Swiss Cheese & Chocolate

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Cheese is a problem. Switzerland produces wonderful cheeses and chocolates, but protects its farmers to the max. That’s one of the few hits that Switzerland took in its Trade Policy Review last month in the World Trade Organization. Since Switzerland is the WTO’s home and several Swiss have headed up either the WTO or its predecessor, the GATT, one might think that Switzerland would be the epitome of the open economy. One would be wrong. They are good, but not a shining example.

The review covered both Switzerland and Liechtenstein, since they have a customs agreement, an open border and most foreign trade issues are handled in Berne, not Vaduz. There are a few minor differences, but we’ll get to those. For the most part, just assume that anything said about Switzerland applies to Liechtenstein, too.

The really strange thing – in this world of percentage ad valorem customs duties – is that Switzerland doesn’t use them. At all. The Swiss are the only WTO members to exclusively use specific duties, generally a set number of Swiss francs per weight of the item being imported. This means that the ad valorem equivalent can go up or down, depending on what is happening with exchange rates. Without changing a single customs duty, Switzerland’s average tariff in ad valorem terms climbed from 8.1% in 2008 to 9.2% in 2012 – running against the grain of what has happened in most countries. Those specific duties amounted to only 2.3% for non-agricultural products in 2012, but averaged a whopping 31.9% for agricultural goods. See what I meant amount protecting farmers?

Many tariff items carry zero duty rates, and others are so low that Switzerland has become known for its nuisance duties. More than 40% of its tariff items carry duties that are equivalent to less than 2%. These can’t contribute much to national tax revenues and are surely a nuisance to importers.

Given the technical excellence that Switzerland is known for, I am not surprised that the country has 23,080 product standards. Luckily for traders, 95% of these are recognized international standards that your products are likely to already meet. And, if your product is already cleared for sale in the European Union, Switzerland is likely to permit free sale in its territory under the so-called “Cassis de Dijon principle” without further technical checks.

Liechtenstein belongs to the European Economic Area (the EU, Liechtenstein, Iceland and Norway) and Switzerland does not, so there are a few things that require adjustment between Liechtenstein and Switzerland. A few products (e.g., fish) face different customs duties and others (e.g., some telecom equipment, salt and pharmaceuticals) encounter different non-tariff restrictions.

Chocolate factory outside of Gruyères

Chocolate factory outside of Gruyères

The big issues are that strange reliance on specific duties and going way overboard on protecting farmers and agricultural manufacturers. Equivalent duties on meat and dairy products average over 100%. One of the agricultural duties is the equivalent of 1,676%! There is a super complex tariff quota system for agriculture with 28 tariff quotas divided into 58 sub-quotas and aggregated with 80 bilateral preferential-tariff quotas. Follow that? I didn’t.

Much of the focus of the comments and questions from Members was on agriculture. Clarification was sought … on tariff peaks and complex variable tariffs, the justification of classifying certain measures in the Green Box, the difference between the system of “observed prices” and “administered prices” in price support measures, ending the compulsory levy on milk, and plans for phasing-out export subsidies entirely.
~ Concluding remarks by the TPR Chairperson, 4/25/2013

Switzerland is plagued by agricultural surpluses (small wonder, given how they are protected) and provides export subsidies to get those surpluses down on dairy products, flour and other milled products that go into food products. The subsidies partially compensate food manufacturers, such as Swiss chocolate makers, for the high prices they have to pay for domestic ingredients.

Mexico’s Unilateral Liberalization

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So many countries responded to the recession by making their trade restrictions tougher. But Mexico went in the other direction – boosting its economy by making it easier to move goods in or out. Unilateral trade liberalization seems to be a theme along Latin America’s Pacific Coast, while those on the Atlantic side go protectionist. (Yes, I’m looking at you, Brazil and Argentina.) Mexico figured out that less expensive imports keeps the consumer spending and factories humming, just what you want when the global economy is going south.

