Business Beyond the Reef

That's a No-No, Beijing!

China regrets the decision.  Notice, they didn’t say that they regret having done anything naughty, they just regret the decision that went against them.  In a December 21 ruling, a WTO appeals panel upheld the ruling by an earlier panel of experts that restricting imports and distribution of foreign films, TV shows and books to a handful of government-controlled companies runs counter to China’s WTO obligations.  The case was brought by the United States, but cheered on by any country that exports media products to China.

I confess that I have not read all 195 pages of the ruling, though it is worth a glance to see how thorough and, frankly, even-handed a WTO panel really is.  The ruling was on reasonably narrow grounds, focused on the monopoly aspects of China’s actions.  Beijing tried to obfuscate by saying they have the right to control imports for moral and cultural reasons, but that was not the immediate issue, which was the artificial narrowing of choice for how to distribute media products in China.  But China persists in arguing that “… cultural goods combine commercial and cultural value, and should be managed in a different way than other products.” Uh hunh.  That wasn’t what the case is about.  Besides, the WTO recognizes the occasional need to take action to protect public morals (that’s why most countries can control cross-border movement of pornography, however it is defined in their society).  From 1947, and now incorporated in the WTO, GATT Article XX specifically allows trade restrictions “… necessary to protect public morals.” It is OK for China to censor imported media for morals, but they must do so on a non-discriminatory basis and allow open access for products that clear the censors.  China hasn’t been doing that.

There is a long history in the WTO and the GATT about imports of “cultural products.”  A famous battle took place in Geneva between Hollywood and France over France’s old screentime quotas, which were meant to protect the French industry under the skirts of protecting French culture.  This doesn’t bode well for the future of China’s current restriction that only twenty foreign films can be imported annually, which wasn’t addressed in the current case.  (Gee, does China restrict its film pirates to copying only twenty films a year?  I don’t think so.)  I’m anticipating that Bollywood and Hollywood will join together to force New Delhi and Washington to bring the next case.

Coral has been used in jewelry for at least 25,000 years – and has likely been traded internationally for nearly that long.  And, of course, coral jewelry is an important trade item for Hawaii, which has significant reserves of black, gold and pink coral in deep water.  Hawaiian corals are harvested under fairly strict rules in accord with the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES).  That’s not the case everywhere.

Mediterranean Red Coral: Over-Harvested

The coral jewelry trade has to be distinguished from trade in live corals for use in aquariums or other “decorative” ventures.  Much of this coral is taken from shallow-water reefs with total disregard for CITES or even common-sense sustainability principles.

And trade in black, gold or pink coral jewelry needs to be distinguished from the far larger red coral trade.  Red corals are the traditional corals found in Mediterranean jewelry, and is harvested at fairly shallow depths (meaning that barriers to entry are low).  Much of the Med has been decimated by red coral harvesting, though many of the more legitimate companies are using more sustainable practices today.  The basic issue is that red coral is very slow growing, only about a 1/4 inch of growth each year.  By contrast, Hawaii’s gold coral grows more quickly at 3 inches a year, making it feasible to harvest at a sustainable rate.  Gold coral is also found about 1200 feet down, a significant barrier to entry.

Though my wedding ring features Hawaiian gold coral, I have been thinking more about the trade since spotting a recent New York Times article about the coral jewelry trade.  Due to the over-harvesting of red coral, the trade is very controversial and has led companies like Tiffany’s to stop selling coral jewelry.  The article highlights the “Too Precious to Wear” campaign launched in 2008 by a non-profit called SeaWeb, but also features the opposing views of red coral harvesters in  Italy and Hawaii’s largest jewelry company, Maui Divers.  Worth a read, though it misses the point that different corals grow at different rates and that the deeper corals create natural barriers to entry into the industry.  Seems to me that we need tighter controls on harvesting and trading red corals, perhaps some control on pink, and lesser controls on black and gold.  But that’s simply a layman’s opinion.

Full disclosure: Maui Divers was a client many years ago.

