The Logistics Performance Index

Bad logistics cause nightmares for international traders. The trade policy community thinks of this in terms of “trade facilitation” – such things as the efficiency of customs clearance, application of nuisance taxes on imports or exports, or even the impact of corruption on the docks (or elsewhere). The World Bank takes a broader view and adds the physical problems of infrastructure to the mix, as well as payment systems, ease of communications or anything else that can slow down a supply chain. The World Bank’s economists came up with a Logistics Performance Index in 2007 to try to objectively measure how different countries are doing in their ease of moving goods. They issue the Index every couple of years and the 2014 version was recently published as Connecting To Compete 2014: Trade Logistics In The Global Economy.

I am not going to go into how the World Bank constructs the Logistics Performance Index (LPI). Suffice it to say that I haven’t seen formulas like that since I was a grad student. It is the conclusions I want to get to. Spoiler: Germany is #1 and Somalia is #160. There are some surprises in between.

Logistics Performance Index 2014

Logistics Performance Index 2014

The World Bank uses the LPI to develop policies for what projects seem suitable to help countries at different levels of development. While high-income countries are growing increasingly concerned about making logistics as “green” as possible, middle-income countries may be more focused on improving the efficiency of logistics services through, for example, outsourcing of warehousing, transportation or freight-forwarding services. The Bank is in the thick of supply chain improvements in low-income countries, requiring considerable investment in management and organization to go with massive infrastructure improvement.

In low-income countries, the biggest gains typically come from improvements to infrastructure, such as roads, bridges, or rail lines, and basic border management, including port reform. But we should caution that this is even more difficult than it sounds. Border management should not stop with reforming a customs agency, as customs agencies often get better marks from our survey respondents than other agencies at the border. Indeed, effective border management reform often requires improving efficiency in other agencies, including those responsible for sanitary and phyto-sanitary controls, and improving coordination between customs and those other agencies.

In addition, low-income countries hoping to improve their logistics performance will need to tackle the problems from multiple angles. Filling potholes and building bridges will not make a supply chain work better if an important border is still slow in processing goods in transit. Increasingly, governments in developing countries are facing a need to execute complicated, multi-pronged projects with varied interest groups and stakeholders.

~ World Bank press release, March 20, 2014

The World Bank report concludes that global logistics has improved, but slowly, from 2007. The biggest gains have been in improved infrastructure in the developing world. Logistics services, and customs and border management, have not improved at the same pace. Supply chain gaps have narrowed the most in communications and electronic automation of port and clearance procedures. At the opposite extreme, almost any supply chain that incorporates rail transport is going to find problems somewhere. Road transport infrastructure can also be dismal, especially in poorer countries, while air and sea transport are generally better. All that said, there is incredible variation in the quality of both infrastructure and associated logistics services.

Both the Bank and the World Trade Organization have been leaning on customs agencies to improve their efficiency at borders, and the Bank now says that customs offices are usually the most efficient at any given border crossing. They (and the WTO) are turning to how other agencies impact trade flows, seeking better performance, say, from sanitary, phyto-sanitary and product standards agencies. The goal is to set up “single windows for trade” to make border crossings as easy and quick as possible.

So who are this year’s winners? The Top 10 (drum roll, please) are Germany, Netherlands, Belgium, United Kingdom, Singapore, Sweden, Norway, Luxembourg, United States and Japan. I was surprised to see Singapore (#5) and Hong Kong (#15) not doing better. But I was also surprised to see the United States as high as it scored (#9). The size of the United States greatly complicates internal movements – and there is room for improvement. America was marked down for efficiency of international shipments (#26), customs clearance (#16) and timeliness of deliveries (#14). Still, pretty good for a big complex country.

I was pleased to see China at #28 (out of 160). China has put a premium on moving international shipments (#22) and on building infrastructure (#23). Work needs to be done on efficiency of customs clearance (#38) and overall timeliness (#36).

The sad ten at the bottom of the rankings? Somalia ranks worst, followed by the Democratic Republic of the Congo, Afghanistan, the Republic of the Congo, Eritrea, Syria, Djibouti, Sudan, Cuba and Yemen.