Unilateral liberalization was a major theme of Mexico’s Trade Policy Review in the WTO last month. Many of these reviews are perfunctory, but WTO members asked Mexico nearly 500 questions about its trade and investment practices, an indicator of Mexico’s growth as a trading power and of broad interest in the country’s liberalization program.

Mexico has launched a unilateral liberalization programme, to be implemented between 2009 and 2013, lowering tariffs on a wide range of manufactured goods. This is most noteworthy as Mexico was one of the few countries to carry out substantial tariff reductions in the aftermath of the global financial crisis, which hit the Mexican economy relatively hard. The most important change took place in 2010, when tariffs were eliminated on 3,852 lines. During the same period, Mexico simplified its tariff structure by reducing the number of tariff levels from 88 to 28.

Mexico has also adopted measures to simplify customs procedures and reduce import costs. Such measures include the elimination in 2008 of certain import requirements and the creation of a single window for trade, which became fully operational in September 2012. However, and despite these efforts, there is scope to reduce the incidence of non-tariff border measures, particularly sanitary and phytosanitary measures. In the area of customs valuation, Mexico eliminated “estimated prices” for glass, iron, toys, textiles, but maintained those on used cars. Mexico continues to require import permits for certain products including oil products, used tyres, and used cars.
~ WTO Secretariat review of Mexico

This is pretty much unalloyed good news. By January 2012, more than 58% of Mexico’s tariff lines were duty-free – and the average tariff had been knocked down to 6.2% from a starting point of 11.2% in 2007. And this was done for Mexico’s own good, not by waiting for others to offer reciprocal concessions! The process isn’t complete and liberalization thus far has been largely limited to manufactured and other non-agricultural goods. Mexico’s average duty for non-agricultural trade plunged to 4.6% by 2012. But WTO members were quick to point out (in those 500 questions) that average duties on agriculture had barely budged, still hanging out at 20.9%. Politicians everywhere are sensitive to the farm vote, I think.

Just don't bring used cars or rough diamonds.

Just don’t bring used cars or rough diamonds.

Restrictions on used products are not uncommon and are often used to protect consumers from unsafe products. But don’t get the idea that all is hunky-dory when sending your goods to Mexico. There are still tariff quotas on some agricultural items. All imports are subject to a customs processing fee, a storage fee, the value added tax (but so are domestic producers) and a tax on production and services. Import authorizations (read “licenses”) are required for a few items, such as rough diamonds, and reference prices are applied on imported used cars.

Mexican exports are also subject to a customs processing fee, and a few products – rough diamonds, iron minerals and some petroleum products – require an export permit.

The message was that Mexico’s unilateral liberalization had demonstrably helped the country weather the recession and put it into a strong recovery. Too bad others don’t think like this.

Anybody notice that used cars and rough diamonds kept popping up? I can understand the controls on used cars, but does anybody out there know the story about rough diamonds? Seems an odd fixation, but it is there.

Moving Up The Value Chain

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Higher value-added in Indonesia.

Higher value-added in Indonesia.

That was the message that came out of Indonesia’s Trade Policy Review at the WTO last month. The country of many islands is determined to prosper from processing some of its copious raw materials (such as lumber and oil) before they are exported. It had been six years since Indonesia’s last review in Geneva, but in that time they have averaged an impressive 5.9% GDP growth rate. Indonesia has almost doubled its GDP per capita and, by doing so, has almost halved its incidence of poverty. Impressive stuff.

Fuels are still Indonesia’s #1 trade item, though the export mix is more dispersed than it once was. The dominance of raw materials industries may explain why 40% of the economy is still in the hands of state-owned enterprises. There has been some divestment by the government, notably in cement, telecommunications, mining, energy, pharmaceuticals, construction, highways, steel, manufacturing, airlines and banks. The government has also gotten out of its previous monopoly on importing alcoholic beverages.