Carrying "Famous Brands"

The world received something of a Christmas present December 18 when an agreement was announced between China, the United States, Mexico and Guatemala in which China agreed to end its “famous brands” export subsidies.  This was a case that the United States and Mexico joined together to bring to the WTO on December 18, 2008 – and achieved a compromise just a day short of a year later, lightening speed in the world of trade policy.  Guatemala joined in shortly after and the three countries worked together to convince China to change its ways on subsidies that encouraged Chinese exports of thousands of different household electronic appliances, textiles and apparel, light manufacturing industries, agricultural and food products, metal and chemical products, medicines, and health products.  It’s surprising that resolution of the case hasn’t garnered more press interest, but I have only seen sketchy reports by Bloomberg and articles in specialist press for the affected industries.  But mainstream media isn’t fond of good news.

The dispute centered on three initiatives by Beijing that made subsidies available to Chinese companies if they met prescribed criteria for export performance (a definite no-no under WTO rules).  The initiatives were all couched in terms of promoting “famous brands” of Chinese products and were known, respectively as the “Famous Export Brand”, the “China World Top Brand”, and the “China Name Brand Products” initiatives.  Subtle, the Chinese.

Companies that qualified as “famous brands” received a broad package of preferences from government agencies, including monetary assistance that was tied to exporting the products. The case also addressed a passel of other subsidies to Chinese exports.

To its credit, China worked cooperatively with the complaining countries, which is why the case was resolved so quickly.  And probably why it received so little press.  There was none of the usual rhetoric claiming the world was “unfair” or that others were infringing Chinese sovereignty.  One suspects that Beijing realized they didn’t have a leg to stand on.  In any event, the case turned out well and the WTO’s dispute settlement mechanism worked as it is supposed to.  Good all around.

Things you might find interesting, but I haven’t had the time or inclination to blog about:

• I’ve got to draw your attention to yesterday’s article in the New York Times about direct marketing in China.  Direct marketing was illegal there until 2006, but – wow! – has it taken off now.  Mary Kay Cosmetics has about 200,000 sales agents in China.  Avon has one million agents, recruiting up to 50,000 each month!  Avon ladies were crossing the Berlin Wall the night it went down, but this is astounding.
• Here’s a present for statistics junkies!  Go explore Worldometers, a site that gives you swiftly-changing real-time numbers on almost everything.  They even did a report on the number of daily worldwide toilet flushes!
• Even better (and more creative) is GapMinder – long a feature of my links list to the right.  Han Rosling takes statistics and brings them alive so that you see what is happening dynamically.  Super cool!
• The U.S. International Trade Commission wants to hear from U.S. exporters about whatever obstacles your company faces in exporting.  They are trying to figure out what more (or less) the U.S. Government should do to help American exporters.  There will be public hearings in Washington, DC, St. Louis and Portland in February and March 2010, and the ITC is looking for written testimony as well.  It will all go into preparing recommendations to the President later in 2010.  Here’s all the info on how to get your views across.

I had not heard much about the palm oil trade for a couple of years.  There was a flurry of interest in Hawaii in 2007 when proposals were made for biofuel power plants on Maui and Oahu that would be fueled by palm oil from Indonesia.  Planners envisaged growing palms or other biofuel crops in Hawaii, but confessed that the power plants would need imported oil for the first few years.  Environmental opposition to forest burning in Indonesia was one of several reasons the plans were dropped.

Reuters reported last week from Kuala Lumpur that South East Asia’s palm oil producers are refocusing their marketing on Asia in response to opposition to their product in Europe.  European environmentalists have realized that palm oil producers are among the prime culprits in burning and flattening Asia’s rain forests and have ignited opposition among European consumer groups.  The world palm oil market is expected to reach $45 billion this year, with nearly half of that being purchased by China, Pakistan and India.

Forests Burning On Borneo

The deforestation issue has caused Unilever to pull back from a $33 million/year contract with an Indonesian agribusiness firm that has been accused of large scale forest burning and wetland draining to make room for new palm oil plantations.  Greenpeace charges the Indonesian company, PT Smart, with destroying peatland forests on Borneo, endangering orangutans.  PT Smart denies the accusation, but palm oil growers fear that environmental pressure will force other big buyers, such as Nestle and Procter & Gamble to curtail their palm oil consumption.  P&G, for instance, uses palm oil in some flavors of Ben & Jerry’s Ice Cream, a brand that touts environmental awareness in its marketing.

