Wednesday, September 22, 2010

Does weak Currency really Help Exports .







Recently, there have been huge arguments between US and China on "Yuan appreciation" with both sides sticking to their points. US firmly believe that China is getting "unfair advantage" in export due to pegged currency; while China believes their currency is "their own call". We don't know what is right or wrong, but we thought of checking if there is any "real" correlation between Exchange Rate and Export.





* Figures in Million
Source: CIA Facts.

Taking Data from CIA facts and just looking at it we can see that saying "there is direct co relation between currency and export" is misleading. As If there would have been one, Zimbabwe should have been biggest Exporter or at least on improvement trajectory. Germany on the other hand should have been smallest exporter. In reality it's exactly opposite.

Although China has taken over Germany's No 1 Position as largest exporter, Germany has been there for a while, and in Ratio of Export to GDP at this volume, it's still No1. This is despite having one of the Strongest Currency (nominally); so for sure there is lot more to be " Successful Export oriented Nation" than just currency.

Obviously, it is story with US, despite USD being still a strong currency (in nominal terms relative to other currencies) Export figure is still huge. What's common in between these 2 nations is their technological edge led by innovation. e.g. no matter whether their currency become stronger or weaker, Intel Chip has to be bought from US. Steel that is used in orthopedic operations has to be bought from Germany, as it does not rust for 200 Years there is no alternate.

China on the other hand has slight different story, as their "Export Model" is slightly different. As I see it's based on strong will power from government, great Infrastructure and most importantly "conservative living standards".
On the down side, cloths and shoes and other daily use items that China export can be technically manufactured by others countries as well.

However making Chinese Yuan strong can have very interesting implications in short, mid and long term. In short term, it can alleviate inflation in china while it can stoke inflation in US as Wal-Mart won't change their vendors immediately and Vendors will raise price as they won't do business in loss.

In Mid term, it depends on whether China and Chinese People continues their policy to keep low profile and continue "Low Profit High Volume" Export or encourage internal consumption becoming a developed nation in itself. They can do both as e.g. If today Chinese household is getting 60,000 and is saving 30,000 If Yuan gets double, Technically Chinese Household will have same purchasing power with 30000 Yuan and even if he saves 15,000 he is good. In short higher purchasing power and possible efficiency improvement programs in Supply Chain can absorb the loss of competitiveness due to currency appreciation.

Another aspect to it is in Transition phase, countries like India, Philippines, Indonesia can take advantage of this phase and develop their manufacturing base leveraging their high population and weak currency becoming a strong competition for China. However doing so need a lot of planning and determination at political, social and Industrial level. If not, Higher Yuan will just mean higher prices for whole world in short term and even stronger economy for China in Mid and Long Term.

2 comments:

  1. 54,4% of Germanys exports are to other EU-countries. And most of them use Euro, so this comparison with Germany doesn't work. That's because most of the EU-nations are running trade deficits.

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  2. Amaresh Ashok GangalJune 29, 2011 at 12:24 AM

    Yeah but same is case with other EU nations. When they have exact same currency why they are not able to export? Whole point here is export is driven by innovation, will power, industrialization, efficiency, R&D and not currency rate.

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