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November 1st: Torsten Jacobi, CEO of Creative Weblogging, joins host Anita Campbell. Sponsored by Six Disciplines. Show details.
Saturday, November 20, 2004
Does the Weak Dollar Help US Small Businesses?
As these things tend to happen, you're just cruising along. And then one day it seems like everyone is talking about a new trend. That trend is the "weak dollar."

The weak dollar can be good news, bad news or no news for U.S. small businesses. It all depends on whether the small business is buying or selling, what it is buying or selling, and where.

The significance of the weak dollar trend was driven home to me the other day. I logged on to eBay to do some Holiday shopping and found a fine antique from a dealer in Great Britain. I thought it might make a good gift for my husband. I looked at the price (in British pounds) and then looked at what I would have to pay in US dollars before converting to pounds. I decided to pass. With the conversion rate favoring pounds Sterling, it just didn't seem like a good value.

So that's what a weak dollar means, if you happen to be an American small business. If you are buying something from another country -- if you import -- then your dollar will not go as far. Offshore purchases will be more expensive to your business.

On the other hand, if you are a U.S. company selling to buyers outside the U.S. -- if you export -- then it is usually good for you. The traditional wisdom is that a weak dollar makes American exports more competitive on world markets. Here's a simple example: suppose my company sells widgets to buyers in Italy. If Italian buyers had to pay 100 euros last year for my widgets, but now pay only 92 euros to meet my price once converted to dollars, Italians are going to find my widgets a good deal. Especially if similar widgets produced by a local Italian company still cost them 100 euros.

Now let's consider a third scenario, the case of a U.S. company buying from U.S. suppliers. There the weak dollar probably doesn't make any immediate difference. The buyer's dollar is worth the same as the seller's dollar. At least, that is the way it looks on the surface.

What I have just described to you are the traditional views. But today in an era of globalization, the issues are more complex.

One twist is that there can be hidden currency costs. Say, for instance, the item you are buying from a U.S. distributor was manufactured outside the United States. Or let's say the raw materials had to be imported somewhere along the supply chain. The prices of goods you buy here in the U.S. from another U.S. seller may have been ratcheted up to cover these hidden currency costs. Those price increases eventually will be passed along to consumers.

Here's another twist: Even if you are exporting, local suppliers in other countries may be reducing their costs to stay competitive. So, in my example above selling widgets in Italy, if the Italian sellers reduce costs and can now sell their goods for 90 euros, they can undercut my price. My small business's products no longer have a price advantage.

And yet another twist: the dollar is weaker against certain currencies than others. I haven't done an exhaustive study on this point, but it appears that the dollar is weakest against the euro and the British pound. But the Chinese Yuan, for instance, is pegged to stay close to the dollar's value. So if you are a US small business having your plastic widgets manufactured in China for sale in the US to Wal-Mart, the "weak" dollar may not make much difference to you. Lou Dobbs will still hate you, but that's another matter....

I could name a dozen different scenarios that make the weak dollar good for one small business or bad for another. One thing, though, is clear. In this increasingly global world of commerce, no country is an island. And no business operates on a single island. The traditional wisdom about currency valuations and who it helps and who it hurts is not such a cut-and-dried proposition anymore.

That's why US policymakers will need to take stock of the whole fabric of the U.S. economy if one special interest group or another starts lobbying for action. Recall the short-lived steel tariff of a few years ago. Under pressure from the steel industry, the U.S. passed a tariff on imported steel, only to find out that the tariff hurt other segments of the U.S. economy -- particularly small manufacturers that used steel.

It's also important to remember that a weak dollar is all about whose ox is getting gored. If you are a businessman sitting in France, you are probably apoplectic about the weak dollar. And if you are looking at the issues from a macro-level, of country deficits and trade balances, then other considerations may be paramount.

But back to the subject at hand. Does the weak dollar help American small businesses? The answer is, it all depends.


UPDATE November 23: For more on the weak dollar, Laurel Delaney points us to this article.

By Anita Campbell | Permalink | |
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