PT Smart is redoubling its sales efforts for palm oil as a cooking fuel in India, and is joined in its Asian marketing by Malaysia’s Sime Darby and IOI, and Singapore’s Wilmar.  It will be interesting to see if reduced demand in Europe, and potentially North America, will put a dent in the rate of deforestation.  Having breathed the smoke of Sumatran forests while living in Singapore, I certainly hope so.

“Oh, down in Mexico
I never really been so I don’t really know”

- James Taylor

When most Americans think about NAFTA, their thoughts are channeled by the “great sucking sound” that never really materialized and by the shibboleth that Americans can’t negotiate trade agreements.   We almost never look at an agreement from the viewpoint of the other guy, and we assume that our own people are getting hurt by it.  I suppose most countries are like that.

I long ago learned that it is more important to read or hear views that are contrary to yours.  But most of us look only at arguments that reinforce our views.  That’s why two studies published this month are important.  They don’t just say NAFTA is good, or that NAFTA is bad, nor do they join the legions of studies that examine NAFTA’s impact in individual U.S. industries or communities.  These studies look at NAFTA’s impact on Mexico.

The first was issued by the Carnegie Endowment for World Peace and carries the imposing academic title of “Rethinking Trade Policy for Development: Lessons From Mexico Under NAFTA.”  The study concludes that Mexico mistook trade policy for development policy and that NAFTA did not go far enough to encourage economic development in Mexico.  The authors (Eduardo Zepeda of the Carnegie Endowment, and Timothy A. Wise and Kevin P. Gallagher of Tufts’ Global Development and Environment Institute) like the post-NAFTA emphasis on addressing labor and environment issues in trade agreements, but admit that tighter provisions would not have helped Mexico take advantage of NAFTA.  More important, they say, would have been a development strategy that, in concert with NAFTA, would have nudged Mexico’s economy on a steeper upward path.  For the United States, illegal immigration and the drug trade are the two big issues with Mexico, and economic development would have addressed both of these.  If a country is advancing economically, its people are less likely to want to leave.  Similarly, an advancing economy provides more opportunities for bettering oneself in a legal and safer fashion than does the drug trade, thus lessening the lure of the drug cartels.  (In fact, it makes sense for drug cartels to fight economic development.  Except their own, of course.)

The authors point to five ideas they say should be central to future trade agreements.  First, they argue that future agreements should avoid any prohibitions on industrial policies, such as favoring particularly promising industries.  (I have never noticed that the United States is especially good at picking winners, but perhaps other countries fare better at this.)  Second, Mexico’s liberalization of agriculture, partially encouraged by NAFTA, led to domestic unrest and left Mexican markets vulnerable to competition from U.S. and Canadian produce.  Third, future trade agreements need better and more stringent benchmarks for environmental and labor standards (I disagree because it is too easy and too tempting to use these in a protective fashion).  Fourth, the lack of U.S. and Canadian funding for Mexican economic development was a fatal flaw in NAFTA.  And last, the presence of NAFTA is no argument for Mexico to ignore creation of its own comprehensive development strategy.

Barrier To Exports?

Clearly, I agree with some of this, but not all – and that’s why it is important to read contrary views.  It makes you think about things anew.  The point about the lack of funding to support economic development is the most telling for me.  I would much rather see the money of U.S. taxpayers poured into Mexico for development projects, than to see billions wasted on a wall between neighbors that will only prompt Mexican ingenuity in getting over, under, around and through.  Let’s put the same money into making Mexico a nicer place to live, which makes the border problem moot – and creates a better market for U.S. goods and services.

