Exporting important for R.I., but so is taking care
Guest Column: Ned Handy
Despite economic challenges that persist in many countries around the world, Rhode Island continues to be actively engaged in the global economy.
According to the latest information from the International Trade Administration, a part of the U.S. Department of Commerce, more than 1,400 Rhode Island companies are exporters. Nearly 90 percent of these companies are small and medium-sized operations with fewer than 500 employees.
In 2011, Rhode Island exported $2.3 billion of merchandise in a number of categories, including primary metal manufactures, chemicals, manufactured products and machinery.
As exports continue to play an important role in the ongoing economic recovery, the current environment represents an important opportunity for Rhode Island’s exporters – particularly exporters dealing with countries whose currencies have been down against the U.S. dollar.
Many U.S exporters assume that dealing in U.S. dollars reduces their foreign-exchange risk. In fact, risk is an element of any cross-border transaction. For exporters who insist on payment in U.S. dollars, these risks include:
• Adverse exchange rate moves. When price is negotiated, no one can predict what exchange rates will be when the transaction is settled.
• Hidden costs. When U.S. exporters demand payment in U.S. dollars, their buyers must convert their local currencies. Any intermediary institution that is involved in the transaction will add its own fee.
• Cash flow disruption. Cross-border trades take longer to complete than domestic deals in part because the exchange process itself can involve many parties. When the buyer is managing the foreign exchange, or FX, the exporter may have little control over how long the process takes, which makes working capital more difficult and unpredictable.
• Competitive handicaps. U.S. exporters who rely on dealing in U.S. dollars are potentially losing sales and handicapping themselves in price negotiations before they even start. If competitors – other exporters or suppliers in the potential buyer’s own country – are willing and able to quote prices in the local currency, they will gain a competitive advantage because the unknown cost of currency conversion is not part of the deal.