Business Beyond the Reef

I’m experimenting with titles for this space.  “Weekend Hits” never excited me – and I’m not sure today’s title does it.  The idea is that each Saturday morning I put up a few items that catch my eye (and might interest you), but haven’t blogged about.  Building on our overall “Business Beyond the Reef” them, how about something like “Breaking Waves”?  “Flotsam & Jetsam”?  Anybody have an idea for a catchy title?

Anyway, here are this weekend’s waves:

• We love pork in Hawaii, grinding on our favorite kalua pig, manapua and pork laulau.  So, a Wall Street Journal article about a battle over pork rinds grabbed my attention.  The U.S. Department of Agriculture (unusually) is making a unilateral change to loosen U.S. import restrictions on pork skins, opening up a market for Brazilian suppliers.  This was done at the request of an Ohio producer of fried pork rinds (I like ‘em spicy) who finds U.S. pork skins in short supply.  They are being opposed by some state agriculture departments and by competing pork rind producers, who argue to keep the imports out for fear of health problems.  We’ve got chicharrones here in Hawaii, too, going back more than 100 years to our first Filipino immigrants.  Yum.
• Spare a thought for poor foreign investors in Cuba.  Cuba lured investors in, but then put a moratorium on sending any of their profits back out.  Here’s an article in the Huffington Post about a European businessman in Havana reduced to trading Cuban food vouchers for convertible currency.
• This may take a few years, but Pakistan agreed this week with Turkey to invest $20 billion in a rail line between Istanbul and Islamabad could be big news for business in the Middle East.  It currently takes at least eleven days to send a container by rail on that route, but the new line promises to cut this to as little as three days, making rail shipments from Europe as as Pakistan feasible.  Now, if the Pakistanis can tie this line into the Indian rail system, we’d really have something going.
• It is encouraging that airlines are now competing for landing rights in Iraq.  The Wall Street Journal reports that Iraqi Airlines now has enough traffic to justify ordering new aircraft from Boeing, despite an influx of foreign carriers into Iraqi airspace.  An Iraqi Airlines spokesman takes an enlightened view: “Anything that connects Iraq to the rest of the world is good for the carrier and the country …”. Iraq’s international airports are seeing scheduled flights by Turkish Airlines, Gulf Air, Middle East Airlines, Bahrain Air and Austrian Airlines.  Austrian was a stalking horse for Lufthansa, which now plans to enter the Iraqi market this summer.
• Just Monday I posted about the “Communist Capitalists” in North Korea.  The Wall Street Journal ran an article yesterday about another money-maker for Pyongyang: monument-builder Mansudae.  Seems they are going after and winning contracts to build huge statues and monuments for cheap – based on all the practice they have had at home.  The WSJ piece details work they are doing in Senegal, and mentions contracts in China and Malaysia.  Libya is getting interested.
• The European Union and India resumed talks this week to negotiate a free trade agreement during 2010.  India did an FTA in 2009 with South Korea.
• That didn’t take long.  The United Steelworkers union and four steelmaking companies in Texas and Illinois have brought the first antidumping case of the year against China.  Chinese companies stand accused of selling oil well drill pipe at unfair prices.  These cases take months to investigate and the mere fact that there is an investigation does not mean that the Obama Administration has taken a stand on the issue – a fine point that will predictably be lost on Beijing.  Anybody can bring a case (given sufficient money for lawyers and a little evidence), but it is the decision that matters.  We aren’t there yet.

I was pleased to hear President Obama bring up exports in his State of the Union address Wednesday night.  Let’s take a look at what he had to say:

Asking For Exports (Official White House Photo by Pete Souza)

“… we need to export more of our goods.  (Applause.)  Because the more products we make and sell to other countries, the more jobs we support right here in America.  (Applause.)  So tonight, we set a new goal:  We will double our exports over the next five years, an increase that will support two million jobs in America.  (Applause.)  To help meet this goal, we’re launching a National Export Initiative that will help farmers and small businesses increase their exports, and reform export controls consistent with national security.  (Applause.)