Improving The Nuts & Bolts Of Trade

Applause came from Singapore and Taiwan, while a Korean looked askance and the U.S. delegation wasn’t sure what to think. I had spoken to a subcommittee on small business at the 2011 APEC meetings in Honolulu. When asked what sort of special treatment for small business should be put into the Trans Pacific Partnership (TPP) agreements, I apparently shocked the crowd when I replied: “None!” I made the point that the TPP negotiators need to focus on making trade simpler and easier. It makes no sense to do that for one size of business, but not for another. And small business would benefit greatest from simplification, just because they can’t afford the large staffs of specialists employed by multinationals. We call this “trade facilitation” in the argot of trade policy. Progress is being made, but I am under no illusion that my diatribe was instrumental. Just another voice.

How long to clear those boxes?

How long to clear those boxes?

We are still waiting to see what emerges from the TPP talks, but there was a huge development at the World Trade Organization (WTO) ministerial meeting on Bali in December 2013. The most important text to come out of the Doha Round trade talks is the new Agreement on Trade Facilitation. You can read the agreement here, but the short form is that it should lead to faster and more efficient customs clearance at borders around the world. We all know horror stories of cargo held up at border crossings, airports or seaports – or about “penalties” for a typo on a document – or “fees” to move your perishable goods out of the blazing sun. The new agreement won’t fix everything, but it will help once it is in place in most countries. If nothing else, the requirements for clear and available publication of each country’s rules and regulations will be a boon to efficient business.

There are special provisions in the agreement, though for developing countries rather than small business traders. Previous WTO agreements usually gave the least developed countries extra time to carry out the agreements (say five or ten years), but the trade facilitation agreement took the novel route of asking governments to detail exactly when they will implement which provision to the agreement. This serves the dual purpose of giving extra time to poorer countries while still holding their feet to the fire. To help out, both the WTO and the World Bank are setting up training and financial programs to make sure that these countries can meet their obligations.

While the WTO’s trade facilitation agreement focuses on customs clearance issues, the World Bank uses a broader definition: trade facilitation encompasses anything that impacts movement of goods, whether it is customs rules, port facilities, adequate highways or railways, or communications infrastructure. The Bank’s economists calculate that if trade could be facilitated worldwide to achieve just half of what Singapore has done, for example, world income would grow by $2.6 trillion! You could take all the world’s tariffs to zero and not achieve such a benefit. Trade facilitation means big money.

The World Bank spent $11.6 billion on trade-related development assistance projects last year – about half of which went specifically to trade facilitation. Why? Just as trade facilitation helps small business traders disproportionately, it also helps poorer countries to earn their income, which – in turn – makes them more viable markets for the rest of us. Here is an example:

Getting bananas from a farm in Cameroon to a super- market in Brussels is not just a question of good roads and shipping. The fruit can also spoil in transit be- cause of logistics failures: too many highway check- points, inefficient customs procedures at the port, slow inspections – all signs of inefficient bureaucracy that, in the end, hurts some of the poorest farmers in the world.

… global import tariffs could be reduced to zero and a Cameroonian farmer would still suffer from process-related hurdles such as filling out excessive paperwork, paying bribes at checkpoints and having goods wait for days at port. These types of barriers are particularly harmful to trade. In fact, reducing supply chain barriers such as border administration inefficiencies and certain infrastructure failures could increase global income up to six times more than removing all import tariffs.

~ World Bank, 2013

Fix problems like this and we go a long way towards fixing the global economy – and making trade easier for small businesses.

 

Who Competes With Hawaii?

It depends on where you are coming from – literally. I’m not questioning who has the best beaches, culture or restaurants. That’s a personal thing that hangs on what you are looking for. I’m talking about where international travelers from a particular market actually go – where they choose to spend their money. No company, in any industry, can assume they will face the same competition in every market. That is inescapable in the tourism biz.

Who competes with this?

Who competes with this?

