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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.

And what can executives at other companies do? “We’ve been encouraging our [USCBC] membership to educate their rank-and-file about the importance of healthy trade with China,” she says.

Jeopardizing U.S.-China trade could indeed have big repercussions worldwide. Economist Andy Xie recently noted that total U.S. trade in goods for this year “should be a touch above $3 trillion,” while China’s trade will be $2.9 trillion. “Given these enormous sizes, a trade war is inconceivable. Even a significant risk of such an outcome would lead to stock markets collapsing around the world.”

Tit for Tat

In any case, “will a stronger yuan get rid of the U.S. [trade] surplus? No way,” says Evenett of the University of St. Gallen. “Focusing on the currency is wrong.” Like Lipson, he recommends that companies and countries (even beyond the United States and China) should be aware of the impact of the growing number of “import-reducing” policies enacted worldwide. Toward that end, Evenett has been part of a team that has spent the past 18 months developing a database of all the measures governments around the world have put in place that affect global commerce.

The results so far should give lawmakers pause. Global Trade Alert researchers have analyzed 22 protectionist measures that harm 15 or more G20 trading partners and affect more than $10 billion in trade. They estimate that the trade covered by these “jumbo” measures alone is around $1.6 trillion.

Despite the surfeit of government actions, and the resulting ripple effects that have harmed trade, Evenett doesn’t think companies need to be worried about a major trade war erupting. But he is concerned about the escalating trade tensions between the United States and China. “What we see bubbling up is quite worrisome,” he concedes. “It’s setting the scene for a very frightening 2011.”

Janet Kersnar is a London-based journalist.

Land of the Sinking Yen

By intervening to stop a strengthening yen, Japan’s central bank throws uncertainty into the forex strategies of U.S. companies.

Japan’s recent moves to weaken the yen have created another headache for U.S. finance chiefs. While big Japanese exporters such as Sony and Honda cheered their central bank’s efforts to halt the yen’s five-month climb against the dollar, the intervention presents quite a different set of issues for American companies.

The yen moved from 83.72 yen to the dollar to 85.74 yen to the dollar in mid-September, before snapping back to 82.38 in early October. According to an executive at Nissan Motor, many companies in Japan are not profitable even at the rate of 90 yen to the dollar, and a continued strong yen could mean domestic job losses.

U.S. dollar to one Japanese yen

U.S. automakers, of course, welcome a strong yen because it makes Japanese cars less price-competitive in the United States. But it also means higher costs for U.S. manufacturers importing large machinery or parts from Japan.

Ryan Gibbons, managing director of GPS Capital Markets, says the Japanese central bank’s move to flood the markets with yen is a wake-up call to U.S. CFOs who have been riding the profits from the currency’s appreciation the past few months. “Take a more conservative approach now,” counsels Gibbons. “If you’re in the money on hedges, you should lock into those.”

A still-ailing U.S. economy won’t assist Japan’s devaluation strategy. Continuing low interest rates in the United States have helped strengthen the yen as investors move money out of dollars. Quantitative easing by the Federal Reserve could cause further dollar depreciation and counteract the intervention.

Still, the yen is more likely to weaken than return to preintervention levels, Gibbons says. CFOs have some time to let the situation play out before final budgets for 2011 are due, but for those starting the process now, Gibbons recommends being at least 5% more conservative with yen-dollar exchange-rate projections. Meanwhile, another round of intervention appeared possible at press time. — Vincent Ryan

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