The second study, by one of the same authors, Timothy Wise, carries an equally imposing title: “Agricultural Dumping Under NAFTA: Estimating the Costs of U.S. Agricultural Policies to Mexican Producers.”  Wise examines the impact of U.S. farm subsidies on trade with Mexico and concludes that U.S. policies cost Mexican farmers $12.8 billion between 1997 and 2005.  The impact was concentrated on Mexican corn farmers, who lost $6.6 billion in the same period.  No wonder farmers were marching on Mexico City, complaining that American crops are being dumped on Mexico.  Mexico has its own farm subsidies, too, and – emulating their northern neighbors – the bulk of these go to large wealthy farms and agribusiness companies.  Neither country does especially well by its small farmers.

The next time you hear someone blithely say that Mexico gets all the benefit from NAFTA, ask them to go share a corn tortilla with a Mexican farmer.

The New York Times‘ Opionator blog has an hilarious post up about the impressions that East Coast Americans (specifically New Yorkers) have about their fellow citizens and states in the western United States.  Thought I’d add a “beyond the reef” perspective to it.

Here We Are!

Here in Hawaii, we’re used to many mainland Americans (we call them “mainlanders” when we’re being polite) not even realizing that Hawaii is part of the United States.  We just had our 50th anniversary as a state, so perhaps it will sink in soon.  I’ve gotten questions from mainlanders about what language we speak and if U.S. dollars can be spent here (oh, yes, please!).  Even those that do realize we are fellow Americans, say that they are going back to “the States” when they leave us.  A pet peeve is all those maps of the United States on network television that don’t show Hawaii.  To be fair, they don’t show Alaska either.  Once, when I ran the U.S. Department of Commerce office in Honolulu, I was referred to as the American consul in Hawaii (perhaps I should have tried charging mainlanders for visas).  I’ll never forget the time I got an urgent phone call from Washington, DC asking that I fly in “on the red-eye” for a meeting the following morning.  My response: “Do you really want me to fly a quarter of the way around the world for a one-hour meeting?”  The caller’s reply: “Oh, is it that far?”  Apparently he thought Hawaii was just off the coast of California.

If Americans have perceptual problems about their own country, imagine what faces foreigners coming to the United States.  The biggest surprise (assuming they can get the visa) is how massive the country really is.  I have disabused Asian businesspeople of the notion that they could set up a breakfast meeting in Los Angeles, meet someone over lunch in Miami, and fly back to Chicago for dinner.  And I’ve had the same conversations with Europeans, especially if they venture beyond the East Coast.

Once in a while, lack of geographic knowledge works to your advantage.  It was nearly a year into the first Arab oil embargo before OPEC glommed onto the fact that Hawaii was part of the United States (see, it’s not just Americans).  We happily accepted all oil shipments and merrily passed some of them on to California (they still owe us for that one).

I’m not saying that Americans are any better about geography (oh, Lord, no!).  Few have any notion of how large Russia or China might be, or how compact Western Europe is, or how far away Australia really is.  And most Americans think of Africa as all one place.  We’ve all got some learning to do.

Note for those of you who read the Opionator piece: Honolulu had Costco long before New York.

I had not planned to post today, but the juxtaposition of two articles on corruption around the world grabbed my attention.  First the bad news, an article in the International Herald Tribune about the role of middlemen in obtaining corrupt decisions in Indonesia’s criminal justice system.  Not unexpected, but appalling nonetheless.  Indonesia is a country I love and enjoy – and it has such potential – but potential is all it is unless practices like this are stopped.  No wonder the average Indonesian has no trust in the rule of law.

The encouraging news was a report in the South China Morning Post (subscription required) about a training course at the University of Hong Kong for anti-corruption officials from around the world.  The course teaches them about Hong Kong’s anti-corruption methods, but also features lectures from Singapore and Australian officials.  There were 36  “students” from a dozen countries, including twelve Nigerian officials.  I was encouraged to see that Nigeria is making progress on anti-corruption drives, as are Malawi and Tanzania, but the news from the Philippines is dire.

There is much more to these stories, but I’m on my way to the airport.

The map below is drawn from the 2009 Index of Perception of Corruption by Transparency International.  I am not sure who put it in graphic form, but it is available here.  Nice work.

2009 Index of Perception of Corruption by Transparency International