Part Two

Trade Relationship between BRICS Nation and US

China and the United States have a history of complex economic and trade relationship.

Both the countries renewed diplomatic relations and signed a bilateral trade deal in 1979. This

triggered a massive boom in bilateral trade, which expanded from $4 billion in exports and

imports in 2014 to more than $600 billion in 2017. China was the United States' most important

trading partner until February 2019, when it fell to third position behind Canada and Mexico,

despite being the largest importer (Nagashybayeva, 2019). It is now a major supplier of high-tech

commodities to the United States, and the global supply networks between China and the United

States are complex. China is also the world's largest holder of US Treasury bonds. The BRICS

countries do not share any economic interests. Their annual trade is currently less than 320

billion dollars, and they are losing ground. Their trade with the United States and the European

Union is 6.5 times that of the United States and the European Union combined. China trades with

the rest of the world at a rate of 12.5 times global average.

There are various outstanding concerns involving bilateral trade between the United

States and China. Economists and policymakers alike have been concerned about the high trade

gap. In order to reduce the trade deficit, the Trump administration has imposed a slew of tariffs.

(Nagashybayeva, 2019). In reaction to what the White House claims is Chinese theft of U.S.

technology and intellectual property, the Trump administration imposes sweeping penalties on

Chinese goods worth at least $50 billion. The measures, which follow taxes on steel and

aluminum imports, target commodities such as apparel, shoes, and electronics, as well as limiting

some Chinese investment in the US (Kai & Brown, 2013). The Trump administration has

imposed new tariffs on Chinese imports worth $34 billion. President Trump and members of his
team feel China is “ripping off” the US by abusing free trade rules to the harm of American

companies doing business in China. Beijing has slammed Trump's actions as "trade bullying"

and warned that tariffs might cause global financial turmoil (CFR.org Editors, 2017).

For many years, China has been the world's largest car market. As a result, automakers all

over the world are competing to sell their vehicles to Chinese buyers. The automotive industry is

a big employer and one of China's top pillar industries. In 2019, the car industry, for example,

accounted for 9.6% of total consumer goods retail sales. In addition, the sector employed over

10% of China's total workforce. According to the China Association of foreign Automobile

Manufacturers accounted for 64 percent of total sales in 2010 (Qi & Xiao, 2007). The majority of

them are built in China through joint ventures. Foreign automobile firms-controlled 85 percent of

the Chinese car market in 2009 (Shayanewako, 2018). In view of the foregoing facts and

numbers, I believe China has considerable knowledge in the field of renewable-energy

initiatives. Resultantly SOLA will be in a sound position to run its operations normally with

minimum number of trade problems in China. According to Forbes, China has been attempting

to establish an anti-corruption campaign to address the country's leaders' extremely high and low

levels of corruption. My main issue is the potential for complications, which, if pushed further,

may have a significant negative influence on the organization. For its success, the SOLA must

place a strong emphasis on recent technological advancements in solar powered cars, as well as

keep a close eye on technological advancements and make appropriate adjustments to guarantee

that it remains relevant in the market.

Financial Environment

According to the United States Federal Reserve, the China/US foreign exchange rate was

6.90420 Chinese Yuan to 1 US dollar in January 2020. The China/US Foreign Exchange Rate
has fluctuated between 8.63970 in January 1994 and 1.71000 in January 1981. The current real

value, historical data chart, and related indicators for China / US Foreign Exchange Rate - last

updated from the United States Federal Reserve on September of 2021 - are provided by Trading

Economics. The following history chart illustrates the daily US Dollar - Chinese Yuan

(USDCNY) exchange rate dating all the way back to 1981. (35 Year of Dollar & Yuan Exchange

Rates)

China / U.S. Foreign Exchange Rate - Historical Annual Data for the last 10 years.
Any changes in currency pricing indicate economic strength, although short-term fluctuations

may indicate economic fragility. By pegging the value of its currency, the renminbi, to the dollar,

China has a direct impact on the US dollar. Unlike to US and many other countries central bank

of China uses a modified form of the traditional fixed exchange rate. The renminbi exchange

rate has been permitted to vary within a specified range around a fixed base rate computed using

a basket of world major currencies for the last fifteen years. (How China Influences the U.S.

Dollar, 2021).

 A cornerstone of China's economic policy is organizing the yuan exchange rate to

promote exports. Unlike to most of others industrialized economies, China does not have a

market-determined floating exchange rate, in spite (renminbi) or yuan is pegged to the US dollar.

In 1994 for more than a decade, the yuan was priced in dollars at 8.28. Due to pressure from

China's biggest trading partners, the renminbi was only permitted to rise by 2.1 percent against

the dollar in July 2005, and it was also changed to a "managed float" system against dollar. Yuan

was allowed to appreciate by roughly 21%, to a level of 6.83 to the dollar in next coming three

years. (Why China's Currency Tangos with The Dollar, 2019).

