Chris Devonshire-Ellis: Why the U.S. Won’t Win a Currency Spat with China

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Op-Ed Commentary: Chris Devonshire-Ellis

“What has happened is that in the last 20 years, America has changed from a producer to a consumer. And all consumers know that when the producer names the tune the consumer has got to dance. That’s the way it is.” (Gil Scott-Heron, “B-Movie,” 1981)

Mar. 18 – As the United States ratchets up the pressure on China to let the yuan appreciate, more and more people are beginning to see exactly what American is able to do to force Beijing’s hand.

Much of it seems to be filing currency manipulation suits against China, which can have the effect, if China is found to be manipulating its currency, of placing tariffs on Chinese products to America. In turn it is felt that pressure would force China to revalue the RMB. Side concerns deal with China’s continuing ability to buy U.S. debt. With some trillions of dollars needing to be refinanced next year, America needs all the buyers it can get.

The fact that China has been and does manipulate the RMB seems to be in little doubt. Cleverly playing a trade-off between the WTO (where China has been by far the most litigious member despite trade balances being heavily in its favor) and the International Monetary Fund, where agreed transparency of reporting on its currency measures to deal with the global financial crisis have remained a Chinese secret, indicate China is indeed playing the rules of global trading to its advantage. “Screw the ethics, let’s just win” oft seems the Chinese position. Washington looks on with discomfort and some embarrassment. Global trade was not supposed to be like this.

However, the underlying issue that economists and analysts seem to forget when looking at the RMB issue is that it doesn’t really matter. Washington could enforce tariffs on Chinese imports which will annoy China and force it to consider filing a trade barrier case with the WTO. But tariffs also damage the U.S. consumer. More telling is the same equation reversed. Revaluing the RMB or moving it to free convertibility will not make Chinese consumers buy more American goods.

Simply put, China doesn’t want or need American consumables. They are conceived of as expensive, culturally incomprehensible, and sometimes just plain silly or wasteful. The vast majority of U.S. companies involved in domestic consumerism have failed spectacularly to make any inroads into making their products culturally and globally acceptable. Coca-Cola, McDonalds, Dell, Apple and Starbucks maybe, but these are giant behemoths. Below this stratospheric level, there has been little or no market research carried out, little or no studies of the preferences of the Chinese consumer or the myriad of regional variations, and little or no attempt to rebrand or reposition products successful in the United States but unknown in China. Reese’s Pieces? Forget it. It’s nowhere to be seen. As the militant, brilliant, (and oft ignored by white corporate America) black Chicago poet (remind you of anyone?) Gil Scott-Heron said in 1981 at a then dig at Ronald Reagan, “When the producer calls the tune the consumer got to dance.” Scott-Heron was often wrong, yet his words ring chillingly true today, even if applied to a different set of circumstances.

The appalling fact is that 20 years of China opening up to the West, America still hasn’t figured out how to sell to it. After all, the growing trade deficit has been a warning for how many years now?. The currency spat is largely irrelevant other than hurting American consumers and pushing up U.S. domestic prices. The reality of China having learned to sell successfully to the United States while the American consumables industry has effectively sat back and watched it happen without learning to reciprocate is hardly China’s fault.

Indeed, if one were a CEO of America’s global export industry, the temptation would be there to take note of which of the country’s export managers had performed less sales growth than the annual GDP growth in the countries they were responsible for, and take remedial action against those who had failed to keep pace without good reason. Clearly, in this regard, America has lagged behind China in its export prowess. One can forgive the development of a growing nation, and its political bumps and jolts, but not to the extent whereby America’s triple-A rating is under threat. America’s use of the WTO has been to help American products overseas while allowing exports to its own shores. All well and good, but what happens when a country the size of China doesn’t want to buy? Or when American products are viewed as culturally irrelevant? What happens to the equation then?

America needs to grow out of its China export torpidity and fast, because its consumer products are geared almost entirely to a demographic whose market is not currently static, but is likely to shrink. It is essentially made up of middle class Caucasians. The nation simply has not adapted properly to the very global trade initiatives it has so strongly championed. It is time for a recalibration of what America does. As China has recognized it is too dependent on export manufacturing and needs to develop its domestic markets, and as India has recognized it is too dependent on services and needs to diversify into manufacturing, so America needs to diversify from the addiction of a consumer driven society and towards one that begins to sell again.

As perhaps what the United States will find out, when looking at the typical American middle class Caucasian market, there aren’t too many of those in Asia, and in China, even less. A currency battle with China will not deal with the underlying issue, and that is that America can’t sell – and is currently incapable of selling – its consumer products to global developing markets.

Chris Devonshire-Ellis is the principal and founding partner of Dezan Shira & Associates, establishing the firm’s China practice in 1992. The firm now has 10 offices in China. For advice over China strategy, trade, investment, legal and tax matters please contact the firm at info@dezshira.com. The firm’s brochure may be downloaded here. Chris also contributes to India Briefing , Vietnam Briefing , Asia Briefing and 2point6billion