We have to seek new markets aggressively, just as our competitors are.  If America sits on the sidelines while other nations sign trade deals, we will lose the chance to create jobs on our shores.  (Applause.)  But realizing those benefits also means enforcing those agreements so our trading partners play by the rules.  (Applause.)  And that’s why we’ll continue to shape a Doha trade agreement that opens global markets, and why we will strengthen our trade relations in Asia and with key partners like South Korea and Panama and Colombia.  (Applause.)”

It is encouraging that the President (or his speechwriters) understand that exports and jobs are positively correlated.  And his goal of doubling U.S. exports within five years is certainly something to aim for, though I fail to see how Obama can deliver it.  State of the Union addresses are always short on details, so we will have to wait to see what is in the National Export Initiative.  Obama’s mention of reforming export controls is consistent with Secretary of Commerce Gary Locke’s proposals that I reported on a couple months back.

So how is President Obama going to increase exports by small business and farmers?  Traditionally, farm exports have been prodded by subsidies (disguised or otherwise) and assisted by the promotion efforts of the Foreign Agricultural Service.  Similarly, the chief export promotion agency for non-agricultural products has been the U.S. Commercial Service, always afflicted with inadequate budgets and too few staff.  Introducing new subsidies has no future, and adequate resources for the export promotion agencies seem ruled out by the President’s proposal to put a three-year moratorium on increasing discretionary spending.  Neither Service is strong enough within their own Departments (Agriculture and Commerce) to increase their resources in the face of a zero-sum budget game.

So, again, how is he going to increase exports?  Perhaps he has negotiations in mind, since he mentioned the Doha Round.  But even if poor Doha should become a magnificent success, that won’t double exports in five years.  Passing the free trade agreements in the pipeline would help, but would they double exports?  No.  Perhaps Obama anticipates talking the dollar down, or even a devaluation.  I don’t think so.  A massive loosening of credit for export sales?  That raises the subsidy issue again.  Export education?  Absolutely necessary, but that won’t double sales in five years.  That pretty much leaves jawboning and we know how effective that is.

Obama played the export enforcement card in his second paragraph.  Always popular with members of Congress who think that other countries are nefarious and that America does no wrong on trade.  Sorry to disillusion them, but the United States is just as vulnerable if other countries want to step up their enforcement of trade agreements.  That is a ticket to trade war unless we restrict ourselves to using the dispute settlement mechanisms in the World Trade Organization.  The WTO, which populists love to villify, has a good record of solving trade disputes – and is a far better option than doing it the old-fashioned way.

My pulse quickened when the President said he wants to strengthen trade relations with South Korea, Colombia and Panama.  I thought he was about to ask Congress to implement the long-stillborn free trade agreements with those countries.  But he stopped short.   These FTAs could mean hundreds of thousands of jobs for Americans, and could – with other future agreements – help meet the five-year goal.  But no, he stayed on the fence – and Congress is not likely to act unless Obama clearly says he wants them to do so.  Disappointing.

But the unthinking Democratic applause for every sentence was amusing.

Myanmar - How Risky Is It?

Last week I posted about why I don’t think small exporters should start out trying to conquer China.  Now, a British risk assessment outfit called Maplecroft has issued an index of countries not to do business in.  More accurately, the Maplecroft Global Risks Index ranks 175 countries according to 26 non-financial risks faced by international business.  These  include political risk, legal shortcomings, likelihood of disease, war risk or terrorism, climate change, natural disasters and more.  In short, anything that might adversely impact an investment, a major project, long-term contracts, or logistics.

Of 24 countries that Maplecroft assesses as extremely risky, 17 are in Africa.  It’s no great surprise that Somalia, Democratic Republic of the Congo, Zimbabwe and Sudan take the four riskiest positions.  Others in the worst two dozen include Myanmar, Afghanistan, Nigeria, Iraq, Bangladesh, Pakistan and Yemen.  None of these are high on my list of favorites, either.

More companies will be interested in the slightly better “high risk” category, which includes such hot destinations as the Philippines, Indonesia, India, Russia and Thailand.  China, Brazil and Mexico are all medium risk.  I assume you have to pay big money to get the complete list and associated analysis, but Maplecroft does show a world map with countries color-coded by their classification: extreme, high, medium and low risk.

I don’t see – squinting at the map – any real surprises, but the index is a good confirmation for what seems common sense.

