Lee McDarby takes a look at how the currency war is costing US manufacturers
Manufacturing was always likely to be caught up in trade disputes between the US and China. Its highly visible inputs and outputs mean that it is an easy political pawn to be played against global trading services.
Tariffs are already driving down productivity and raising costs for US manufacturers. In fact, December 2018’s Manufacturing Purchasing Managers Index (PMI) results came in at 53.8, the lowest result in 15 months. The weak overall rise in new orders led to a drop-in business confidence among manufacturing firms, with particular concerns surrounding the longevity of new business growth.
The challenges extend beyond tariffs to wild fluctuations in exchange rates. President Trump has accused China of manipulating its currency and keeping it low against the dollar.
Whether the Chinese Yuan was depreciated by design, or as a result of market responses to the trade war, it has put US manufacturers exporting to Chinese markets at a further disadvantage.
However, US manufacturers need not be passive victims. There are several straight forward steps that every manufacturing business should take to effectively assess currency exposure and hedge to reduce risks.
Trade war threatens US exporters
As a result of escalating trade tensions the US dollar has continued to rise against the Yuan. This strong growth is likely to drive demand in the US for Chinese goods and reduce the impact of imposed tariffs.
Conversely, US exporters will struggle as they lose competitiveness in target markets. Despite this week’s ceasefire on retaliatory tariffs [at the time of writing], Chinese products amounting to an annual trade value of about $200 billion are still subjected to an additional ten per cent in duties. Against an already weak Yuan, the currency war has threatened to exacerbate an expanding trade deficit, making trade much more expensive for US firms exporting goods.
The principle for how a business navigates these fluctuations in foreign exchange is fairly straightforward. Foreign exchange experts such as moneycorp can help businesses monitor the markets, manage currency fluctuations and allow them to take advantage of buying foreign currency when the dollar is strong.
Currency rates can have a number of impacts on businesses, but the most common challenge is around payment transactions.
Regardless of whether you are a manufacturer importing machinery or exporting goods to China, at some point your business will have to make or receive a payment transaction to or from a foreign partner. It is at this point that currency fluctuations become real; potentially forcing you to accept poor exchange rates and the associated financial losses.
Likewise, if you are a business owner looking to expand your operations overseas and need to make a large one-off payment, you may notice considerable changes in currency rates in between the planning phase of the venture and the eventual launch of the project.
Fluctuating exchange rates need not to lead to huge company losses. Being prepared and well-advised can not only protect manufacturers from risks, but can also ensure they are making the most out of their international payments.
Working with a regulated financial institution such as moneycorp, allows a business to hedge its currency – with a deposit – exchange rates can be locked for a period of up to two years. Moreover, specialists in foreign exchange can offer much better rates for currency transfers than most banks. Alternatively, a business can get products that protect their budget rate, but still allow them to take advantage of favorable movements in the foreign exchange markets.
Uncertainty lies ahead
The week commencing 14th January 2019 marked the beginning of fresh talks aimed at resolving the trade dispute between the US and China, however the two sides are unlikely to reach a full deal until March.
The most likely outcome is that China will give some minor concessions, however Trump may decide to go ahead with his planned increase in the tariff rate – from ten per cent to 25 per cent on $200 billion in goods – this would likely reignite tit-for-tat tariffs.
Whether the tariffs to date benefit or cost your business, you have the opportunity to enhance your profits through an effective foreign exchange strategy. Global trade demands a global perspective on currency models, and company finances. Make sure that you’re on the winning side of any currency markets.
The realities of a global supply chain mean that in a period of fluctuation, it appears the only winners are those that deploy an effective FX strategy.
Lee McDarby is Managing Director, Corporate Foreign Exchange and International Payments at moneycorp. Established in 1979, the moneycorp group serves the growing foreign exchange and payments needs of global businesses, importers and exporters, online sellers and personal clients. Headquartered in London, with a worldwide presence, moneycorp prides itself on providing exceptional customer service. A global company with local expertise.