being counteracted by increased production in less regulated countries (commonly known as “carbon leakage”).59 Debates over environmental policy, therefore, often center on what can be categorized as the three-Cs: Cost, Competitiveness, and Comprehensiveness. 60
Supply chains also have entered into policy debates over other environmental issues, such as illegal logging and sustainable development. Some headquarters firms have been targeted for protest because of actions of overseas members of their supply chains.
Exchange rates determine the value of one currency in terms of another. The exchange rates of most industrialized nations are allowed to float while many developing nations actively intervene to manage their exchange rates. For floating currencies, their value is determined by international financial transactions with occasional intervention by governments. Managed exchange rates usually are pegged to or managed against either one currency, such as the dollar, or to a basket of currencies that usually contains the dollar along with currencies such as the Euro or Japanese yen. China has such an exchange rate regime.
Exchange rates can change dramatically over relatively short periods of time relative to the life of a typical manufacturing chain. When the value of the dollar declines, it increases the dollar cost of all products produced in countries whose currency has appreciated relative to the dollar. If a country’s exchange rate is tied to the value of the dollar, that currency will decline in tandem with dollar, and the dollar depreciation will have no effect on the price of goods traded between the two countries. The prices of goods traded with countries without a dollar tie (such as Europe, Japan, India, or South Korea), however, will change. A country that ties the value of its currency to the dollar, however, still has to pursue policies to maintain its exchange rate that may cause domestic interest rates to rise or the rate of inflation to increase.
Figure 6 shows the value of several currencies relative to the dollar since January 2004. This has been a period of high volatility in exchange rates with the Canadian dollar up by 34% at one point in 2005 before dropping to almost parity in December 2008, the Japanese yen down by 12% in 2005 but up 16% at the end of 2008, and the Chinese Renminbi (RMB) up by 21% since Beijing announced its managed float in July 2005. The Euro also has risen and fallen over the period. At the end of 2008, the Korean won was 33% below its peak in October 2007.
CRS Report R40100, “Carbon Leakage” and Trade: Issues and Approaches, by Larry Parker and John Blodgett.
60 For further information, see CRS Report RL30024, U.S. Global Climate Change Policy: Evolving Views on Cost, Competitiveness, and Comprehensiveness, by Larry Parker and John Blodgett; CRS Report RL30853, Clean Air Act: A Summary of the Act and Its Major Requirements, by James E. McCarthy et al.; CRS Report RL34762, The National Ambient Air Quality Standard for Particulate Matter (PM): EPA's 2006 Revisions and Associated Issues, by Robert Esworthy and James E. McCarthy; CRS Report RL34513, Climate Change: Current Issues and Policy Tools, by Jane A. Leggett; or CRS Report RL34659, China's Greenhouse Gas Emissions and Mitigation Policies, by Jane A. Leggett, Jeffrey Logan, and Anna Mackey.