Business Beyond the Reef

Where are the Americans? (photo: José Porras)

I have long held, and so have my friends in the travel industry, that the biggest tourism boom in history will be touched off when the United States ends its embargo on trade and investment with Cuba.  Notice I said “when”.  Normalization will happen, but that’s like saying that the stock market rises in the long term.  We can’t know when it is going to happen.

In a New York Times article on Monday, those of us who see this coming are described as “dreamers”.  And the article itself is headlined “Dreaming of Cuban Profits In A Post-Embargo World”.  The big dreamers attended a conference last week in Cancún that attracted both Cuban tourism officials and potential U.S. investors, among many others.  Part of the message is that everybody is in Cuba except the Americans, with one speaker saying that 500 international companies have offices in Havana.  I’m not sure that means that business is being done, however, reflecting on the conference I attended last November where a figure of 150 foreign firms was used.

Cuba’s tourism minister, Manuel Marrero Cruz, told the attendees in Cancún, “We are not waiting for the Americans. We’re developing tourism for others around the world.”  Like Cuba doesn’t need a market of millions of people only an hour or so away.

And some Americans are getting to see Cuba for themselves.  the Obama Administration loosened travel restrictions for Cuban-Americans, a quarter a million of whom visited Cuba last year.  This is an increase of 80,000 from the previous year.  One wonders when it will dawn on both sides of the Florida Straits that other Americans might be interested, too.

What concerns me is that Congress could open up travel to Cuba without also opening up investment.  That will provide huge tourism revenue to Cuba, but will exclude U.S. travel and tourism companies, other than airlines and tour packagers, from participating.  What’s the sense of opening things up if we only guarantee profits for non-U.S. hotels and others who will be on the ground in Cuba to service the  avalanche of Americans?

Medical tourism has gotten a lot of play lately, and has a surprisingly long history in Hawaii.  Before we ever knew the term, Hawaii’s hospitals were making money from patients that were coming from Japan and Taiwan for rehabilitation programs in the tropical sun.  This was back in the early 1980s, when I did some work with Honolulu’s Rehabilitation Hospital of the Pacific.  They were attracting patients from Asian societies that traditionally shunned handicapped patients and kept them hidden away from all eyes.  These patients prospered in Hawaii in a program that not only provided the rehab therapies they needed, but spent half the day getting them out to beaches, parks, shopping centers and in touch with humanity.  Worked miracles.

Medical tourism then started to go the other way.  Famously, Hawaii’s singer Don Ho made several trips to Bangkok to receive stem-cell treatments that he could not obtain in the United States.  Many other Americans ventured overseas to find either treatments they could not get at home or prices lower than those prevailing in the U.S. market.  (Americans aren’t alone in this.  My cardiologist in Singapore had patients from at least thirteen other Asian countries who flew in to see him.  In Austria, there were regular tours across the border with Hungary that featured dental work at lower prices.)

Bangkok's Bumrungrad - Healthy Business

Asia’s ascendancy in supplying the medical tourism trade may be about to hit a bump in the road.  And that bump is the new health care reform in the United States.  By covering millions of Americans who were not insured or under-insured in the past, there may be less incentive for Americans to venture overseas for treatment.  And, to the extent, that the reforms put a lid on prices (if they do), financial incentives for outbound medical tourism may diminish.  Couple this with a more open attitude by the Obama Administration towards stem cell therapies, and Americans may have more reason than ever to stay at home.  So who gets hurt by this?

Asian and Latin American hospitals and clinics that have made a specialty of attracting U.S. patients, that’s who.  Muhammad Cohen interviewed officials at Bangkok’s Bumrungrad Hospital for Asia Times.  Bumrungrad attracted 420,000 overseas patients last year, and they see pros and cons from America’s health reforms.  Obviously, they don’t rely exclusively on the U.S. market for patients and Bumrungrad will likely kick up their marketing in other countries.  Also, they see possibilities that some Americans may decide that the penalties for not buying insurance are less costly than the insurance they need, so they will continue to go overseas for treatment.  And health care reform should have only a marginal impact on U.S. patients going abroad for cosmetic surgery or installation of medical devices, both of which can be substantially less expensive elsewhere.  They also will continue to attract some of the six million Americans who live overseas.