A number of measures – including export restrictions and taxes on raw resources, tighter import licensing requirements, point of entry restrictions on imports, ownership limitations on banks and certain divestment requirements for foreign mining companies – have recently raised concerns about the direction of trade and investment policy-making. In this regard, the authorities consider that domestic industrial policy considerations, aimed … at developing local industries and moving up the value chain, should be balanced with maintaining an open foreign trade and investment regime …
~ WTO Secretariat paper

Indonesia has enacted a large number of new laws and regulations, most of which seem designed to increase trade while still meeting the imperative to produce more highly processed goods. Much of Jakarta’s emphasis has been on boosting agriculture, fisheries, shipping, mineral and coal mining, and tourism. There are also new rules for investment, product standards and export financing. A foreign investment law was enacted in 2007 that created more transparency for investors, but there are still restricted sectors such as agriculture, forestry, fisheries, energy, communications, financial services and health services.

The most important single change for traders was the 2007 introduction of the National Single Window, an online processing system for customs documents, import license applications and duty payments. The Single Window has been implemented at Indonesia’s ten busiest ports of entry and now covers 90% of inbound and outbound trade. Efficiency at the ports has gone up enormously and opportunities for fraud have dropped. Both the customs authorities and traders appreciate that the Single Window has reduced the number of appeals cases due to disagreements over customs classification and valuation. That said, importers still complain about cumbersome import registration requirements, rules for import licensing and pre-shipment inspections, and new rules on which ports can be used for certain products.

WTO members applauded Indonesia’s decisions to lower many of its tariffs. Indonesia relies less on customs duties for revenue than most developing countries (trade accounts for only 4% of tax revenues), and taxes its exports nearly as much as its imports. This, too, reflects the national policy of encouraging production of higher-valued goods, taxing them less than raw material exports. Indonesia’s simple average MFN tariff was 7.8% in 2012, down from 9.5% in 2006: 7.5% for industrial imports and 9.5% for agricultural. This helps Indonesian consumers and improves market opportunities, but traders are still a bit concerned because Indonesia’s bound tariffs have not been reduced to match. This means, at least theoretically, that Indonesia could raise any of those lower duties with no consequences in the WTO. (This is what Brazil has been doing recently, much to the trading world’s irritation.) Free trade agreements with ASEAN and other trade partners reduce applied tariffs even more.

Import licenses are often used to protect domestic production of rice, sugar, salt, textiles and textile products, cloves, animals and animal products, and horticultural products. WTO members raised questions about the convoluted, non-transparent nature of getting some of these import licenses.

Jakarta has enacted more definitive rules for applying anti-dumping or countervailing duties, and for using safeguard measures. Indonesia has become one of the WTO’s more active users of anti-dumping duties and safeguards, though it has not yet used countervailing duties.

The WTO secretariat gave Indonesia a pretty good review on its use of product standards, highlighting transparency in standards processes and the country’s use of international standards. But some WTO members raised questions in the trade policy review, arguing that Indonesia still doesn’t use international standards sufficiently.

Indonesia became an observer to the WTO’s Government Procurement Agreement last year, generally a prelude to becoming a full signatory. They aren’t quite ready to take that leap yet.

Government procurement remains an important instrument of industrial policy. Foreign companies may only bid in co-operation with a national company (unless no national company has the ability to provide the goods and services requested) and only on bids that exceed certain thresholds. Procurement rules mandate the use of domestic products in government procurement if there are providers offering goods and services with a local content exceeding 40% of value. … bid-rigging remains a major problem and accounts for around 70% of the Competition Commission’s caseload, pointing to the need for a comprehensive procurement law and strengthened audit procedures.

Export taxes and other rules are major tools in encouraging a switch to higher-value local production. Mining companies that currently export mineral ore will be required to refine the ore in Indonesia by next year. In addition, new export taxes and licensing requirements have been put in place for leather and wood, palm oil, raw cocoa and mineral ores.

Given Indonesia’s island nature, it is no surprise that infrastructure is a constant concern – for trade and anything else.

