can understand now why Chinese visiting the US are much more interested in going to the malls or outlets then seeing historic landmarks.
All we need is a level playing field with our trading partners. Think about the potential in selling products into China at cost. In a market of 1.4 billion people you don’t have to use your imagination as to what that could mean for our economy. Employment would skyrocket, new businesses would flourish, and companies could expand and become successful. Another major benefit to all this economic activity? Deficit reduction.
Resolving our trade deficit and making progress on reducing our federal deficit is a feasible achievement, but first we need to get our government and trade officials kicked into gear and get the WTO to push for the removal of artificial tariffs and trade barriers. There needs to be a wakeup call to Tim Geithner and Ben Bernanke to tell them to step aside and get Gary Locke and Hillary Clinton in there to get things done. We live in a global economy and it is safe to say that while currency manipulation will not resolve global recovery, free, open trade and competition will.