I have a friend in Mongolia who occasionally blogs about trade issues.  Jargal Dambadarjaa and I met years ago at a Rotary Club in Denver, where he was studying and doing business.  (Did you know that Colorado has the largest Mongolian population in America!)

Tuvan Customers

Jargal’s latest post is about trade between Mongolia and Russia and transhipments from China to Russia across Mongolia.  He tells about a border crossing between northwestern Mongolia and the Tuva Republic that is part of Russia.  Apparently, Tuva has no access to the rest of Russia by train, so most of what they purchase comes from China, passing through Mongolia.  Despite the lack of a rail connection, the Tuvans are merrily selling Chinese goods to the rest of Russia, transporting them by truck.  Jargal says the Tuvan side of the border crossing features a couple of food markets and 3-4 cafes that seem to get much of their business from the Russian customs officers.

It’s the Chinese goods that sustain business.  While Mongolia imports wheat, flour, gasoline and energy from Russia, there is relatively little that is not Chinese moving in the opposite direction.  Mongolia would like to sell more meat and live animals to the Tuvans, but the Russians are limiting imports for health reasons.  Recently, shipments of 2,000 breeding animals from Mongolia were stopped at the border, while – at virtually the same time – Tuvan authorities said they wanted to buy up to 65,000 animals from Mongolia.

Jargal points to price differences on meat between Mongolia and Russia as something that should drive the trade and give Mongolia an export industry.  He says that boneless beef that costs US$8 in Kyzyl, Tuva’s capitol, costs only $3 in Mongolia’s capitol, Ulaanbaatar.  The same beef purchased in Ulaangom, where it comes from, runs only $.80.  The key will be working with the Russians to make sure that Mongolian animals and their products meet the European health standards that Russia is increasingly adopting.  Jargal says there is scope for investment in a new meat processing plant in Mongolia to supply this trade.

Another sign of potential for business, says Jargal, is the popularity among the Tuvans of trade fairs that have been run on the Mongolian side of the border, featuring both Mongolian and Chinese goods.  He says that one recent fair resulted in a traffic jam at the border when more than 4,000 Tuvan vehicles tried to cross the border to get to it.

• A WTO dispute settlement panel issued its findings this week on a long-standing row between the European Community and the United States on aircraft subsidies.  Washington (meaning Boeing) has long held that European “launch support” for new Airbus models is an illegal export subsidy, and a WTO panel of experts has now largely agreed.  This causes consternation in European capitols and a renewed emphasis on negotiation to forestall a U.S. request for retaliation.  Since there is a similar case, brought by the EU, that says that U.S. military purchases and NASA research contracts constitute the moral equivalent of “launch support” for Boeing, and panel findings are due by the fall, there seems room to negotiate.  But I’m not holding my breath.  These issues have been around since the birth of Airbus in 1970.

"Euro Leaf"

The European Union is requiring European firms to use a new organic food products label, beginning July 1, 2010.  It is optional for imported products.  From what I saw of the “Green Dot” when it started, it would be a good idea for anybody selling organics in Europe to see if their products qualify for the new label.

• It’s nice to finally see a crack in China’s stonewall on exchange rate manipulation.  The central bank and the Ministry of Commerce are going head-to-head – and I’m pulling for the bankers.  The central bank is saying that tying the renminbi to the U.S. dollar is a “special” response to the recession, implying that the policy might be changed when global economies are healthier.  The Commerce Ministry, of course, represents the Chinese exporters, many government-owned, that benefit from tying the renminbi.  They are hardly going to tell the central bank to stop giving them so much money.  So, the fight is on in Beijing.  See my post from Monday about the revaluation battle.
• If you need an excuse to fly to Paradise, come on out to Honolulu for the May 14 U.S.-Hong Kong Business Forum.  Full disclosure: I’m chairing a panel.  More info at www.ushkforum.org.
• I ran across a succinct statement of the dilemma Europe faces on bailing out Greece: “Greeks work fewer hours than Germans, have more days off and retire at an earlier age. Germany is going to step in and rescue this?” That’s Vincent Farrell, Jr. on RealMoney.com (subscription required).
• It’s a spirited dispute.  The United States yesterday asked the WTO to form a dispute settlement panel to hear its complaint against the Philippines taxes on distilled spirits.  While not overtly discriminating against imported spirits, the Philippines achieves this by applying far higher taxes to spirits distilled from grains or other sources not used by Filipino distillers.  Spirits distilled from local products, such as sugar or palm, are taxed at 13.59 pesos per proof liter.  But imported spirits made from other products may face taxes as high as 540 pesos per proof liter.  Guess there are not many scotch tastings in Manila.
  