Yes. The U.S. International Trade Commission has a new report about the export performance of small and medium-sized U.S. businesses.  The report examines exports by SMEs (i.e., firms having fewer than 500 employees) between 1997 and 2007.  So, what’s the verdict?

SMEs accounted for about 30% of U.S. merchandise exports in 2007 (that’s roughly $306 billion), a comeback from a low of about 26% in 2003.  And they weren’t selling the t-shirts and kitsch that many people associate with small business.  The bulk of SME exports were computers and other high tech equipment (roughly $47 billion), machinery (about $37 billion), chemicals ($35 billion) and transportation equipment ($29 billion).  Pretty substantial stuff.

Where was it going? Canada and Mexico (about $45 billion and $35 billion, respectively) were the top destinations, naturally, given proximity and NAFTA.  Next up were the big Asian markets, led by China ($22 billion) and Japan ($18 billion).  Germany was the largest European market, buying about $12 billion from America’s SMEs.

Ambassador Bridge: Taking Small Exporters to Canada

That’s the overall picture on the merchandise side, but we need to get into the details.  SME exports of the big ticket items (high tech, chemicals and machinery) overwhelmingly went to Canada and Mexico, and then often to only a single customer.  Given that, it isn’t surprising that most of the growth in SME exports came from new entrants, firms that had never exported before, but starting out with a single customer, usually in Canada or Mexico.  This may tell us how important NAFTA is to small business development in the United States, something that populist politicians need to know before they re-open trade agreements.

Intriguingly, buyers in Hong Kong, Switzerland and Israel seem the most relaxed about dealing with smaller suppliers, since these were the markets for which SMEs recorded the highest percentage of U.S. exports.

Exports of services by small companies show a different pattern. Their largest markets are Canada (no surprise) and the United Kingdom.  The ITC speculates that sales to overseas affiliates of larger U.S. companies may play a role, hinting that SMEs may be piggy-backing on existing domestic business with these companies.  Services exports are concentrated on professional services, such as architecture and engineering services.

Entrepreneurial North Korea and Vietnam are striding into capitalist ventures.  Never thought of North Korea as entrepreneurial?  Think again.

Come and Get It! (photo: Shih-Tung)

Admittedly, they started out in Cambodia, that hotbed of free enterprise.  The North Korean government opened the Pyongyang restaurant chain – with the first two “franchises” in Phnom Penh and Siem Riep – back in 2002.  And they are expanding across Asia, reports the South China Morning Post (subscription), featuring North Korean food, waitresses, decor and entertainment.  The SCMP correspondent raved about the food, but expats sampling the fare in the Phnom Penh restaurant have a few complaints.  Following their success in Cambodia, the Pyongyang chain moved into Bangkok in 2006, quickly followed by Vientiane and Kuala Lumpur.  They have had restaurants in China for years, but I don’t know if they are officially part of the chain.  That said, one store manager in China complains that their owners in North Korea (the infamous Bureau 39) exact an “annual franchise fee” of $10,000 to $30,000 per restaurant.

Those franchise fees are what this all about.  North Korea needs foreign exchange and has been trying to earn it legitimately through restaurants and other enterprises since the 1990s.  Unfortunately, they have also tried illicit trading ventures.   There is a report of a Pyongyang Restaurant in Vienna, but I haven’t confirmed that Austrians are now eating kim chee.  Chinese restaurants in Vienna are generally pretty poor, and their prime business has often been money-laundering.  I recall a gangland style killing at one near my house in the late 1990s.

The recession may be catching up to these new capitalists; there is a report from last summer that many of the restaurants are closing.  They depended on South Korean tourists for cash flow.

In a similar vein, says Asia Times, former Vietnamese Army officers who fought in Laos are back on the battlefield.  This time their mission is to build a luxury resort and golf course where they fought so many years ago.  The Long Thanh Golf Trading & Investment Joint Stock Company (snappy name) is developing their resort just outside of Vientiane, amid charges that the Laotian government has given them a sweetheart deal to obtain the land and get rid of the farmers now living there.  It’s curious that, just before the $1 billion golf resort project was announced, the Vietnamese Army gave significant quantities of “armaments” to their counterparts in the Laotian Army.  Coincidence, of course.

