The effect of currency appreciation on a supply chain can be illustrated by the Chinese RMB.61 The appreciation of the RMB has a similar effect on production costs (calculated in U.S. dollars) as a wage (or other cost) increase in China. However, it has one major difference. Exchange rates fluctuate more than wage rates. Exchange rates move in both directions, while wage rates tend to be “sticky downward.” They rise but rarely fall. A supply chain manager, therefore, is less likely to shift production because of an appreciation in China’s exchange rate than in response to a comparable rise in wages. In China’s case, however, the exchange and wage rates are both moving in the same direction. Together they work to magnify the increase in costs to manufacture there.
Index of Currency Exchange Value
S. Korean Won
Over the long term, however, exchange rate appreciation can dramatically affect the relative cost of production in a country. At the time of the Plaza Accord in September 1985, for example, the Japanese yen was worth 230 yen per dollar. At the end of 2008, the rate had been around 90 yen per dollar for a 155% appreciation in the yen. This greatly affected the price competitiveness of products exported from Japan and also many of its imports and has been a major factor in the
61 CRS Report RS21625, China's Currency: A Summary of the Economic Issues, by Wayne M. Morrison and Marc Labonte.