I must have caught a wave this week.  Not surfing or paddling, but anticipating trade policy proposals.  I blogged a little over a week ago about how well the WTO’s dispute settlement mechanism works, and then Monday about the controversy over revaluing the yuan.  On Tuesday, the South China Morning Post published an op-ed piece by Kevin Rafferty that proposed combining the two: taking exchange rate disputes away from the IMF’s rather ineffective system and putting the WTO in charge.  Rafferty acknowledges that he got the idea from Simon Johnson, former chief economist of the IMF, who has pushed it on numerous occasions.  Here’s one for the New York Times last fall.  Johnson is pretty cautious, but makes a good case, while recognizing that such a shift would require long drawn-out negotiations.  I worry, too, that it might overload the WTO’s dispute settlement system.

I am not alone in that worry, as I discovered yesterday morning when I read an opinion piece in the Asia edition of the Wall Street Journal.  Titled “Don’t Push The WTO Beyond Its Limits,” it is an article by a fellow in a position to know how much political weight the WTO’s dispute structure can withstand: James Bacchus, a former U.S. congressman and trade negotiator, and – most importantly – a former member of the WTO’s Appelate Body.  And that is exactly Bacchus’ point: the WTO process may crumble under an all-out fight between the United States and China over exchange rates.  Bacchus outlines two scenarios, both dire.

Legislation has already been introduced in Congress that, if passed, would characterize China’s undervaluation of the yuan as an export subsidy and would require the Obama Administration to apply “countervailing duties” to all imports from China.  Aside from the disaster this would create in all those American companies that use Chinese inputs and parts, this would massively increase U.S. unemployment as Walmart and other importers find their cost of doing business quickly rising.  Interesting to see if a Democratic, pro-labor Congress will do this during Congressional election campaigns.  (There I go again, just not able to resist the lure of rationality.)  But, should the Congress be nuts enough to do this and Obama crazy enough to go along, the resulting “countervailing” duties against Chinese goods will be speedily taken to the WTO by the Chinese.  And on excellent grounds.  I helped negotiate the WTO’s rules on export subsidies and countervailing duties – and currency valuation is not covered by those rules.  Regardless of what a member of Congress from East Podunk says, an undervalued currency is not prima facie evidence of an export subsidy.  Therefore, duties to counter the undervaluation are not warranted.  Should the WTO take the case, it will speedily decide for Beijing, leaving Washington to choose between backing down or ignoring the decision.  If the latter, China will eventually be allowed to retaliate – and on a huge scale, further destroying American jobs.  Is this really what the Congress wants?

The Big Mac Index - as good as any.

The second scenario that Bacchus lays out is more subtle, based in the original General Agreement on Tariffs and Trade (GATT), which has been subsumed by the WTO.  Article XV:4 (which addresses the impact of exchange rates on trade) says that signatory governments “shall not, by exchange action, frustrate the intent of the provisions of” the GATT.  The United States could, theoretically, bring a case in Geneva that relies on this provision, but that will open a political and diplomatic can of worms that could rebound for decades.  Neither the GATT nor the WTO have ever had a dispute using this clause, so there is no case law to be consulted.  A case would call into question how to measure over or under-valuation of a currency versus other currencies, should the WTO measure it or should the IMF, what sorts of currency controls need to be governed by either organization and how, and at what point, a currency is so out of line that further cases can be launched.  This is a morass we really don’t want to get into, especially with the economic power of the United States and China pushing in different directions.