$35 billion in export sales. That’s how much we are hurting ourselves.

Seems Like There's Business

The U.S.-Korea Free Trade Agreement is still waiting for implementation by the Obama Administration and the Congress, a refusal to act that I have posted about several times.  Trade Partnership Worldwide has released a study for the U.S. Chamber of Commerce that quantifies how much Washington’s inaction hurts the United States when faced with competition from Korea’s new FTA with the European Union and the prospect that there will soon be a Korea-Canada FTA.  The study was done by Laura Baughman of Trade Partnership and Joseph Francois of the University of Linz.

The bottom line, say Baughman and Francois, is that America’s failure to implement the U.S.-Korea FTA will cost the United States $35.1 billion in exports, which will reduce GDP by $40.4 billion and cause a net reduction in the welfare of U.S. citizens of $25.2 billion.  What’s that mean in jobs?  More than 345,000 jobs lost.  Any way you look at it, we are losing big money.

For an administration and a Congress that claim they are concerned about jobs, failure to put this agreement in place reveals a curious lack of interest in putting Americans to work.  It must be more important to put Europeans and Canadians to work.  Am I missing something here?

• Lest you think that all trade disputes are between the United States and China, Washington filed a case against the Philippines last week, protesting that the Philippines’ excise tax on distilled spirits discriminate against imports.  The Philippines levies a lower tax on spirits made from local products, such as sugar or palm, than it does if the same spirit is made from non-tropical products, such as wheat.  The Americans argue that the differential tax rates illegally protect local spirits producers, while Manila will say – with an innocent look – that foreign spirits made from sugar or palm get the same low rate, so there is no discrimination.  I expect the European Union and perhaps Japan will join the United States’ filing.
• Micronesians are trying out their muscles in Europe in what could prove a landmark case in the environmental business.  A Czech power company has applied for approval to renovate an old coal-fired power plant to extend its life, but the Federated States of Micronesia has filed a motion with the Czech review body to deny the power company’s request.  The Micronesian argument is that anything that will raise or extend the growth of greenhouse gasses is a danger to the very existence of some Micronesian islands.
• I was so excited about the new China-ASEAN free trade agreement that I totally missed the January 1 start of the Russia, Kazakhstan and Belarus customs union.  A customs union isn’t the same as an FTA, generally requiring that its members have identical customs duty structures as well as free trade.  The European Union is a customs union, and there are a few others, but I am skeptical that that the new one will work.  It just seems so lopsided, it is hard to imagine that Moscow isn’t calling all the shots.  I expect that Kazakhstan and Belarus will see a surge of Russian products, but that shoppers in their big neighbor won’t notice much.  Kyrgyzstan and Tajikistan are said to be considering joining.
• This is for my real estate friends, who are always looking for new sources of business.  Realtors in Scotland are reporting a surge in interested buyers from Georgia (no, not the one in the United States).  Russia, China and India, too.
• The United States is dropping in the freedom standings.  The Heritage Foundation and the Wall Street Journal have released their 2010 Index of Economic Freedom, which purports to measure things such as freedom to trade, invest, establish a business, own property and other good stuff.  The winners are Hong Kong and Singapore, so one reflects that the index has nothing to do with political freedom.  Still, it is disappointing that the United States has fallen to #7, reflecting tighter regulation of business during the recession backlash.  Who is last on the list?  Coming in at #179, drum roll, please – North Korea.
• I’m late on this, but it got so little notice that I didn’t notice it.  On December 28, President Obama signed a bill that extends the life of the Generalized System of Preferences for another year.  Now GSP expires December 21, 2010.  So we have to get the attention of the Congress again next fall.

Global Yard Sale

Trade in used products has an image problem, despite a largely honorable history.  Most of us imagine shady characters passing off shoddy goods.  But recessions have a way of changing things.  Just look at the growth of thrift shops in the United States, growing at five percent a year for the past three years to more than 25,000 stores.

