Currency Wars vs. Innovation
It’s always easier to blame on others than taking responsibility of our actions. Same holds true to the ongoing currency war between the US policymakers against the Chinese manipulation of its Yuan. The rhetoric looks like the Yuan’s appreciation is a panacea to all the Job losses and the ailing economy at home as if it will act as a magic bullet and the policy makers can just fold their hands up doing nothing. Blaming Yuan can be a good politics for next election cycle, however, will hurt the next generation of Americans if not assessed thoughtfully. What is really unfortunate is nobody seems to be talking about the most important aspect of growing economy: innovation.
The issue of currency manipulation should have been raised years ago. Now it’s too late that focusing exclusively to appreciate Yuan by US policymakers’ looks like a very loosing game. Yuan’s appreciation, believe it or not, in fact will work for the Chinese favor rather than help create US jobs and make US manufacturing competitive. Studies have shown that cost of production in China is skyrocketing, meaning; Chinese products will no longer remain cheaper anymore. This, however, won’t guarantee that US products will fill the gap in place of expensive Chinese products, simply because, US manufacturing is also losing war against innovation. Let’s say, Yuan is appreciated by 50-100%, wages and cost overrun of manufacturing products in China becomes high, yet, US manufacturing will still be very unlikely to gain its lost market share. Because China is not cheaper anymore won’t barricade companies to move into India, Brazil, South Africa or Vietnam to manufacture dirt cheap products again.
It’s the Capitalism stupid, not the currency. This is how Capitalism works and Capitalism survives if only there are resources to exploit, both human and natural by paying a minimal price. Country like India, which is gearing behind China on its race to economic growth, with its more than 500 million youthful population, improving science and engineering education, poses enormous potential for multinationals to produce goods and services. It’s not only India or Brazil, but the whole Africa is yet untapped for its natural and human capital, which will potentially replace China as a hub for cheap labor. On the other hand, Chinese government has realized already that exports based economy won’t be sustainable. Hence, the policies have been put forward to boost the domestic consumption by its people, which means, they will have no choice but to appreciate Yuan to increase the purchasing power of its people. Just look at the past few months; of Yuan has appreciated about 20% and government will further appreciate because it will act on its favor. It’s State owned Bank’s with branched in New York and two other cities recently announced customers of the option to open account on Yuan’s denomination. This shows that China is on the race to make Yuan an international currency. So, when the big jump in Yuan’s appreciation happens, US shouldn’t take it as their victory, because China was going to do that anyway, not because it gave in on US’s stance, but was going to be good for its economy.
Now the question arises; what is the winning way? I think it’s the innovation in US manufacturing to make value added and unique products and services. US manufacturing is ailing because it is not innovating anymore, so they are not competitive anymore. An example is Paper Industry; paper mills have moved overseas, while more and more are being closed here at home. The reason is not only because cheaper labor and forest resources in Brazil, Malaysia or Indonesia. Mills overseas are streamlining their manufacturing, bringing in new technology, innovating new products, while many mills at home are still running with paper machines that are decades old, no lean manufacturing in place and no innovation for new products and services. The situation has become so perilous that the Innovation Guru Doug Hall has summed his message to US manufacturing; “You Innovate or Die”. My own experience as an innovation consultant at Eureka Ranch translates small business in US is in peril because they are not innovating. And it’s the small business that creates the most jobs, not the other way around. Big corporations will keep on stockpiling profits by running operations overseas, while small business will be hard hit due to massive competition from foreign made goods and services. The situation is going to be worse because there is no clear direction and commitment from policymakers on innovation and help small business. It’s still not too late for policymakers to focus on innovation, invest more on R&D, clean energy and produce more engineers. Not taking bold action for innovation will not only make US lag far behind, but also diminish the prosperity it has garnered, eventually making American civilization, a story of the past, as we have witnessed on the Rise and Fall of Civilizations of the past like Romans and Far East.
Sushil Khadka
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