 The floating exchange rate system causes currency volatility. Variation in currency can

have a significant impact on a given country's enterprises, consumers, overall economy and

remittance inflows. A weaker currency tries to boost exports while rising import costs, hence

reducing the country's trade imbalance which depends on the sector. It can adversely affect both

domestic and international trade and have bad effect on enterprises that export or import supplies

from other nations. Currency fluctuations can have a significant impact on a company's bottom

line. If the dollar declines against the other targeted business country, for instance a profit margin

of USD 6 million projected by a SOLA company based in the United States could fall to USD

5.5 million (China in this case). Similarly, if the dollar does well versus the Chinese currency,

they may enjoy an increase in earnings.

SOLA has a variety of options for actively limiting foreign currency variations, starting

from basic and low-cost to more complex and expensive.

SOLA Need to Build Protection into Commercial Relationships/Contracts

Long-term contracts, which may have a major foreign currency component, should be

subjected to a corporation like SOLA. It is a fairly efficient technique of insuring against foreign

exchange volatility, but it necessitates strong legal wording in the contract and extremely explicit

disclosure of the indexes against which the exchange rates are assessed. It necessitates the

financial and commercial teams implementing a regular review rigor to verify that once an

exchange rate clause is triggered, the proper mechanism to reclaim the loss is followed.

Transact in Own Currency (USD for SOLA)

SOLA might be in position to insist on invoicing and payment in US dollars even if it is

based in China. The risk of currency exchange is changed to the local supplier or client.

Practically, it would get more difficult as certain costs, including salaries and taxes must be paid
in local currency. That’s’ why it might be doable for a firm whose operations are basically

managed online.

Stop Loss Orders

If SOLA uses stop loss orders, they must lock in a deal such that it never trades below an

acceptable exchange rate as it ensures that the currency is exchanged at a fixed rate well. It's a

command that sells or buy currency at a defined "worst case" rate. It is typically used to limit the

risk of exposure to currency fluctuations when there is an adverse opinion about it.

Hedging Arrangements via Financial Instruments

The most challenging, however seemingly well-known, means of hedging foreign currency risk

is through the use of hedging arrangements via financial instruments. The two most frequent

ways to hedge are through a currency option and forward contract.

1. Forward exchange contracts. It is a contract in which a corporation commits to sell or

buy a set amount of foreign currency at a future date. By entering into this contract with a

third party, the company can protect itself from future changes in exchange rates of a

foreign currency (usually a financial institution bank etc.) (Ainsworth, 2019)

2. Currency options. It gives a company the opportunity to sell or buy a currency at a

certain rate on or before a given date, but not the obligation to do so. They're much more

similar to forward contracts as in that the company isn't required to complete the transaction

once the contract has expired.  Consequently, if the option's exchange rate is higher than the

present market spot rate, the investor will exercise it and benefit from the contract. The

investor would let the option expire worthless and trade foreign exchange in the spot market

if the spot market rate was cheaper.

Steps for SOLA to Manage Currency Risk

 It's not easy to figure out where and how currency changes effect SOLA's cash flow.

Currency rates effect cash flows in a given organization due to a variety of factors ranging from

macroeconomic trends to competitive activity within market segments.

Review Operating Cycle

Examine the SOLA operational cycle to see where foreign exchange risk resides.

Accepting Unique Currency Flows

For SOLA it's critical to recognize that currency swings can have an influence, and

deciding whether or not to hedge isn't a simple matter of luck.

Manage SOLA exposure to currency risk

When it comes to solar powered automobiles there is a time lag between making business

decisions and seeing the effects of those actions on the company's financial account. Purchase

and sales orders are negotiated, supplies are shipped around the world, and things are created,

stored, and delivered during that time gap. Invoices are issued, reviewed, approved, and

eventually paid in parallel to the physical process (Assistant & Joe Nosari, 1984). In the

meantime, currencies appreciate and depreciate. If the production and material costs are

denominated in a different currency than the sales proceeds, then variations in foreign exchange

rates can easily root out the sales margins used by SOLA in its first assessment. Financial

instruments can help to decrease the risk of the company's financial goals being jeopardized.

Hedging guarantees that the FX rates influencing the company's bank account balances do not

fluctuate significantly from those used in its decision-making.

 References

Ainsworth, P. (2019, March 7). A Guide to Managing Foreign Exchange Risk. Toptal Finance

Blog. https://www.toptal.com/finance/interim-cfos/foreign-exchange-risk

Assistant, J. M., & Joe Nosari, E. (1984). Utilizing currency portfolios to mitigate exchange rate

risk. The International Executive, 26(3), 20–21. https://doi.org/10.1002/tie.5060260311

CFR.org Editors. (2017, April 27). U.S. Relations With China. Council on Foreign Relations.

https://www.cfr.org/timeline/us-relations-china

Dollar Yuan Exchange Rate - 35 Year Historical Chart. (2020). MacroTrends.

https://www.macrotrends.net/2575/us-dollar-yuan-exchange-rate-historical-chart

Hays, J. (2012, April). FOREIGN CAR COMPANIES IN CHINA | Facts and Details. Facts and

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Klement, J. (2021). Geo-Economics Chapter 6: The Rivalry between the United States and

China. SSRN Electronic Journal. Published. https://doi.org/10.2139/ssrn.3792545

Nagashybayeva, G. (2019, June 7). Research Guides: U.S. Trade with China: Selected

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https://doi.org/10.1016/s1872-583x(08)60007-8

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