Problem:
The Chinese central bank maintained a firm peg of the yuan to the U.S. dollar at 8.27 yuan/$ from 1996 until July 21, 2005 when the yuan was revalued upward by 2.1%. At the same time the yuan became pegged to an undisclosed, trade-weighted basket of currencies.
During 2003 and 2004 pressure had been building in the U.S. Congress for a revaluation of the yuan. Senator Chuck Schumer of New York led a move for a tariff of 27.5% on Chinese imports if the yuan was not revalued by at least that amount.
Following the revaluation the Chinese central bank has continued to intervene in the foreign exchange market to limit the effects of market forces. During the first four months the yuan moved in value by only 0.35%, leading to renewed demands by Senator Schumer and others in Congress, supported by disadvantaged businessmen and their lobbyists, for a punitive tariff of 27.5% on Chinese imports.
You are the Wal-Mart Senior Vice-President responsible for Purchasing. Wal-Mart imports from China in 2005 were $18 billion.
Lee Scott has asked you to make a presentation at the January 27 meeting of the Wal-Mart Board of Directors:
A. Addressing the impacts that this situation might have on Wal-Mart's profits and (The threat of the actual tariff)
B. Presenting your action plan to deal with these risks.
C. In preparing your presentation you should deal with Lee's recent comment to you that he wants you to look at shifting some purchases from China to Vietnam and Thailand.
D. As a responsible "corporate citizen" Wal-Mart wants to make economically sound arguments in statements to the media and to Congressmen. Your presentation must include a review of the implications for the U.S. Balance of Trade and the U.S. economy from continuation of China's current control of the yuan. What are the most important likely consequences of a continuing U.S. BOT deficit?