To get a feel for how far this could go, take a look at The Economist‘s Big Mac Index (which, frankly, is as good an index as anything published by the IMF or by government agencies).  The March 16 edition of the BMI shows the Chinese renminbi (or yuan) nearly 49% undervalued when compared to the U.S. dollar.  It also shows the Malaysian dollar as nearly 41% undervalued.  Should the United States take action against China, but not Malaysia?  The same index shows the U.S. dollar nearly 48% undervalued against the Norwegian kroner, so should Washington expect a suit filed by Oslo?  See where this is going?  Chaos.

Did you ever wonder how countries go about collecting trade statistics?  I didn’t think so.  But it is actually kind of interesting.

They add it all up in Suitland, Maryland.

I attended a seminar last week in Honolulu that was staged by the U.S. Bureau of the Census, which doesn’t just count people every ten years.  Census is America’s data collector and national bean counter.  Actually, I don’t know that they count purely domestic beans, but they would if they enter or leave the country.  And it is important to count those beans that enter international trade.  At the macro level, exports add to our national production when we calculate GDP, and imports subtract.  Economists can come up with any number of reasons why this is or is not desirable, but Census does the numbers so we can all argue from the same data.  On micro levels, trade data is vital for spotting trade problems, and as input for companies’ marketing plans.

The seminar was about the Mandatory Automated Export System, which is the vehicle through which Census collects U.S. export statistics.  But AES has objectives other than mere number collection.  It is the primary means by which the Commerce, State, Defense and Homeland Security Departments figure out what is going on with “controlled” U.S. exports.  Under AES, exporters or their agents (such as freight forwarders or services such as FedEx) must file export documents prior to the goods leaving the United States.  Among many other things, the documents must indicate if the product is subject to export licensing requirements and if the license has been received from either State or Commerce.  The wrong information can trigger an inspection by U.S. Customs to make sure you aren’t shipping the wrong stuff to the bad guys around the world.  That’s a no-no.

Most exports have nothing to do with such controls, but Census still wants to know what you are shipping and where it is going.  You can’t file this data the old fashioned way.  It’s pretty much got to be electronic, but Census has a nifty online filing system that seem fairly straightforward.  If you are a heavy or frequent exporter, somebody in your firm already knows all this, but if you are a small, sporadic exporter go the Census AES site and study up.  One thing you should know is that you generally don’t have to file documentation on AES if your shipment is worth $2500 or less.  But there are exceptions, so take a look at the Census site anyway.  Besides, I’m hoping your export business will grow and you will have to become an expert on using the AES.

Gottlieb Daimler: What would he think?

Bribery may get you some deals, but it always comes back to bite you where it hurts.  And it is about to bite Daimler, which appears to have run afoul of America’s Foreign Corrupt Practices Act.  The U.S. Justice Department filed a case Monday that alleges that Daimler paid tens of millions of dollars in bribes to win contracts in 22 countries during a decade that ended with 2008.  Why should it be the Americans that prosecute the case, and not the Germans where Daimler is domiciled?  You’ll have to ask Berlin why they weren’t watching (my suspicions are not kind).  The Justice Department had jurisdiction, however, when the alleged bribery began to involve Daimler subsidiaries and plants in the United States.  And, as you will recall, Daimler owned Chrysler for much of the decade in question.  I don’t know if their Mercedes production in Alabama is involved in the case or not.

Non-Americans and many U.S. citizens don’t realize how tough the Foreign Corrupt Practices Act is.  To grossly simplify things, the FCPA outlaws any payment of any kind that is designed to favorably impact the outcome of purchasing decisions overseas.  The Act recognizes that bribery and other forms of corruption exist worldwide and actually allows certain types of payments.  But once your payments begin to involve somebody who makes the decision on whether or not you get the business, you are toast in the eyes of the law.  Exceptions are allowed for so-called facilitating payments that don’t affect if you get the contract, e.g., things like greasing someone’s palms to move your perishable cargo out of the sun in a tropical port.  (See the very useful Layperson’s Guide to the FCPA from the Justice Department.)

I spent years in South East Asia and often got questions from U.S. companies about the FCPA.  These companies, understandably, were worried that foreign competitors who pay bribes would get the business and the poor schnooks from America would get left out.  Actually, just the opposite proved the case.  In a major procurement competition, we discovered that one of our non-U.S. competitors was offering bribes and presented our evidence to the buying government.  Our competition was promptly tossed out and the U.S. company won a mega-buck contract – precisely because they followed the FCPA to the letter.

