Business Beyond the Reef

• Mea culpa!   Time passes and CeBIT, though still a great show, is no longer as big as it once was.  Old friend and former colleague George Ruffner, who runs the commercial section at the American Embassy in Berlin, tells me that CeBIT 2010 only had 4,000 exhibitors and 330,000 visitors.  Still huge by Honolulu’s standards.  See “Now That’s A Real Show!”
• My old friend Jargal Dambadarjaa posts an interesting Mongolian view of doing business in Japan.  Worth a read.
• France’s president, Nicolas Sarkozy, says that the U.S. is setting a bad example of protectionism with its procurement of military tanker aircraft.  Probably true.  Not that European military procurements have always been completely free and open to competition.
• Talks open today in Qatar that could have a profound impact on world trade in some endangered species.  I trained as a fisheries economist, and still have a lot of friends in the business, so it catches my attention that the UN conference to review the Convention on International Trade in Endangered Species of Wild Fauna and Flora (known to the trade by the more convenient CITES) will take a searching look at trade in bluefin tuna.  It’s high time, despite my tendencies to favor free trade over all else.  Bluefin has been massively overfished in the Atlantic, where the tuna population is now under severe stress.  If our descendants are ever going to get a taste of this wonderful fish, we need to take drastic action now.  The opposition to limiting trade in bluefin, of course, consists of the main fishing fleets in the Atlantic (Portugal, Spain, France) and the one market that consumes over half of the worldwide bluefin catch – Japan.  The CITES meeting is also looking at trade in numerous other endangered species, such as elephant ivory and red coral, the subject of an earlier post.
• Why do we have world expos?  Greed, pure and simple, says Tom Holland in the South China Morning Post (subscription required).
• China is now the top non-European market for France’s Bordeaux wines.
• Finally!  The 2010 Formula 1 season begins this weekend in Bahrain.  So why is this in a business blog (aside from being my favorite spectatator sport)?  F1 cars are the world’s fastest and most expensive billboards and play an important role in international marketing.  The sport offers glamour for firms seeking image advertising, and the coverage tops everything but the Suimmer Olympics and the soccer World Cup.  Vroom!

I’ll take some flack for this one.  We have a prevailing ethic in the Western World that says that nothing, absolutely nothing should be talked about behind closed doors.  This is often fostered by the media, whose denizens naturally want an easy way to gather what passes for news.  Or it is pushed by organizations and individuals, usually not elected, that think nothing should happen without their input (often thought of in terms of a veto).  You might call this a pet peeve from an old curmudgeon (are there curmudgeons who aren’t old?).

Aside from curmudgeonly tendencies, I’m here to tell you that meaningful trade agreements cannot be negotiated in public.  I was reminded of this when I was researching yesterday’s post about the draft Anti-Counterfeiting Trade Agreement.  I found endless diatribes online because ACTA is being negotiated by governments behind closed doors.  The total-freedom-of-the-Internet folks have their knickers in a twist because those evil government negotiators are trying to think of ways to limit online sales of pirated goods.  MarkMonitor expects that Internet counterfeit sales will top $135 billion in 2010, so “freedom” is actually pretty costly to consumers.  I don’t know about you, but I don’t feel the need for busybodies to protect my freedom to buy fake pharmaceuticals or other life-threatening products online – or anywhere else.

"What do you do, sir?"

But can you negotiate a good trade agreement of any sort out in the glare of publicity?  Or in the “sunshine” as its supporters prefer to call such openness?  I don’t think so, and I have tried it both ways.  The core issue is that once a country, a politician or an executive has gone on the public record as having a certain position, our society tries to remove the possibility of changing your mind.  If you can’t change your mind or position, then you are going to take the most extreme position you can get away with – even if that position is not what you need to have at the end of the day.  We have all seen how often politicians and public officials are attacked for changing their minds, charged with being “wishy washy”, not sticking with their values or “waffling”.  The same goes for a trade negotiation.  If you say it in public, you are stuck with it – even if common sense argues that compromise might be reached with just a bit of flexibility.  The “pro-sunshine” people thrive on public debate and generally have no interest in compromise, the essence of a negotiated agreement or settlement.  Negotiation prompts flows of ideas, different perspectives, maybe even new information.  Public posturing does not.  As John Maynard Keynes said: “When the facts change, I change my mind. What do you do, sir?”  That process is less likely to happen in a public debate.

