Hidden Tax US Companies Pay In Chinese Transactions
The U.S. dollar has been the global trading currency for decades, but there’s a hidden cost that goes along with that greenback. In a recent Western Union survey, American businesses said they are paying over two billion dollars in fees, because one in five Chinese exporters add fees to their transactions for what they call “foreign exchange risk.”
The United States is the No. 1 export destination and the majority of transactions between companies based in the U.S. and China are settled in dollars, not in Renminbi, the legal tender in mainland China. Alfred Nader, vice president of corporate strategy and development of North America for Western Union Business Solutions, breaks down this hidden cost.
LL: You surveyed more than 1,000 mainland-China-based companies to see if they preferred using local currency or dollars in transactions. What did you find out?
AN: These preferred to be paid in the Renminbi — but surprisingly, 42 percent have not asked their clients to be paid in the Renminbi. They told us the reason why they have not asked is they believe U.S. companies think it is too expensive to get the Renminbi. They have been hesitant in asking.
LL: Why the reluctancy of the U.S. willing to settle in local currency?
AN: We can look at this from a historical perspective. For 40 years, the United States has been making payments to China in U.S. dollars. It will take a behavioral change to pay in a different currency. All of a sudden, it would be a sudden shift to deal in a foreign currency.
China is the world’s second-largest economy and eventually the Renminbi would be a fully convertible global currency. The days of the dollar could be losing ground. The Chinese government is not really following a game plan that has ever been written. In the next 10 years, we will see the Renminbi emerge as a global currency.
LL: So companies would rather spend $2.4 billion in fees just to trade in the dollar?
AN: Yes. Here in the U.S. we get an invoice in U.S. dollars. These companies believe they are saving time and money, but in reality the Chinese have to cover currency risk, so they have to add a cost in transaction. Essentially there is a hidden cost when dealing in transactions with a dollar. Now this tax goes beyond China transactions. All other countries do this as well. That’s the cost of doing business with any country abroad. It’s a lot of money.
LL: Would paying in Renminbi create opportunity for American companies?
AN: Yes, but the first thing they need to do is become Renminbi-ready. They need to get their treasury and purchasing systems ready. If the Chinese are reluctant in asking to get paid in Renminbi, then U.S. companies need to make the first step.
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A Senior Talent Producer at CNBC, and author of "Thriving in the New Economy:Lessons from Today's Top Business Minds."