The Yuan and Indiana Jobs
For release noon Oct. 5 and thereafter (780 words)
The U.S. government is putting diplomatic pressure on the Chinese to permit the value of the Yuan to rise with respect to the U.S. dollar. The assumption is that if Americans pay more in dollars per unit of Chinese currency, Chinese goods would be less attractive in price, and U.S. imports would decrease. Similarly, the Chinese would find U.S. exports less expensive per Yuan, purchase more U.S. goods, and help correct the U.S. balance of trade deficit.
So, is the Chinese Yuan-U.S. dollar exchange rate of any consequence to the economic well-being of Indiana?
The Kelley School of Business at Indiana University’s “2008 Report on Indiana’s Global Exports” notes that China ranks sixth among destination countries for Indiana exports, following Canada, Mexico, the United Kingdom, France and Germany. It is likely that China’s share of Indiana’s exports will increase relative to other primary traders, experiencing low growth relative to emerging economies such as China, Brazil, India and Russia. Exports to China from Indiana have increased five-fold since 1997.
In 2007, China overtook Japan to become Indiana’s fourth-largest machinery export destination. Machinery exports to China from Indiana increased at an 18.2 percent annual rate of change from 2001 to 2007. China is also in the top five among all countries for Indiana exports of electrical machinery, iron and steel, aluminum and plastic products. The sixth-largest export destination for Indiana’s organic chemicals is China, which saw an 81.9 percent jump from 2006 to 2007.
Excluding Puerto Rico, Indiana, with 9.5 percent of the total, ranks third among pharmaceutical exporting states, and China is one of the five largest destinations for Indiana’s pharmaceuticals.
As a state, Indiana is quite dependent on selling merchandise abroad to all countries, including China. Indiana ranks eight among the 50 states in terms of export sales to its total production. Among Midwestern states, only Michigan and Kentucky are more export dependent. Indiana’s Global Exports notes that the number of jobs is not necessarily tied to the dollar value of export sales. For example, a relatively small dollar value of exports in fabricated metal products drives a large number of jobs in Indiana. In 2006, export sales supported more than 27,000 jobs in Indiana’s transportation equipment manufacturing industry.
Indiana exported $25.9 billion in goods in 2007, an increase of 14.4 percent over its 2006 export total. These numbers probably underestimate the global reach of Indiana production. The value of corn, soybeans and other agricultural products, sold abroad by intermediaries, are not fully accounted as Indiana exports.
Because Indiana is relatively dependent on selling manufactures abroad, any deceleration in export growth (due to exchange-rate changes or otherwise) has a considerable economic impact. Indiana is vulnerable to variation in export sales by industries, both positive and negative. Sales for pharmaceuticals are particularly erratic. Most fluctuations in the nature of Indiana’s exports can be accounted for by the top three destinations: Canada, Mexico, and the United Kingdom, rather than by China and other emerging countries.
Although economic theory confirms that a reduction in the value of a country’s currency increases exports, this is a case where we have to be careful for what we wish. What the weakening dollar gives in terms of helping export sales, it may take away in rising import prices. A weakening dollar makes U.S. goods cheaper in world markets, but the rising cost of imported inputs puts a profit squeeze on producers.
The risks associated with exchange rates present an additional challenge to exporters when collecting foreign currency from firms thousands of miles away. Erik Hromadia discusses what an international banker can offer Indiana exporters in Indiana Business Magazine. For example, he recommends that firms entering global markets use an export letter of credit issued by the importing customer’s bank and confirmed by the Indiana exporter’s home bank.
Banks have set up an additional variety of tools to hedge against exchange rate risk. A forward contract is an agreement to exchange two currencies at a fixed rate at a future date. An options contract offers the flexibility to purchase or sell foreign currencies at a fixed rate on a future date without making a commitment to do so.
Exports are a significant part of production and jobs in Indiana. Yes, a change in the value of the U.S. dollar with respect to the Yuan and other currencies changes the competitiveness of Indiana’s products in world markets. Exchange-rate fluctuations can wipe out profit — or create windfalls.
Ultimately, the products of Indiana companies selling overseas will depend on quality and their prices in local currency. Exchange rates are beyond the control and expertise of ordinary firms producing products on world markets. By purchasing a forward or options contract, the Indiana exporter does not have to play the foreign exchange lottery.
Maryann O. Keating, Ph.D., a South Bend resident and an adjunct scholar of the Indiana Policy Review Foundation, is co-author of Microeconomics for Public Managers, Wiley/Blackwell, 2009.