Two of the best negotiators I have known were Bill Kelly for the United States and Rod Grey for Canada.  We were negotiating a code of conduct about export subsidies, a truly contentious issue – and, yes, we were behind closed doors in Geneva.  Kelly stated the U.S. position on a particular point, but Grey, a great student of negotiating history, interjected that the United States had taken the opposite position in talks decades earlier.  Kelly shot right back: “the United States reserves its right to change its mind every quarter of a century or so!”   The whole room, Ambassador Grey included, dissolved in laughter.  Can you imagine that in front of a TV camera?

Counterfeiting is where the big money is, says The Economist (subscription required).  The OECD makes a rough guess that  international trade in counterfeit goods reached $250 billion in 2007.  Of course, it is tough to measure illegal activities since the perpetrators are understandably reluctant to release their numbers.  $600 billion is the guess of the International Anti-Counterfeiting Coalition, adding that pirated goods may make up to 7% of world trade.  MarkMonitor says that, this year, there will be $135 billion in Internet sales of counterfeit goods.  Most anything has been counterfeited: weapons parts, electronic components, parts or aircraft engines, fake gold bars – even your birth control pills.  It’s not just Rolex and Levis anymore, but potentially life-threatening stuff.

Can you tell if it's real?

Japan and the United States launched negotiations four years ago for an Anti-Counterfeiting Trade Agreement (ACTA).  ACTA still hasn’t seen the light of day, not surprising when multiple governments and innumerable companies and NGOs are involved in the talks.  The problems of commercial counterfeiting and intellectual property piracy remain huge and may prove intractable.  While stealing someone’s ideas seem heinous in some societies, others see it as merely ingenious innovation.  Still, without adequate protection, companies are going to be very reluctant to invest in new technologies or (at least) to tell anybody about it.

Some say that existing protection (patent laws, etc.) is adequate, while others (usually holders whose patents are nearing expiration) lament that their IP can’t be protected longer.  Pharma companies, for instance, want to reap the benefits of their research, while NGOs want to get the benefits of new drugs out to everybody quickly.  Without the first, you don’t get the new drugs, but how much protection is enough?  You can see why this is a tough one to negotiate.

That said, progress is being made on ACTA and there may be an agreement by the end of the year.   Talks have grown to include Australia, Canada, the 27 members of the European Union, Mexico, Morocco, New Zealand, Singapore, South Korea, and Switzerland.  Negotiations get tougher with each addition, but please note how few of the world’s more rampant counterfeiters have come to the table.  The group just met in Guadalajara in late January to talk about civil enforcement, border measures and enforcement of IPR in a digital environment.  Other elements of a draft ACTA include criminal enforcement, and cross-border cooperation on IPR protection.  The objective is to get something like similar legal regimes among the participating countries.

The Global Intellectual Property Center, under the U.S. Chamber of Commerce, is looking for U.S. companies to help them build support for an ACTA in Washington.  GIPC is getting ready to send a letter to Ambassador Ron Kirk, the U.S. Trade Representative, expressing strong support for a robust ACTA.  The letter will serve the double purpose (this is according to me, not the U.S. Chamber) of stimulating interest and support among Washington’s political legions.  Ambassador Kirk says he wants to get a strong ACTA, but thus far it is difficult to differentiate what is rhetoric and what is real in the Obama Administration’s trade policies.  If you work for a U.S. company that would like to give Kirk some backbone on IPR issues, then please get in touch with Corbin Blackford at the U.S. Chamber of Commerce.

