RMB Depreciation Policy – Negotiation Lessons For Westerners

Rule #1 of Conflict in China:  Choose Battles Wisely

China seems poised to undertake an official policy of devaluing the RMB:  as observed in the Aug 6 Business Times of Singpore:

SHANGHAI – China’s yuan should depreciate to an “appropriate” degree to bolster exports as the economy weakens, an influential state newspaper urged on Monday, in a rare official affirmation of China’s newfound desire to let its currency depreciate in a measured way. The official China Securities Journal said in a front-page commentary that yuan depreciation is now needed due to weakness in both the domestic and global economies.

Let’s leave the economics and trade issues for others to ponder, and focus on the negotiating lessons that can be drawn from Beijing’s latest move.  The main lesson is to learn from the mistakes of Sec. of Treasury Timothy Geithner and don’t negotiate the way he did.  He has turned a somewhat arcane financial indicator into a cornerstone of US-China relations, and it was always a no-win proposition.   There were plenty of other areas where the US could have drawn a line in the commercial sand and won — or at least scored a couple of meaningful compromises.  IP protection.  Food & product safety.  Equal market access for international companies.  Geithner’s first mistake was the one that undoes many Western negotiators in China — he didn’t pick his battle, because he didn’t know what he was getting into.

Three lessons from the forex negotiation for Westerners doing business in China:

  1. Pick your fights wisely.  Forex rates don’t make good policy debates.  It was too easy for China to point a finger back at the US ( Quantitative Easing is one handy example ) and to claim meddling in domestic affairs by a foreign power.  Anyone familiar with Chinese negotiating tactics knew that the currency issue was a non-starter because it didn’t leave an opening for any face-saving compromise.   Beijing felt that it couldn’t accede to US demands — even when it was to its own benefit to do so.  The US didn’t have an alternative that it was willing to use.   Before engaging in a conflict with a Chinese counterparty, you have to be able to map out exactly what you will do next in every contingency.  If you don’t have an alternative that you are willing to use, then bide your time or pick a different battle.
  2. Don’t talk tough to a Chinese counterparty unless you can back it up.   Westerners in general and Americans in particular tend to assume that they are always negotiating from strength.  There’s nothing wrong with a little posturing, but in China you have to be ready to follow through.   The US Treasury is required to report on exchange-rate policy every six months, and as recently as May 2012 refused to label China an official manipulator.   China is no place for idle threats.  Either throw down or shut up.   In Chinese negotiation, your main strength is your ability to walk away.  If you can’t or won’t, then your chances of victory plummet.
  3. Don’t show your hand while the betting is going on.   Geithner made forex a central point to the US-Chinese economic relationship.  The Obama administration created the headline and made their priorities clear to Beijing.   By staking its reputation to this issue, the US squandered their leverage early.  By not following up on threats to punish Beijing for currency manipulation, Washington came off as weak.

The actual impact of a depreciating RMB on the economy probably won’t be all that dramatic, but it will make the Obama administration look ineffectual both abroad and at home just as they desperately need to look strong.  The Romney people will doubtlessly point to it as an example of Obama’s lack of leadership.  If the US protests, Beijing will cite it as another example of Washington trying to undermine China’s sovereignty.

Failing to thoroughly analyze your strategy, publicizing your intentions and failing to follow through on threats is poor negotiating technique anywhere, but it is disastrous with a Chinese counterparty.  Learn from Washington’s mistakes and pick your battles more wisely in China.

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