Embracing China’s decision to let its currency move more freely, US businesses said on Monday that the move would make it easier to compete against Chinese companies and would help reduce the US trade deficit.
They cautioned, though, that the rise in the currency, the yuan, is expected to be gradual, even if many US economists say it is between 20 percent and 40 percent undervalued.
SGI, a California company that makes servers and data storage equipment, looks forward to extra business.
“It’s a real opportunity for SGI and other American companies to expand sales to China,” said Mark Barrenechea, the chief executive. “Although this will increase some costs for American businesses that source in China, it also means that Chinese businesses can more readily afford American exports.”
Trade experts said the winners would be US companies like General Electric and Caterpillar that export to China, while companies like Wal-Mart and Target that rely on China as a low-cost export platform may be squeezed by rising costs.
In fact, costs have already been rising this year because of demands for higher wages among Chinese workers, who are balking at the coastal jobs once coveted as a way out of rural poverty.
Even though Caterpillar has tractor-making factories in China to serve the local market, the company was quick to praise the country’s decision, struck just days ahead of a crucial G20 meeting of nations. That is because along with what it produces there, Caterpillar sells China some of its most sophisticated, and therefore expensive, US-made equipment, including giant bulldozers, large mining trucks and gas turbines.
“Presumably, a stronger currency will increase their buying power, and if their economy remains strong, that will inevitably lead to more exports,” said Jim Dugan, a Caterpillar spokesman.
As China’s goods become more expensive, goods produced in the West will become relatively more attractive, not just in China, but around the world.
Fred Hochberg, chairman of the Export-Import Bank of the United States, said it was hard to predict how much China’s currency increase could bolster US exports.
“It depends on how they implement it, what rate of speed and how much it is really market-driven,” he said.
US companies and global companies that count on China to produce goods at a low cost, however, may be hurt by the currency’s rise just as they have been suffering from rising labor costs. John Frisbie, president of the United States-China Business Council, cited companies with low-end products, like apparel, shoes and toys, as among those most affected.
Wages have risen recently in China to help workers keep up with inflation and in response to labor unrest, most notably strikes at several Honda plants and 11 worker suicides at Foxconn Technology’s mammoth electronics factory in Shenzhen.
Mitch Free, chairman of MFG.com, a company based in Atlanta that helps secure manufacturing for Black & Decker, Whirlpool and Motorola, said Chinese manufacturing prices had risen by 8 percent in the last year, largely because of labor costs. He expects the trend to continue.
“They’re proactively giving some wage increases,” Free said. “We’re seeing people sending messages to the buyers, through the system, saying that they’re revising a price or can only hold a price for a short time because they’re anticipating wage increases.”
How much US exports increase depends in part on how much China allows its currency to rise. Fred Bergsten, director of the Peterson Institute for International Economics, predicted that if the yuan rose by 20 percent over the next two or three years, and if adjacent countries like Taiwan and Malaysia similarly let their currencies rise, the US would lop US$100 billion to US$150 billion a year from its current account deficit and create up to 1 million US jobs.
Most of that change would be in exports, not just exports to China, he said.
Frisbie was more skeptical about the impact on the trade deficit. Neither a stronger yuan nor higher wages would have much effect on major companies like GE or Boeing that have made large investments in China to sell to local consumers, he said.
For companies that make products in China for sale elsewhere, however, there will be an incentive to reconsider where their factories are.
“They’re the ones who are strategizing to consider other locations,” he said. “They’re the companies that will be impacted most. They’re looking at other places with low labor costs, like Vietnam.”
Other Asian countries could well let their currencies rise along with the yuan, reducing the potential benefit of transferring operations out of China.
Still, some companies may decide to continue diversifying their suppliers, said Hana Ben-Shabat, who oversees A.T. Kearney’s global-retail index.
“Companies will spread their bets among different countries instead of being so attached to getting a large proportion of their goods out of China,” she said.
She said she did not expect a wave of moves to lower-wage countries because labor costs make up only between 15 percent and 20 percent of apparel costs.
“Cost of labor in Bangladesh is way lower than China,” she said, but given other costs like shipping, “the same garment could cost much more out of Bangladesh than in China.”
At one big company, Li & Fung, which does work for Wal-Mart and Liz Claiborne, among others, the president, Bruce Rockowitz, said China was still attractive.
“This is not the end of China, but it’s the end of lower prices,” he said.
Clyde Prestowitz, president of the American Strategy Institute and author of The Betrayal of American Prosperity, said he expected no rush out of China by US companies.
“In fact, I see important guys going in, like Intel and Applied Materials,” both semiconductor manufacturers, he said. “Foreign companies are obviously concerned, but I haven’t seen anybody except Google talk seriously about getting out. It’s a big market that’s going to get bigger.”
ADDITIONAL REPORTING BY DAVID BARBOZA
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