China says U.S. actions unfair! Brazil retaliates against U.S cotton subsidies! Everybody says China’s currency is unfair!

Despite those headlines, most countries have behaved themselves on trade.  But that isn’t newsworthy.  Editors thrive on threats and unfairness, whatever that is.  I hate to disappoint them, but a study released over the weekend concludes that major trading countries have shown remarkable restraint during the recession, keeping protectionism at bay for the most part.  The study is a joint production of the World Trade Organization (WTO), the Organization for Economic Cooperation & Development (OECD) and the UN Conference on Trade & Development (UNCTAD).  Those three outfits rarely agree on anything, so I have to take notice.

They looked at new import-limiting actions among the G20 countries (the major trading countries) during the past six months, comparing them with the previous six months.  They found that new protectionist measures only impacted about 0.4% of world trade, roughly half of what happened in the prior six months.  The trend is good, but our friends at Global Trade Alert see no reason to relax.  At this point in a recession, there is always pressure to protect damaged industries.  Still, it’s good to put such things in perspective.

Habitat of Punished Consumers

To continue with the good news, Canada last week announced that it is unilaterally lowering customs duties on 1,541 tariff lines of industrial equipment.  This was part of the annual budget proposal to Parliament, so it isn’t a foregone conclusion, but it prompted a surprising (to me) op-ed piece in the National Post, asking that the Harper government go even further to help the Canadian consumer in tough times.  The editorial noted that Canadian manufacturers will get a boost because the lower tariffs will make it less costly to invest in new equipment, and that the lower duties will cut Canada’s customs revenue by only about 1.4%.  The author, Terence Corcoran, then wonders about cutting Canada’s tariffs on consumer goods, arguing that customs duties represent $4 billion a year of “consumer punishment”.  Corcoran is right, of course, but even in enlightened Canada, it may be tough to find a politician willing to look at things that way.  Still, it’s wonderful to see the argument made, even if it will be a cold day when U.S. senators line up to speak against “consumer punishment”.  Most politicians seem to think consumers are masochistic non-voters.

Congress is showing signs of waking up on trade.  U.S. Trade Representative Ron Kirk had to listen last week to a chorus of senators saying that its time to finally implement the free trade agreements with South Korea, Panama and Colombia.  The White House may not have noticed that the European Union, among others, has redoubled its efforts to negotiate new FTAs – and that the United States is idly standing by while its competitors win advantages over American exporters.  And, more astounding, some of these senators appear to have realized that exports create or maintain jobs in their states!  Will wonders never cease.

Baucus & Grassley Get It. Obama & Kirk Don't

The occasion was Ambassador Kirk’s testimony about the Obama Administration’s trade agenda, which merely paid lip service to the three stillborn FTAs while pandering to organized labor and other groups seeking to use the FTAs for non-trade purposes.  Senator Max Baucus, the Democratic chair of the Senate Finance Committee, started in by arguing that the Congress “should approve the trade agreements that we have already negotiated and signed.“  He added: “we must … recognize the consequences of further delay. Our competitors are signing trade deals that will put our farmers and businesses at a competitive disadvantage unless we act.“  Senator Baucus noted the EU’s free trade agreement with South Korea, and Canada’s agreement with Colombia.

It is less surprising that Senator Charles Grassley chimed in for the Republicans: “South Korea has already concluded a trade agreement with the European Union, and Colombia has reportedly just done the same. Such erosion to global US competitiveness concerns me … .  This delay in implementation hurts US credibility around the world, not just economically, but geopolitically as well.”

The Obama Administration seems stuck in the rut of not liking agreements negotiated during the Bush Administration, and they keep talking about reopening agreements to make them “perfect”: meaning forcing Koreans to buy American cars and allowing U.S. unions to determine labor policy in other countries.  There is clear bipartisan support for the FTAs in the Senate.  Go for it, Mr. Obama!

I don’t often think about Georgia.  The country, not the home of the Atlanta Falcons.  But an article in Asia Times last week caught my imagination as a good example of unintended consequences in trade.