Years of under-investment have left Indonesia’s infrastructure network crumbling. Roads are congested, ports are bottlenecked, and many Indonesians do not have access to either potable water or reliable electricity. Inadequate infrastructure has also contributed to poor distribution systems, which have resulted in high logistics costs; for example, shipping costs are between an estimated 50% and 80% higher than elsewhere in the region.

Overall, the Trade Policy Review seems to have given Indonesia pretty good marks.

Shipping Solutions

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Port of Honolulu (photo: Foreign Trade Zone #9)

Port of Honolulu (photo: Foreign Trade Zone #9)

Almost any company is saddled with shipping problems – whether its moving products out to customers, or getting supplies or inputs in. You don’t how bad it can be, though, unless you live on an island. First off, your options are limited. No train, no trucks. It’s gonna be by air or by sea. Take your pick. Either one has limited competition compared to anyplace on a continental mainland, so you know your shipping costs are going to be high – probably at monopoly or oligopoly prices. You gotta cope with that, but how?

If you are doing business in Hawaii – or plan to visit our fair islands this summer – the Hawaii Pacific Export Council (which I just happen to chair at the moment) is joining with the Hawaii Department of Agriculture to stage Hawaii’s first Shipping Fairs so you can examine all the available options for shipping in or out of islands. The Shipping Fairs will be 1-day events on Oahu and Maui in June – and on the Big Island and Kauai in July.

Join us for the first-of-its kind Shipping Fair throughout the State! This program will give you the opportunity to discover or refine the best method to get your goods to a neighbor island, a mainland state, or an international destination! … a dozen shipping experts … will be on hand to provide you with information so that you can leave the Fair with pricing and routing information for your product, in the markets you specify.

The fairs will offer short presentations by reps of shipping-related companies, ample time for one-on-one meetings, and visits to 2-3 actual shipping facilities so you can see how they work. And whether they would work for you.

Here is the info you need for scheduling and registration:

When: Oahu: June 14th | Maui: June 27th | Big Island: July 19th | Kauai: July 26th

Cost: $35/person – includes lunch, materials, and transportation to shipping facility tours.

Register: http://tinyurl.com/SWIF2013

More info: http://tinyurl.com/SWIFInfo

Questions: lharvey@hawaiiexportsupport.com

Did The Wrong Man Win?

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Roberto Azevedo

Roberto Azevedo

News broke yesterday that the new Director General of the World Trade Organization will be Roberto Azevedo, Brazil’s current ambassador to the WTO in Geneva. Ambassador Azevedo certainly knows how the WTO works and what its strengths and weaknesses are, so I have no problems with his experience and expertise. What concerns me is that he is from Brazil, arguably one of the most protectionist of the major trading countries in recent years. I have no way of knowing if Azevedo agrees with his country’s approach to trade, but it does give me pause. Perhaps, once he is Director General, Azevedo will reveal himself as a staunch proponent of getting rid of trade barriers. He will presumably be trusted by most developing countries as one of their own and may thus be able to prod them into making their economies more open. One hopes.

The opposite could happen. Just at a time when public opinion in the United States and Europe may (that’s a BIG “may”) be coming around to lowering trade barriers to benefit consumers, a Director General who truly believes in Brazil’s approach to trade could push in the opposite direction, encouraging more import substitution by developing countries. We’ll have to wait and see.

Much of the trade press appear to think that Azevedo’s main task will be to perform magic tricks to revive the Doha Round and declare it a success. I disagree. It would certainly be nice to say we had a success, but it may be better just to kill the thing and move on. Ambassador Azevedo would be wise to try to save a few agreements from Doha that do seem ripe for conclusion, but the round should otherwise be allowed to fade into oblivion.

I am more concerned that the WTO needs to come up with a way to integrate the many regional and bilateral trade deals that are being negotiated (or have been done over the past decade). I don’t know if this is possible, but is there a way to bring, say, the Trans Pacific Partnership to the WTO and negotiate to spread its benefits globally? Some way to start negotiations on a regional level and then grow them until you have the kind of results we used to get from a formal round of multilateral negotiations? It is always easier to reach initial agreement among fewer parties, but how do you then include those who weren’t at the negotiating table?