I have seen U.S. companies use the FCPA as an unassailable defense when they have been approached by bribe-seekers, enabling them to respond that the business wasn’t enough to risk lengthy jail terms and huge fines when they return home.  This is generally respected overseas and makes negotiations far more straight-forward.

The ability to use the FCPA as an excuse not to bribe saves companies from starting down the slippery slope of bribery.  Once it becomes known on the grapevine that a company pays bribes, that firm will get asked for bribes in every subsequent competition and will find it nearly impossible to stop paying.  Not good for the bottom line.

Daimler is about to learn the benefits of staying clean.  Many countries, including some developed nations in western Europe, have even allowed companies to deduct the cost of bribes from their corporate income taxes.  I guess they simply see bribes as a marketing expense.  They are about to find out different.

By the way, the markets in which Daimler is said to have made improper payments include China, Croatia, Egypt, Greece, Hungary, Indonesia, Iraq, Ivory Coast, Latvia, Nigeria, Russia, Serbia, Montenegro, Thailand, Turkey, Turkmenistan, Uzbekistan and Vietnam.  Seems widespread enough.

Whew!  That was quick!  Just as I finished drafting this post, news came across that Daimler offered yesterday to pay $185 million in fines to make the FCPA charges go away.  This is a company practiced at making quick payments!

Facing Foreign Devils - or Foreign Firms?

The dead hopes of foreign firms litter the Chinese landscape.  The skeletal remains of their efforts to get rich in China have been piling up ever since the British hoped they could sell one shirt to every Chinese close to two centuries ago.  But hardly a day goes by that I don’t find some small company that pins its hopes on China.  Company owners see all the articles about how big the market is and decide that they must be in China because that is the sexy place to be.  These are kindred to the firms that lost their shirts in eastern Europe or central Asia or Vietnam, or wherever else has caught the media’s fancy in recent decades.  They try to enter markets without doing their homework or objectively assessing what is best for their company.  If a small U.S. company wants to head for Asia, and they have little experience there, I will always try to pursuade them to try Hong Kong or Singapore, or perhaps Taiwan first.  Don’t begin with China.

The Wall Street Journal ran an article yesterday, entitled “U.S. Firms Feel Shut Out In China”.  It reports a new survey of 203 member companies of the American Chamber of Commerce in China.  These are big companies, by and large, and the results of the survey should be daunting to small new entrants to this market.  The survey questions focused on how tough things are if you are trying to win government contracts in China.  The respondents were companies experienced in government procurement worldwide and who know what it takes to succeed in China.  38% of them report that they feel unwelcome in the Chinese market, a sharp increase from the 26% who felt that way in a survey less than a year ago, and from the 23% who felt discouraged in 2008.  The Journal comments that “sentiment is rapidly deteriorating“.  I’ll say.

The deterioration follows China’s new procurement regulations that favor “indigenous innovation” for technology products.  (See “Indigenous Innovation Can’t be Wrong“.)  These rules threaten to make it harder for foreign firms to sell servers, computers, telecom equipment, software and even wind-power generation equipment in China.  They are not in place yet, but 37% of AmCham China’s respondents say they are already feeling the impact.  A majority of 57% expect negative impacts on their operations in China.

But this isn’t just a tech issue.  Only 32% of the respondents were in high tech or IT industries, while 30% are in general manufacturing and 27% are in services niches.  While half the respondents who said they feel unwelcome in China cited the indigenous innovation policy, 58% cited inconsistent interpretation of regulations by Chinese officials and slipshod treatment by Chinese courts.  As one businessman told the Journal: “… a lot of people are rethinking their China strategies.”

The bottom line?  If companies like Google can’t hack it in China, what makes you think you can?

[I have relied on the Journal's report on the AmCham survey, which has not yet been released on the AmCham China website.  Should the actual survey reveal different conclusions, I'll be coming back to you when I see it.]

Tied Yuan

I have hesitated to comment on whether or not China should revalue the yuan.  Not because I’m shy, but because everybody else is jumping on this one.