The presentations made at last month’s Hawaii Tourism Authority’s Spring Marketing Update often presented data about what choices Hawaii’s foreign customers face when deciding where to go on a vacation. In other words, with which destinations must Hawaii compete to attract tourists from a particular market? This is governed by multiple factors, including attractiveness, language barriers, travel costs and geography – so the answer is likely to be different depending on where in the world the potential tourist lives.

Japan has for years been the major source for non-U.S. travelers coming to Hawaii. Japan had nearly 17.5 million outbound travelers in 2013 – and Hawaii grabbed about 8.7% of them. Bear in mind that outbound travelers includes those traveling on business or for other non-tourism reasons, so our analysis is not an exact science. That said, where did the other 91.3% go? Most of them kept their travel nearby in East Asia. The tourists among them were likely swayed by shopping, the ever-growing availability of golf courses, and the shorter flying times. More Japanese visitors went to China (16.5%), South Korea (15.7%) and Thailand (8.8%) than flew eastward to Hawaii. Smaller alternative destinations included Taiwan (8.1%) and Hong Kong (6.1%).

Australians and New Zealanders are known to travel worldwide. Together they mustered nearly 11 million travelers in 2013. The top destinations for the Aussies were New Zealand, Indonesia, Thailand, China and then the United States (including Hawaii). Our Kiwi friends went first to Australia, then to Fiji, Thailand, the United Kingdom and then the United States. Wonder why New Zealanders aren’t attracted to Bali as much as the Australians?

Hawaii is still a bit player in the South Korean market, drawing only a little more than 1% of the outbound travelers. Similarly to Japan, Koreans seem most attracted to nearby destinations such as Japan and China. HTA notes that Hawaii is a popular honeymoon destination for Korea, but is facing growing competition in the market from high-end competitors in Mexico (Cancun) and the Maldive Islands.

Hawaii’s competition for European markets is extremely diverse. While most leisure travel is within Europe, long distance is no deterrent for many European travelers. Currently, there is strong growth in European travel to South America. Brits tend to go to Spain, Greece, France, Italy and the United States. Hawaii’s direct competition for the U.K. traveler, however, includes Mexico, Florida and the Caribbean. HTA’s contractor for Europe warns that British travelers will be looking at Brazil, Antigua, Costa Rica, Greece, Malaysia, Mauritius, Mexico, Oman, Slovenia and Sicily in 2014.

Germany’s travelers are just as diverse. Short-haul tourists go to Spain, Greece and Turkey, but the long-haul travelers prefer Asia and the United States. If they are looking for a tropical destination, Germans will tend towards the Caribbean, the Indian Ocean or South East Asia. Hot competition for 2014 will likely come from Brazil, the Seychelles, Mauritius and Thailand.

Most Taiwanese travelers spend their time and money at Asian destinations. In 2013, growth was especially strong for Taiwanese going to Thailand (+65%), Japan (+50%) and Singapore (+23%). Hawaii’s main long-haul competitor for Taiwan’s tourist dollar is the Maldives. Taiwanese still find plenty to do and see on China’s Hainan, on Guam and Palau, in the Philippines, Indonesia, Korea’s Jeju, Malaysia, Thailand and Okinawa. The Taiwanese tourist has to really want to come to Hawaii when faced with these alternatives. For instance, travel from Taipei to a Philippine resort may take 90 minutes, rather than ten hours to Honolulu – and the vacation may cost less than half. Tough market.

Latin Americans are just discovering Hawaii, which must compete with the continent’s own tropical wonders. It can be done though, proven by the success of Fiji and French Polynesia at attracting Latin tourists. HTA’s new contractor for Latin America warns of coming competition from Turkey, Greece, China and the United Arab Emirates.

The take-away from all this is that no destination – or company – should assume they have the same competition in every market.

Hawaii Reaches Out To Foreign Tourists

Hawaii calls ...

Hawaii calls …

Well … at least more widely than it used to. It was a canon of Hawaii’s tourism policy that the official Hawaii Tourism Authority (HTA) always refused to put much marketing money into markets that did not have direct flights to Hawaii. That’s why we only saw a pittance spent in Europe – and nothing at all in places like S.E. Asia, the Middle East, Africa or Latin America. Trade show participation was also tied to regional spending, so you didn’t see official Hawaii stands in shows like the biggest tourism fair of them all – ITB in Berlin. Some of us raised a fuss about this short-sightedness – knowing there were a ton of well-heeled potential visitors from such places and trade shows. Hawaii’s response? HTA railroaded a bill through the state legislature to close its board meetings when marketing was on the agenda, making budgets and targets into state secrets.

