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Is a Trade War at Hand?

Recent moves on Capitol Hill may force CFOs to carefully consider what will help them versus hurt them.

A flurry of congressional activity regarding foreign trade has more than a few CFOs on edge, and for good reason. On the one hand, they understand why Washington would seek to improve current economic conditions by getting tough on major trading partners, including China, whose protectionist policies hamper U.S. exports.

On the other hand, even if their companies have benefited from this year’s modest recovery, CFOs know that they still face a challenging 2011 and 2012, a period during which their biggest growth prospects will not lie at home but overseas — including those countries that may be irked by recent U.S. trade actions. As a result, many finance executives are concerned that the current discussions in Washington, regardless of whether any bills being promoted are actually passed, will spark a trade war.

Most of the attention is on China. Last year it replaced Germany as the world’s biggest exporter, and its rise to the top can be traced not only to its status as the locus of low-cost manufacturing but also to its efforts to keep its currency artificially low against the dollar. The latter action has helped China’s exports thrive, to the point where it now sells far more than it buys, creating a burgeoning imbalance with its main trading partners, including the United States and the European Union.

China’s critics had welcomed its announcement in June that the yuan would be allowed to float more freely. But disappointment soon followed, as the currency strengthened only a few percentage points, as opposed to the 10% to 30% jump that many U.S. companies hoped for. Meanwhile, China’s trade surplus continues to rise year over year; in August it soared to $20 billion from the prior period’s $16 billion.

Combine that trend with the recession and a potentially power-altering midterm election and many experts say the stage is set for an intersection of politics and business that will not only generate plenty of rhetoric, but perhaps some misguided policies.

As those experts note, trade deficits and surpluses are an imperfect measure of how goods flow between countries. Beyond the statistics, what often gets overlooked is the impact of globalization and the intertwined nature of goods traded between countries. Economists point out, for example, that many of China’s exports come from U.S.-owned companies or other multinationals.

Meanwhile, companies outside China need China as much as it needs them. Research from two European academics — Joseph Francois of Johannes Kepler University in Linz, Austria, and Simon J. Evenett of University of St. Gallen, Switzerland — underscores the importance of imports to the competitiveness of U.S. firms. They found that most imports from China into the United States aren’t the inexpensive jeans, T-shirts, and toys that American consumers buy from their local Wal-Marts, but, in fact, unfinished parts and components that U.S. industries use to make high-value goods.

“Send China a Message”

The recent activity in Washington began with two key votes in September — first by the House Ways and Means Committee followed by the full House of Representatives — in favor of imposing tariff duties on countries that have artificially undervalued currencies. Whether or not the bill is passed by the Senate and approved by President Obama remains to be seen, but should the effort succeed in some form, its impact on U.S. companies will vary widely depending on where a company sits in global supply chains.

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