Global competition for the U.S. dollar?
The state-run China Daily reported two stories last week suggesting that the U.S. dollar may not be the touchstone of global trade, and that other currencies, such as the renminbi (or yuan), the official currency of the People’s Republic of China, will ascend in global importance. These stories underscore an obvious concern that sourcing prices in China will only continue to escalate in the short term. From a longer term perspective, these stories also highlight the need for vigilance in monitoring developments impacting supply chains and the contracts which define and control them.
The first story of interest was published on Thursday, May 21, when China Daily quoted Brazil’s President, Luiz Inacio Lula da Silva (while visiting the PRC) as calling for China and Brazil to trade in their own currencies and put an end to trade based on the U.S. dollar. In calling for finance ministers of the two countries to begin discussions on the matter, the Brazillian leader noted trade costs between the nations would be reduced by the elimination of fees to exchange currency into US dollars as an intermediate step to payment. Brazil already has agreements with other trading partner nations calling for trade in local currencies.
And on Friday, May 22, China Daily ran a piece predicting a greater global role for the yuan on account of China’s growing role in the global financial economy. Perhaps just as telling, in a manner casting China in the role of Queen Getrude to the world’s Hamlet, is the level of attention China continues to place on protesting (methinks too much) that it has not engaged in currency manipulation as a means to favor its own exporting industries. Consider, for example, the great pains taken to get out news, perhaps overlooked by the rest of the world, to the effect that the Obama administration (speaking through Treasury Secretary Geithner) does not view China as having manipulated the currency exchange rate for export advantage.
The emergence of such arrangements as called for by Brazil, and the push of the Chinese to elevate the global status of its own currency, could mark the beginning of a major trading shift away from U.S. dollar denominated transactions. Setting aside the likelihood of this actually coming to pass (perhaps not as far-fetched a notion as it was a year or so ago), or the time frame within which such a change would evolve, there are serious business risks and opportunities here, and some legal issues to keep in mind.
Consider, for example, all of the standing agreements in a typical global supply chain which base all of the interdependent transactions flowing through the chain on U.S. dollar demoninated pricing. Many of these agreements may be long term in nature, and while some may have termination provisions based on the convenience of a party or termination for cause under specified circumstances, major changes of this nature may likely not give a party who begins to suffer a competitive disadvantage on account of currency a right under current contracts to terminate for good cause. At best, most existing agreements would typically include a so-called “force majeure” (or temporary change in conditions) clause which would allow suspension of performance during the pendency of a currency crisis, but even then the right to terminate based on such an event is usually limited or non-existent in most iterations of this clause.
Therefore, closer attention to currency issues should be at the top of the list of external factors every supply chain manager should monitor, if not already at or near the top of the list given the current volatility in the world economy. While this truly would be a longer-term trend, if it does become a trend, currency provisions should also top the list of items for which to periodically reassess contracts, particularly as contracts are renewed or entered into during the ordinary course of business.
- Randy Hanson
The first story of interest was published on Thursday, May 21, when China Daily quoted Brazil’s President, Luiz Inacio Lula da Silva (while visiting the PRC) as calling for China and Brazil to trade in their own currencies and put an end to trade based on the U.S. dollar. In calling for finance ministers of the two countries to begin discussions on the matter, the Brazillian leader noted trade costs between the nations would be reduced by the elimination of fees to exchange currency into US dollars as an intermediate step to payment. Brazil already has agreements with other trading partner nations calling for trade in local currencies.
And on Friday, May 22, China Daily ran a piece predicting a greater global role for the yuan on account of China’s growing role in the global financial economy. Perhaps just as telling, in a manner casting China in the role of Queen Getrude to the world’s Hamlet, is the level of attention China continues to place on protesting (methinks too much) that it has not engaged in currency manipulation as a means to favor its own exporting industries. Consider, for example, the great pains taken to get out news, perhaps overlooked by the rest of the world, to the effect that the Obama administration (speaking through Treasury Secretary Geithner) does not view China as having manipulated the currency exchange rate for export advantage.
The emergence of such arrangements as called for by Brazil, and the push of the Chinese to elevate the global status of its own currency, could mark the beginning of a major trading shift away from U.S. dollar denominated transactions. Setting aside the likelihood of this actually coming to pass (perhaps not as far-fetched a notion as it was a year or so ago), or the time frame within which such a change would evolve, there are serious business risks and opportunities here, and some legal issues to keep in mind.
Consider, for example, all of the standing agreements in a typical global supply chain which base all of the interdependent transactions flowing through the chain on U.S. dollar demoninated pricing. Many of these agreements may be long term in nature, and while some may have termination provisions based on the convenience of a party or termination for cause under specified circumstances, major changes of this nature may likely not give a party who begins to suffer a competitive disadvantage on account of currency a right under current contracts to terminate for good cause. At best, most existing agreements would typically include a so-called “force majeure” (or temporary change in conditions) clause which would allow suspension of performance during the pendency of a currency crisis, but even then the right to terminate based on such an event is usually limited or non-existent in most iterations of this clause.
Therefore, closer attention to currency issues should be at the top of the list of external factors every supply chain manager should monitor, if not already at or near the top of the list given the current volatility in the world economy. While this truly would be a longer-term trend, if it does become a trend, currency provisions should also top the list of items for which to periodically reassess contracts, particularly as contracts are renewed or entered into during the ordinary course of business.
- Randy Hanson
posted by Womble Carlyle at 2:50 PM
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