The second hand trade is big business around the world.  Back in the 1970s and before, there was money made in shipping used clothing from North America and Europe to the poorer countries in Africa.  Some of this was done by charities, but much of it was by companies peddling used shirts, cast-off pants or even moving seconds and overstocks (that now go to outlet malls).  Later on, shipments of used factory equipment from the United States to Latin America grabbed the headlines.  Sale or lease of second-hand aircraft around the world is common.  Many of the warships found in developing countries are in their second or third lives after being decommissioned by more developed fleets.

Opposition to the used good trade is widespread.  Many countries seem insulted that they should buy used products, though it can make wonderful sense when financing is scarce.  Some routinely ban used clothing as a perceived health risk, as others ban used cars.  Often, restrictions on used goods reflect local pride more than real problems.

It shouldn’t surprise us that the recession has generated more demand for used goods in international trade, nor that the Internet has spurred the trade.  The South China Morning Post (subscription required) reports a surge in buyers searching for used goods on Alibaba.com, the China-based business-to-business portal.  Alibaba.com says that searches by U.S. buyers looking for used goods rose by 113% between November 2008 and November 2009.  U.S. companies were looking for things as diverse as used sailboats, second-hand cars from Korea or Japan, used clothing, laptops, golf carts and car parts.  (I’m not sure I’d put used car parts on my car, but that’s just me.)  One Shanghai-based purveyor of used vehicles and construction machinery reports that inquiries via Alibaba.com have risen 20-30% in the past year.  Alibaba boasts more than two million used products on its site.

Cambodia's National Road No. 6

Cambodia’s new highways are being rolled out quickly – and may have a profound impact on regional trade in S.E. Asia.  Refurbished highways between Phnom Penh and Thailand were opened December 28, and are only a small part of the tremendous road building going on in Cambodia.  Ten projects, totaling 730 miles, are currently underway and at least another eleven projects are in the pipeline.  Good business for those who can get there.

Prime Minister Hun Sen calls these roads “elephant steps, not mouse steps” in terms of their speed and their potential impact on his country.  Clearly, the roads will benefit tourism, making it easier to visit sites such as Angkor Wat from Bangkok.  Cambodia will make money out of day-trippers from Thailand, plus the roads will encourage more tourists to stay in Cambodia to see sites that have been unreachable from Thailand.

The new roads are already easing logistics and spurring trade, linking Cambodia to the highway systems of its neighbors.  Thai firms are already pushing everything from construction materials to instant noodles into Cambodia.  Japanese companies are using the new routes to link operations in Bangkok to Ho Chi Minh City.

The competition to build Cambodia’s new highways is intense, reports the New York Times.  The Asian Development Bank is financing some of the roads, while China is building others.  The new road to the Thai border was built by a Thai company using ADB funds.  Mr. Hun Sen has commented how the Chinese build more quickly than do the companies doing the ADB projects.  I wonder what he will say when the maintenance bills come in.

Where are they now?

Ocean shipping is what delivers the goods in world trade.  So I was concerned to read in the New York Times last Friday that a huge number of ships are lying idle, waiting for future cargoes to materialize.

It’s not as bad as it appears.  The idleness mostly reflects a surge in the number of new vessels coming out of shipyards.  Recessions can be a good time to build your fleet, because you can get better prices from shipyards than during a boom.  And some of the big shipping companies have  overextended themselves (just like banks), initiating too much new construction in the boom times now past.

But some of the idleness is the sad legacy of several ocean shipping firms shutting their doors last year.  The major carriers lost $20 billion in 2009, and at least seven smaller lines sank from sight.  Their ships are now lying idle somewhere.

This is a huge, huge business – one that most of us take for granted unless we are using them, or live and work near a major port.  One researcher guesses that the liner industry (the ships that carry containers on regularly scheduled routes) accounts for 13.5 million jobs in shipping, ports, shipbuilding and related industries.

Traffic is improving as the world withdraws from recession, but it is uneven.  The greatest pickup is in the bulk trade, meaning employment for tankers and bulk carriers carrying oil or minerals.  The container trade has not responded, another indication that recoveries are still a few months away from hitting their stride.  Ten percent of the world’s container ships lie idle and another 371 new container ships are expected to slide down the ways this year.  Not a good time to look for profits in the container ship business, but – for the rest of us – this might help keep shipping rates reasonable as demand for goods rises.