Georgia: Land of Sweet Mountain Water

The story begins in 2006 when Russia, in a political fit, closed its borders to goods coming in from Georgia, mostly wine and bottled water.  It was a vain attempt at coercion by Moscow that, ironically, may be strengthening Georgia’s economy and has certainly diversified Georgia’s customer base.  Not that Georgian companies weren’t hurt by the Russian embargo, but most of that hurt was swamped by the damage caused by the 2008 war between the two neighbors.  Neighborhood spats are never good.

Moscow has finally seen its error and has said it will reopen the border later this month.  Georgia’s exporters are greeting this with glee, but – now that Russia has proven itself an unreliable market – the Georgian companies are not slowing their push to develop other markets.

Georgian wine enjoyed a great market in Russia before the embargo, which almost wiped out several producers.  Georgia’s wine exports dropped from 10.6 million liters in the second quarter of 2005 to less than 2 million in the same months of 2009.  Their wines are little known in the West, but Georgia is developing new customers in central Asia, China and recently appeared in Singapore.

Georgia’s top bottled water producer, Borjomi, saw its sales drop 43%.  The company is bouncing back with its bottles now sold in thirty different countries, even entering the China market in 2008.

Just goes to show that embargoes almost never work the way you think they might.

• Things get done when contracts are at stake.  That’s the message of Apple’s review of labor violations by its foreign suppliers.  Apple and its Supplier Code of Conduct are pushing companies worldwide to clean up their acts.  Democrats in Congress want to do the same by inserting fair labor clauses in trade agreements and by holding up the FTAs with Korea, Panama and Colombia.  Which approach is more effective, do you think?  Apple seems a better example of good governance than the politicians.
• Recent headlines say that China is now the second largest producer of electronic waste, while others say that the developed world is “dumping” its e-waste on China.  A friend in China tells me that, au contraire, China is buying up e-waste as fast as it can find it – even sending freighters as far as the Bahamas to pick it up.  Good cheap source for exotic materials.
• Gee, there’s piracy in China?  This time it’s over video games.  See the Wall Street Journal. No surprises, but an interesting story.
• The federal budget is a bit off my trade beat, but this is a wonderful and quick visual representation of how little is actually being sought in budget cuts.
• Trade can be fruitful.  Mexico, under pressure from a NAFTA dispute settlement panel, ended its 47% antidumping duty on red delicious and golden delicious apples from Washington state.  The duty had added $10 to the price of a box of apples.  Despite the duty, Washington state has been selling more than 30% of its apple exports in Mexico, so that seems likely to surge.

I added a new page to the blog this week that is way cool.  Check out Travel Map, which shows where I have traveled.  You can get your own Travel Map for your blog or website, too.  And I have had the Visitor Map for several months now.  It shows where YOU are – also way cool.  No, I can’t identify you, but it shows where your ISP is located.

Amazing what's under there

Can you have too much of a good thing?  Mae West said no, but Mongolia’s leaders aren’t sure about that.  A friend in Ulan Bator sent me a link to a Bloomberg article about Mongolia’s riches and the dangers of “Dutch Disease“, the idea that a sudden surge of wealth can make future growth more difficult.

Dutch disease is an old concept in economics, though it acquired the current name only in the 1960s.  The thought is that a sudden influx of wealth, whether to an economy or to an individual, can lead to bad decisions as to how to use it properly.  It’s like blowing your new earnings as a pro football player and having nothing left when a knee injury kills your job.  The name came from the impact of enormous quantities of North Sea natural gas raising the value of the Dutch guilder, which then killed Dutch exports, crippling the economy of the Netherlands.  Similar things happened in Spain with the influx of New World gold and silver, and the discovery of gold in Australia in the mid-19th century.  And Nigeria has done an abysmal job of harnessing revenues from its immense oil and gas industries.