We still don’t know the budgets, but there are hopeful signs. HTA is expanding its European promotions beyond Germany and Britain to include France. And they have hired a contractor to begin promoting Hawaii in Latin America, finally realizing that changing planes in Houston or Los Angeles is not such a big deal to Latin travelers. This slight change in strategy was revealed at HTA’s Spring Marketing Update last month in Honolulu. Let’s see what we can glean about Hawaii’s international marketing from the presentations.

Here’s a table I put together from HTA’s preliminary full-year stats for 2013:

HI tourism dataJapan is the big dog, leading the way with numbers of arriving visitors and the total amount of money that they spend in Hawaii. But the Japanese stay the shortest of Hawaii’s international customers and total spending actually declined in 2013. Japan is an aging market and not even the usually optimistic HTA seems to expect huge growth from Japan. In fact, HTA expects that higher costs and fewer airline seats will lead to even shorter visits and reduced spending by our Japanese tourists. HTA used to devote close to 3/4s of its foreign marketing budget to Japan – and I expect they still do.

Canadians are Hawaii’s cheapskates, spending almost as little per person per day as our visitors from the U.S. West Coast. At least the Canadians stay longer, though growth in their total spend last year was flat.

Australia and New Zealand are markets in which Hawaii has generally spent little, but they are growing anyway. Favorable exchange rates are pushing them in our direction and it seems as if HTA is taking them more seriously in its marketing plans. That 31.4% growth rate in their total spending is pretty gaudy.

The initial surge of tourists from South Korea (after the advent of the U.S. visa waiver program there) may have abated, so now Hawaii faces the tough slog of building the market and attracting repeat customers. The growth rate in total spend is decent and Koreans stay longer than either the Japanese or the Chinese.

Europe kept up a healthy growth rate in 2013, though their spending per person per day is on the low side (still beating those cheap West Coasters and the Canadians). Europeans stay in our islands longer than anybody else, however, a reflection of vacation habits and the travel time for them to get to Hawaii. There is a lot of variation in which Europeans come to Hawaii. The biggest cohort is from the United Kingdom, which sent more than 49,000 visitors to Hawaii in 2013 – 8% more than in 2012. The Brits may soon be caught by German visitors – more than 44,000 growing at 10.3%. The Swiss and the French start from smaller bases (16,000+ and nearly 21,000, respectively), but they are growing at 14.7% and 13%.

China is a spectacular anomaly. They are the big spenders of Waikiki. They don’t stay for long, but the Chinese seem to head directly to the most expensive stores they can find.

Latin America is on the list for the first time and the dearth of growth reflects Hawaii’s previous lack of marketing. Their length of stay is impressive and I expect that arrivals and expenditures will rise.

That incredible growth rate from Taiwan tells you that the U.S. visa waiver program has just been put in place there. It is too early to tell what is going to happen with this market. Airlift capacity is in doubt and Taiwanese can easily get to other tropical destinations. We’ll see.

I’ll be coming back at you with more about Hawaii’s foreign tourism markets.

Doing Business In Myanmar

Given Myanmar’s isolation for decades, it might surprise that the country has been a World Trade Organization member since 1995. Trade was important to them back then and is even more important today. The powers-that-be certainly have an incentive to smooth out trade issues to encourage new foreign investment. The WTO conducted a Trade Policy Review of Myanmar last month. This was the first-ever review for Myanmar, so other WTO members asked well over 200 questions in advance, and more in the review meetings. [Some of you may call the country Burma, but I am going with the WTO’s official usage.]

There has been so much change in Myanmar – and not all of it in politics. The country moved to a floating exchange rate (albeit a managed float) in 2012 and has achieved enviable GDP growth, 6.4% in 2013. That said, GDP per capita is about $900, so there is a lot of room to grow more.

