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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.

For Cass Johnson, president of the National Council of Textile Organizations (NCTO), the legislation, if passed, would be a positive development. “From the perspective of our industry, our concern is that China’s prices for its manufactured goods are artificially low,” he says.

According to the NCTO, China’s share of the U.S. apparel market is now at 40%, up from virtually zero in 2000. Meanwhile, over that same period, the number of U.S. textile employees has dropped to 412,000 from more than one million. More than 500 textile plants in the United States have closed over the past 10 years.

And while the U.S. textile sector — which exported more than $10 billion worth of goods in 2009 — has been adding more jobs and reopening plants recently, Johnson says it is still struggling to compete against Chinese goods — which are unfairly cheap because of the low yuan, he argues.

As for the argument that a big hike in the value of the yuan will trigger inflation in the United States as Chinese goods become substantially more expensive, he says, “Inflation isn’t our big concern, unemployment is.” With overall unemployment in the United States hovering stubbornly around 10%, “we’re just hoping for some relief, and hopefully [the bills] will send China a message,” he says.

Others say that any message sent by legislation risks being the wrong one. The U.S.-China Business Council (USCBC), a group of some 250 companies promoting trade between the two countries, calls Washington’s recent bills “counterproductive.” Its president, John Frisbie, said in recent testimony before the House Ways and Means Committee, “USCBC believes that China’s exchange rate should better reflect market influences from trade flows and supports effective actions to get to that goal. Counterproductive tariff legislation…will do more harm than good.”

One company joining USCBC’s lobbying efforts is Caterpillar. The $32 billion firm manufactures a vast range of construction and mining equipment worldwide, and has eight factories in China alone. But it is also a big exporter into Asia-Pacific, which accounted for about one-fourth of the $10.4 billion of goods its U.S. plants sold overseas in 2009. Any trade friction would hurt. As William Lane, its government-relations director, stated before the House Ways and Means vote, “Some in Congress want to start a trade war and undermine our efforts to sell to our fastest-growing export market.”

Multinational companies aren’t the only ones voicing concern. Another USCBC member is Chindex International, a U.S.-based, $171 million Nasdaq-listed company that has been exporting medical equipment to China for the past 20 years, and which also operates a network of private hospitals in major cities in China. CEO Roberta Lipson calls the recent votes in Washington “misguided.” She says, “A 10% or 15% increase in the yuan’s value is not the solution to [the U.S.'s] economic problems. Other countries have even lower costs than China.” A better strategy, she reckons, is to convince China to lower its own duties “so that there is a more level playing field.”

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