Mongolia is seeing a rush for significant resources of gold, uranium, coal and copper.  In fact, Mongolian leaders compare it to the influx of riches during the great Mongolian conquests of Central Asia, China and beyond.  Canada’s Ivanhoe Mines and Rio Tinto of the United Kingdom invested in a joint venture last year with the Mongolian government to develop copper and gold deposits worth perhaps $30 billion.    Peabody Energy of the United States is among potential partners for a $2 billion coal deposit.  Ivanhoe is in another big coal mine.  Considering that Mongolia’s GDP is a little over $5 billion, you can see the potential impact just these projects can have.  And there are more to be developed.

The problem is Mongolia’s lopsided distribution of income.  Like many developing countries, there is an elite that reaps most of the benefits – and a large underclass that does not.  Mongolia’s leaders, many of them Harvard educated (the point of the Bloomberg article) appear to see the issue, but it remains to be seen what they will do about it.  It is encouraging that they are at least talking to experts from Chile and elsewhere, whose countries have managed to avoid an infestation of Dutch Disease.

A mine is a terrible thing to waste.

Is that the Agenda, Mr. Ambassador?

The Obama Administration’s 2010 Trade Policy Agenda was published Monday to almost no notice by anybody.  I guess it is just wonks like me who read such things.  The agenda comes out as part of the annual report to the Congress  of the Office of the U.S. Trade Representative.  It is probably skimmed by a few Congressional staffers and then put on a shelf somewhere, or saved as a .pdf file.  But it can contain some important clues for any company involved in international business.

Scott Lincicombe read the agenda before I knew it was out and does a good analysis of how inherently mercantilist the document is.  I’ll let his blog speak to that, but nobody should be surprised.  U.S. and other major country trade policies have been mercantilist for as long as I can remember.  How many members of Congress can you remember who advocated increasing American imports?  Occasionally we do it for altruistic reasons, such as the Generalized System of Preferences or the Caribbean Basin Initiative, but truly meaningful cuts in import barriers are pretty scarce outside of major trade rounds.  We did allow in some Brazilian pork rinds recently.  It tends to be smaller, perhaps more mature countries that see that free markets for imports are just as important for an economy as the same thing for exports.  In my experience, Singapore, Hong Kong, Chile come to mind.  An old friend, who headed up Austria’s Foreign Service, argued that if you start doing business in one direction, you will likely end up doing business in the opposite direction, too.  That’s my credo.

So what did I glean from the new agenda?  In order of what I spotted in a quick read:

• The Commerce Department says over ten million American jobs were supported by industrial exports in 2008, and the Department of Agriculture chimes in that ag exports supported 800,000 jobs.  Let’s see, industrial exports supports close to 93% of the jobs and ag exports support only 7%.  Now why, do you suppose, that the Administration and the Congress continue to throw 90% of the federal export promotion budget into agricultural exports?  Can you say “farm lobby”?  Can you say “misallocation of scarce resources”?
• 95% of the world’s customers and 80% of production are outside the United States.  Does this give you a clue as to where your company should look for growth?  The IMF says 87% of economic growth will be offshore during the coming five years.
• There is lots of boilerplate about reviving the Doha Round.  I hate to say it, because I am a believer in multilateral negotiations and a couple of former colleagues drafted the agenda, but businesses can ignore the Doha stuff for now.  Ain’t gonna happen soon.
• You can also ignore the lengthy section on enforcement of trade agreements.  That’s simply pandering to know-nothings in Congress who persist in believing that the United States is all righteous and correct, while everybody else cheats and takes advantage of our good nature.  I can assure you that we are just as tricky and slick as anybody else – but that truth doesn’t attract votes.
• Did you realize that USTR emphasized “deepening engagement with major emerging markets“, especially the BRIC countries, in 2009?  I didn’t either, but I have to question the choice of targets, apparently chosen by Goldman Sachs.  Why on earth would USTR want to push companies into the criminal morass that is Russia, or get them bogged down in figuring out how to do business in China?  Both markets make sense for a small sub-set of companies, but most should be heading for easier markets.  I have always preferred cash flow over potential.
• There is much about joining the Trans Pacific Partnership and working with APEC.  I am growing warmer about TPP, so I like this.  The language leaves the impression that we are negotiating a new TPP and gives scant notice to the fact that TPP has been around for several years and joining it involves talks and give-and-take with several other countries.  We’re not starting from scratch.
• Like Scott Lincicombe, I see no indication that the Obama Administration is prepared to ask Congress to ratify the free trade agreements with South Korea, Panama and Colombia.  Pity.  That’s several hundred thousand U.S. jobs down the tubes.  I guess they figure that Americans aren’t looking for jobs right now.  (Check out Public Citizen’s Eyes on Trade blog re: Ron Kirk’s testimony about the Trade Agenda. Kudos to Senators Grassley and Baucus.)
• What’s missing?  Trade in services.  Apparently Ron Kirk and his merry men and women haven’t noticed the overwhelming advantages that U.S. exporters have in services, or that services give a tremendous boost to our balance of payments.  (Services don’t show up in the balance of trade, the preserve of hard goods exports and imports.)  Perhaps the national trade agenda should include pushing our services exports?  Just a little bit?