Myanmar's Port of Yangon

Myanmar’s Port of Yangon

Exports and imports each account for about 16% of GDP. In 2012, Myanmar exported mostly natural gas, wood and wood products, jade and fisheries products – aimed primarily at Thailand, China and India. Almost all the natural gas goes to China. Imports came mostly from China, Singapore and Thailand, mostly petroleum products and iron and steel products.

Myanmar has never been involved in a WTO dispute, whether as accused or accuser. The country has no anti-dumping, countervailing, safeguards or subsidies legislation. Myanmar has not yet implemented the WTO Customs Valuation Agreement – and WTO members participating in the TPR pushed Myanmar to do so quickly.

There is a lot of movement on national laws and regulations that impact doing business. A new Foreign Investment Law was enacted in 2012 and a competition law, a Consumer Protection Law and comprehensive IPR legislation are coming. The Foreign Investment Law isn’t perfect, not surprisingly. Investing companies can get tax breaks if they increase export profits (always a questionable practice in the WTO), and they are required to increase their percentage of local employment over time.

Unusually, Myanmar has bound all of its agricultural tariffs (which limits their ability to arbitrarily raise these duties), but 94.3% of its tariffs for non-ag items are unbound and could theoretically be raised at any time. This leads to wide discrepancies in duty rates. While transport equipment and electrical machinery enter duty-free, customs duties can shoot to 550% on products such as chemicals, beverages, tobacco and cereals. Overall, however, applied tariffs average out to 9% for agricultural imports and 4.8% for industrial products. The problem is that the high bindings on many products makes long-term tariff planning unpredictable.

Until recently, all imports required non-automatic import licenses, which could take weeks to get approved. But a year ago, in April 2013, 166 imported products were declared exempt from the licensing laws. It’s a start, but still not exactly a welcoming trade regime.

Export licensing is almost a mirror image. Almost all exports need a license to leave the country, but 152 products were exempted from this last year. It used to be, too, that all exports had to pay an 8% commercial tax plus a 2% income tax before being exported. This was changed last year to exempt almost all exported products from the commercial tax. This tax is still applied to gems, natural gas, crude oil, teak and timber.

The commercial tax is also a source of discrimination against imports, which are taxed at 5%. Domestic production for 70 competing products is not subject to the tax.

Business news from Myanmar might lead one to assume a huge role in the economy for state-owned enterprises. I was mildly surprised to see that while Myanmar has 41 SOEs, they only account for about 9% of the country’s GDP. That said, WTO members are concerned that Myanmar has not been forthcoming with information about state trading.

Services seem more tightly controlled than doing business in hard goods. Myanmar runs a trade deficit in services, but foreign involvement in the internal market is often limited by monopolies granted to state-owned companies and restrictions on foreign investment in service trades. Except for representative offices, no foreign companies have been able to work in banking or insurance. Civil aviation and maritime transport are closely controlled by the government, though it seems that foreign companies will be allowed to take part in telecom contracts. Foreign investment is allowed, with up to 100% ownership, in the hotel business and related lines of work. WTO members encouraged further opening to foreign investment, whether for services, agricultural processing or hard goods industries.

Trends in Myanmar’s trade-related policies are good, but WTO members would like to see more changes accelerated. If you or your company are new to S.E. Asia, there are easier markets to wet your feet in. Try Singapore or Hong Kong, – where you have a better chance of figuring out what is going on.

We’re Back!

Business Beyond the Reef has been “off the air”, so to speak, due to “technical difficulties”. I had to change hosts, because the previous host either couldn’t or wouldn’t help solve a severe technical problem that made it impossible for any of us (even the author) to actually see the blog. The subsequent transfer to a new host, too, was bungled – and we lost all of the old BBR posts. That is irritating, but not a disaster since the majority of my posts focus on current happenings in international business and trade.

Anyway, normal service is being resumed – with my first post of the new era coming up tomorrow.

Bear with me while I experiment with some new features. And feel free to make suggestions for features you would like to see on the blog site – or topics you would like to see me take up. Thanks for your patience.

Steve Craven