Currency Fight With China Divides U.S. Businesses

ZHUJI, China — For American business, the United States currency dispute with China is a two-sided coin.

On the tails-we-lose side are companies like New York-based PS Brands, one of the biggest American importers of socks. With the Obama administration pressing China to raise the value of its currency, the cost of Chinese-made socks is likely to rise. So PS Brands’ main supplier here is demanding shorter contracts at higher prices.

“Before, I could price six months out,” Elie Levy, chief executive of PS Brands, said during a recent factory visit here. “Now they only want to price 30 or 40 days out because the dollar could lose value.”

For the heads-we-win side, look to an American company 9,000 miles away, in Irvine, Calif., where the prospect of a weaker dollar is actually good news. There, Staco Systems, a maker of aerospace electronics, has a growth business selling parts to state-owned aviation companies in China. If anything, a stronger Chinese renminbi would make Staco’s products even more attractive to buyers in China.

PS Brands’ problems, contrasted with Staco’s opportunities, make clear why American businesses are far from unified on whether Washington should be waging a currency fight with China.

United States monetary policy has already caused the dollar to drop in value this year against most other major currencies. But the dollar’s value has fallen only modestly against the renminbi. That is because Beijing has kept the renminbi artificially low by pegging it to the dollar — instead of letting it float to its market level, as most other global currencies do.

Beijing’s critics say the artificially low renminbi, by making Chinese exports cheaper than they otherwise might be, has helped China run up its huge trade surplus with the United States and much of the rest of the world.

At the Group of 20 summit meeting in Seoul, South Korea, last week, President Obama chided China on its currency policy, calling for Beijing to “act in a responsible fashion internationally” and saying the undervalued renminbi was “an irritant to a lot of China’s trading partners and those who are competing with China to sell goods around the world.”

Beijing countered that between 2005 and 2008, when the value of the renminbi rose by about 20 percent against the dollar, it had little braking effect on the soaring United States trade deficit with China. Chinese officials say Washington is simply searching for a scapegoat.

“China will do its best to manage its economy, and never blame others for its own problems,” China’s president, Hu Jintao, said on his way to the Seoul meeting.

Big American multinational manufacturing companies can feel the pinch of dollar-renminbi fluctuations. In many cases, though, they have set up operations in China and elsewhere that let them hedge by doing business in local currencies.

But currency exchange rates are a much bigger factor for the many small and midsize American companies that still manufacture on shore, like Staco. They tend to embrace a dollar policy that would make their export prices lower.

Meanwhile, the American companies most likely to oppose Washington’s currency fight with Beijing are businesses like PS Brands — Wal-Mart would be another good example — that get their goods from China and sell them in the United States. Those companies’ balance sheets are likely to suffer, and American consumers more likely to feel the effect, when the cost goes up on Chinese imports — whether socks, sofas or smartphones.

What often gets lost in the heated rhetoric, though, is that American and Chinese officials actually agree in principle that more balanced trade is healthier for the global economy. Where they diverge is on how fast to get there.

The Obama administration wants fast action because it worries that the growing United States trade deficit will continue to threaten jobs and economic growth. But Chinese officials worry that letting the renminbi rise too quickly would bankrupt coastal factories that price their goods in dollars and that already operate on thin profit margins, destroying tens of millions of jobs.

As a result, Beijing has allowed the renminbi to rise against the dollar only moderately, by about 3 percent this year. China’s critics say it needs to rise by as much as 20 percent more.

The challenges to both sides are evident here in the city of Zhuji, two hours south of Shanghai, where Mr. Levy arrived recently to negotiate the purchase of about $1 million worth of socks.

PS Brand, which had $58 million in revenue last year, is a private company with 35 employees. Its Chinese supplier is Shuangjin Knitting and Textile, which operates a 300,000-square-foot factory here that will produce about 43 million pairs of socks this year. Dealers like PS Brands distribute those socks to customers like Wal-Mart, Adidas and Disney.

On the crisp, autumn day of Mr. Levy’s visit, about 75 workers were busy stitching, sorting and packaging thousands of socks headed for America, including labels featuring the cartoon character Dora the Explorer.

The factory’s boss, a friendly, 41-year-old entrepreneur named Yang Tiefeng, boasts that he has sock manufacturing down to a science. His facility can churn out 5,000 pairs of socks every hour at a cost of about 25 cents a pair, he says, which at current exchange rates still leaves him a tiny profit.

Analysts say those socks retail in the United States for about $2.99, with the difference divided among shippers, middlemen, marketers and the retailer.

But even without the currency fight, the economics of sock-making here are shifting. This year, labor shortages in China’s booming coastal factory towns have pushed up factory wages. And skyrocketing cotton prices, propelled by bad weather in cotton-producing regions, have been an even sharper blow.