We see American politicians ranting and raving, certain that China is deliberately hurting the world through exchange rate policy.  These are generally the same know-nothings that are convinced that China will sell all its American bonds as an act of economic war – like they expect that Beijing will enjoy selling at a huge loss.  How dumb do they think the Chinese are?

The other extreme, of course, is the Chinese stonewall reaction, closing the gates and refusing to consider any possibility of revaluation.  They have done this so much on so many issues that Beijing has now trained a large cadre of international reporters to say that change will only come if we stop criticizing.  Hunh?  It’s a brilliant negotiating position for China, but it should be ignored by the rest of the of the world.  It seems that any criticism of China, no matter the subject, earns condemnation as an infringement of Chinese sovereignty.  But, since any compromise with another country on anything is a limitation on sovereignty, this amounts to a Chinese declaration that it will not negotiate with anyone and plans to hunker down in the Forbidden City and dictate to the world.  I’m not convinced that China really wants a return to the days of the Middle Kingdom, but perhaps I am too hopeful.  At best, the sovereignty plea is rather immature.

It is in China’s interest to revalue the yuan – slowly.  Revaluation will be key to controlling China’s inflation which bids to become a major destabilizing influence in the country.  Revaluation is an easy way to reduce prices by making imports less expensive and forcing domestic producers to compete with those imports.  China, however, needs to accomplish this slowly.  A Chinese official said last week that many Chinese exporters are operating on a profit margin of only 2%, which means these firms are highly vulnerable to a sharp revaluation.  It also means that China’s export machine is not the juggernaut the world believes it is, that China may do better without those marginal exporters, and that China would be wise to move some of its resources out of exports and into domestic ventures through increasing domestic consumption.  Which brings us back to revaluing the yuan to control domestic inflation.

One might also argue that, by tying the yuan to the U.S. dollar, China has actually given away its sovereignty for the sake of marginal exports and limited its own ability to control its economy.  Any country tying their currency to the U.S. dollar has surrendered exchange rate policy and much of their ability to control prices to the U.S. Federal Reserve.  Does Beijing really want the key decisions about Chinese inflation to be made by Ben Bernanke?  I didn’t think so.

So, revaluation is in China’s own interest.  But sudden change brings unanticipated consequences.  So best to do it in predictable stages, slowly, and to protect Chinese sovereignty by re-establishing Beijing’s authority over its own currency.

• I guess you want to be careful about currency reforms.  North Korea executed a party official this week for screwing up a reform of whatever passes for currency in the country.  Could this be why Beijing is so resistant to change?
• Faced by Asian competition and shifts in fashion, Swiss watch makers have redesigned and repositioned their products – and their exports are beginning to boom despite the recession.  Some good lessons here for all exporters.  I know I love my Swiss watch: slender, light with the clearest clock face I have ever seen.
• Have you noticed that, whenever China gets bad publicity about its products (e.g., dairy products laced with melamine, or improperly handled vaccines), they start criticizing other countries’ goods?  The latest is an attack on the quality of luxury products supplied by Hermès, Hugo Boss, Versace, Dolce & Gabbana and Tommy Hilfiger, among others.  Aside from the fact that I never feared for my life (only my fashion sense) due to a Hilfiger shirt, doesn’t this criticism come from the world’s top producer of counterfeit luxury products?
• Ah, mercantilism.  Such a lovely word.  I was amused to see Germany’s reaction to French charges against Germany’s trade surplus.  They say that criticism by the French is a compliment.
• It’s nice to see your stuff get picked up elsewhere.  Thursday’s post about Hawaii tourism (Selling Hawaii – or Not) was picked up by ETurbo News and I have been getting good feedback.
• Amid all the dour news about U.S.-China relations, the two countries reached agreement Thursday to re-open the Chinese market to U.S. pork exports.  China had used swine flu as an excuse to close its pork market in 2009, shutting down $275 million in U.S. sales.  It’s back on for now.
• Anybody interested in selling renewable energy equipment in China needs to look at the report issued by the National Foreign Trade Council last Monday: China’s Promotion of the Renewable Electric Power Equipment Industry: Hydro, Wind, Solar and Biomass.