Few in the press seem to understand that the WTO’s work is more than just negotiating rounds. Many pundits say that without a successful negotiating round the WTO will lose its relevance, piling pressure on Azevedo to somehow pull Doha out of a hat. I submit that the WTO is relevant even if for its dispute settlement regime alone. Did you ever stop to think how countries solved their trade disputes before the WTO and the GATT came along? Too often, it was by sending one country’s young people out to kill another country’s young people. The WTO is worth it just for that. Not to mention all its other programs, providing training for developing countries, engendering calm rational discussion of trade issues, and maintaining dozens of trade agreements that have been negotiated over more than six decades. But the mainstream press doesn’t know all that stuff.

I wish Ambassador Azevedo the best. And I pray that he is not captive to his own country’s trade policies. The WTO needs an independent actor as Director General who will try to do what is right for worldwide economic development.

Who Is the World’s Baddest Pirate?

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Ukraine, that’s who! Ignoring the fact that China produces close to 3/4s of the world’s counterfeit goods, the Office of the U.S. Trade Representative has handed the title of Pirate King to the Ukraine. I’m trying to figure how that happened. Must be something like giving the Nobel prize to the wrong person, though I am not sure that Beijing will complain that they didn’t get the title this time. USTR released the annual Special 301 report on intellectual property rights last Thursday, 58 stirring pages about who cheats whom around the world.

We’ll get the good news out of the way first. Won’t take long. The Special 301 Report sets up two categories of bad guys. Those that are just somewhat bad, perhaps merely an irritant, are put on the Special 301 Watch List. The really bad guys are featured on the Special 301 Priority Watch List (sort of a “Most Wanted” list of IPR violators). The good news is that Brunei and Norway are in the clear and no longer on either list. And Canada has been downgraded from the Priority Watch List to the Watch List. The Bahamas, China, Israel, Laos, Panama, the Philippines and Russia all worked on new IPR laws in the last year. Taiwan granted more IPR protection on pharmaceuticals. And Turkey beefed up its enforcement on IPR. That’s it.

While we are at it, the inmates of the Priority Watch List are Algeria, Argentina, Chile, China, India, Indonesia, Pakistan, Russia, Thailand and Venezuela. Not many surprises there. The plain old Watch List contains Barbados, Belarus, Bolivia, Brazil, Bulgaria, Canada, Colombia, Costa Rica, Dominican Republic, Ecuador, Egypt, Finland, Greece, Guatemala, Israel, Italy, Jamaica, Kuwait, Lebanon, Mexico, Paraguay, Peru, Philippines, Romania, Tajikistan, Trinidad and Tobago, Turkey, Turkmenistan, Uzbekistan and Vietnam. Naughty, naughty. But not as bad Ukraine – now IPR Public Enemy #1 and in a category all by itself.

I regret that the Government of Ukraine has earned the first new Priority Foreign Country designation in 11 years due to its severely deteriorating climate for IPR protection and market access, and call upon that government to reverse recent backsliding and swiftly resolve the problems identified today.
~ Demetrios Marantis, Acting U.S. Trade Representative

Ukrainian pirates in action!

Ukrainian pirates in action!

What did the Ukrainians do to deserve this special tribute? A lot apparently. USTR seems miffed that Kiev has ignored earlier agreements and negotiations to clean up its act. The “collecting societies” that are supposed to collect and transmit royalties to foreign rights holders aren’t doing the job fairly or transparently. Ukrainian government agencies are openly and merrily using pirated software, making no secret that they are doing so. And the country is making next to no effort to combat online piracy and copyright infringement. At least the Chinese pay lip service on such things before they go back to pushing out more counterfeit goods.