The agenda is a generally disappointing document.  I see little that is new or innovative, and I see a document just loaded with pandering to know-nothings.  As it is a mandated report to the Congress, perhaps that is appropriate.

The U.S. tourism industry has waited a long time for this.  The U.S. Senate passed the Travel Promotion Act last Friday (and I thought all they were doing was bickering over health care) and it is going to the White House for President Obama’s signature.  The bill establishes a national tourism organization for the United States with the catchy name of the Corporation for Travel Promotion.

Discover America at ITB Berlin - Can We Do Better Now?

Few Americans ever think of tourism as an export industry, despite seeing thousands of foreign tourists in major U.S. cities, exploring the national parks and shopping malls, or sunning on local beaches.  You see, to most people, exports have to be things that can be loaded on a ship in a 40′ container.  But attracting foreign visitors to the United States has the exact same effect on our balance of payments as selling a new 777, so it really is an export.  And the U.S. Congress has finally glommed onto that.  It took a lot of years.  The Commerce Department knew tourism was an export, but could make little headway within the government.  And the new act took years of lobbying by the visitor industry.

Travel and tourism generates $1.3 trillion in business in the United States annually and supports some 8.3 million jobs.  Largely due to 9/11 restrictions, the country attracted 933,000 fewer overseas visitors in 2008 than in 2000 (and it has gotten worse during the recession).  The average overseas visitor spends $4,500 per trip (visitors driving in from Canada or Mexico spend about $900 per visit), so that missing 933,000 represents a lot of lost revenue and more than 200,000 lost jobs.

The new Corporation for Travel Promotion will focus on promoting travel to the United States, but a major part of that, unfortunately, will involve teaching potential customers how to cope with tight, sometimes humiliating security restrictions and visa requirements.  The CTP will be a so-called public/private partnership with half its money coming from fees collected by the U.S. Government and the other half from private matching funds.  This makes sure that both the travelers and the industry feel the pain, but it also provides budgetary independence for the new organization.  Travelers from countries in the Visa Waiver Program will pay $10 each every two years, which is expected to raise $100 million annually, to be matched equally by industry funding.  I don’t much like charging customers for promotion costs, but $10 doesn’t compare to what they are already paying for travel and visas, so it is unlikely to deter anyone.  It’s certainly not as much a deterrent as today’s visa application fees ($131 whether you get the visa or not).

If the projections are right, the United States will suddenly have one of the most powerful travel promotion organizations in the world.  We spent about $6 million on travel promotion at the national level in 2005 (that’s the most recent comparable data), while countries like Greece, Australia and Mexico spent more than $100 million each.  What can we do with a $200 million promotion budget?  Stay tuned.

For international travel industry news, produced in Hawaii. check out Jürgen Thomas Steinmetz’s eTurboNews.