The collecting society dispute has an interesting twitch. Ukraine pulled the license for the reputable Ukrainian Music Rights League last year. “This action has been credibly characterized as an attempt to empower rogue collecting societies, including a rogue collecting society that reportedly has strong ties to government officials.” Sounds like Ukrainian officials found a new source of income, one that is spreading beyond the music industry now that Ukrainian courts have abolished the previous rules for accrediting collecting societies. The country has reverted to ad hoc licensing and the rogue societies are winning. USTR says that this legalizes misappropriation of royalties. And the Special 301 report certainly hints that the pockets of Ukrainian officials are being lined.

Kiev has told USTR that they want to begin using legal software in government ministries, and that $12.3 million was budgeted for this purpose in 2013. The actual value of the pirated software in official use far exceeds that amount – and there is no indication that any of the money has actually been spent – or is likely to be spent – on legal software.

Online piracy is a thriving business in the Ukraine. One Ukraine-based pirate website, ExtraTorrent.com, bills itself as “The World’s Largest BitTorrent System” and is among the top 200 most-visited websites in seven other countries, including the United Kingdom, India and Australia. Ukrainian authorities did make a brief effort, early in 2012, to close a pirate website, called EX.UA, which sold pirated music, videos and software and had become Ukraine’s 12th most-visited website. EX.UA was quickly back online, following an uproar by Ukrainian consumers and celebrities. [Both EX.UA and ExtraTorrent.com are up and running today. I checked.]

There is much more in the Special 301 report including details on all the other pirates mentioned on the Priority Watch List and the Watch List. Go read about your favorite black hat.

The Battle Of The Sun

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Is it environmental one-upsmanship or old-fashioned protection of an infant industry? India’s Jawaharlal Nehru National Solar Mission (NSM) was created to boost domestic production of solar cells and solar modules – clearly a good idea for the environment, right? The rub is that this is done by requiring that Indian solar projects buy their solar modules, cells or thin film technologies only from Indian factories – effectively banning foreign competition for solar power gear from Indian soil. It is a tad subtler than an outright ban. An Indian solar project can use foreign kit, but they won’t get the sweet power purchase deal from the national power monopoly. Washington started asking questions in the WTO a few months back, saying that Indian policy is a local content requirement that violates multiple international agreements. I posted about it because it is a traditional trade spat, but in new bright green environmental clothing.

Please, local marble only.

Please, local marble only.

New Delhi struck back a couple of weeks ago. Not by defending itself, but by arguing that the United States also has illegal local content requirements (who knew?). The Indian argument seems to be “you do things wrong, so you can’t complain when we do things wrong“. That’s often a good political, but is not a recognized defense in international law. Quite the contrary. Canada is in the process of losing a WTO case brought by the European Union and Japan against local content requirements used for renewable energy projects in Ontario.

There is substance to India’s case, which relies on the concept that defeated the Canadians: national governments are responsible for what their state, provincial or local governments do that violates international obligations. India has now raised questions about water utilities, for instance, in New England, Pennsylvania, West Virginia and South Carolina that impose local content rules on iron pipes and fittings used in water projects. New Delhi sees discriminatory local content rules being used in solar and renewable energy projects in Michigan, California and Texas. And pipe procurements in Alabama, South Carolina and Florida that are restricted to local products. This kind of puts Washington between a rock and a hard place, because there is long precedent for asserting the legal primacy of international treaties over local or state law, going back at least to a case brought by Japan against “Buy America” procurement legislation in Mississippi in the 1970s.

This is all part of a larger picture. As customs duties have come down across much of the world, local content requirements have become a favored tool for restricting foreign competition. U.S., European and Japanese companies often find themselves the victims of local content rules, so their trade agencies are waging an aggressive campaign against such rules wherever they are found. There have been complaints against similar practices in Indonesia, Brazil, Russia and the Ukraine – and we are likely to hear about more.

For better or worse, India is telling us that perhaps Washington should make sure its own house is in order. Not a bad idea. But just try selling that to local and state politicians egged on by local producers. In any country.