Business Beyond the Reef

• 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.

• The mind boggles.  Club Med has invested in a ski resort in China.  Way up in the northeast, in Heilongjiang Province, Club Med has bought into a financially-strapped ski resort.  This may be an intriguing clash of cultures.
• President Obama’s approval of loan guarantees for two nuclear reactors in Georgia has split the unions.  Construction unions love it, but the approval is drawing fire from the United Steelworkers because some 20% of the package will buy critical components from steelmakers in China or South Korea.  The union is trying to create doubts about the safety of Chinese steel, but we are not talking about consumer goods here.  China has been successfully manufacturing reactors, while our own industry has been moribund for thirty years.  Why should we expect to be competitive on something with which we have little experience?
• We had the pasta war, several chicken wars, even the turkey ball war.  But the toilet paper war is just beginning.  Unions in Australia are challenging imports of cheap toilet paper from China and Indonesia, saying the product is being dumped (I’m not going to touch that pun).  Having had personal experience with cheap toilet paper in both Indonesia and China, this dispute is self-limiting.  Australian consumers are only going to buy it once.
• Brazil now exports more to China than it does to the United States, a reflection, of course, of the recession.  The problem is that China buys a vastly different group of products than Brazil sells to U.S. customers.  Brazil’s trade with the United States is mainly in industrial goods, but China is mostly buying commodities such as soybeans and iron ore.  This destroys the value-added business of Brazilian product companies and sends Brazil back to the days of simply being a commodity supplier.  This will presumably end when the U.S. economy moves into recovery.  In the meantime, not everybody is dancing in Brazilian streets.  For more, see the article in Asia Times.
• The recession also hurts the Cuban cigar trade.  Sales were down by 8% in 2009, reflecting reduced international travel (which, of course, cuts sales at duty-free airport shops) and Spain’s economic downturn.  Spain has historically been Cuba’s largest cigar market, but … up in smoke.
• A suit brought by Totes-Isotoner alleging gender discrimination in customs classifications was tossed out by a Federal appeals court this week.  The company argued that having different duty rates for men’s and women’s clothing (a time-honored practice around the world) discriminated against whichever gender got the higher rate on a particular item of clothing.  I would guess this is about gloves.  The court in New York disagreed.  Totes-Isotoner says they will appeal to the Supreme Court.  (note: these classifications are set, at the 4-digit level, by international agreement – not by any one country.)
• Shipping lines complain loudly about all the empty containers they have to move westbound across the Pacific.  So what do they do about it?  They raise their westbound rates. What a novel idea – raise prices to attract business.  Gotta think about that.

Everybody is talking about spats between the United States and China, but I am more worried about India’s reaction to China’s growth.  I have posted before about trade fights between the two, but things seem to be taking on more of an edge.

Several years ago India stepped up construction of new power plants, recognizing the needs of a growing economy and trying to alleviate tenuous electricity supplies.  The plan was to increase electricity production 60% between 2007 and 2012.  India did not have the domestic capacity to build all those power plants and, not liking the higher prices of other builders, they awarded many of the new contracts to Chinese firms.  As a result, China is building about 25% of India’s new power capacity.  Thousands of skilled Chinese workers and engineers have fanned out across the subcontinent and Indian imports of Chinese power generation equipment has surged.  So New Delhi is having second thoughts.

The Wall Street Journal reports that India’s Central Electricity Authority has decreed that Indian equipment will be purchased for all future power plants built by government-controlled utilities.  New Delhi is said to be considering new taxes on imports from China and has warned power companies to stock up on spare parts for their Chinese-origin equipment.  And India has tightened visa requirements for foreign workers, forcing some 3,000 workers back to China last fall.  That wasn’t enough, so in December 2009 it was decided that no more than 1% of the workers on a power project can be foreign nationals (or forty people, whichever is less).  Predictably, all these restrictions have drastically slowed progress on the new power plants and has caused consternation in Beijing.  The Indian government says it is only trying to give India’s power generation equipment manufacturers time to build up their own production capacity.  Hmmm … could this be protectionism?

China has given India something else to think about with its expansion into ports in South Asia, says the New York Times.  Not since the fleets of Zheng He has the Indian ocean seen so much Chinese maritime activity.  This time China is building ports, not just visiting them and trading.  New ports are  being built by Chinese companies at Hambantota in Sri Lanka, Chittagong in Bangladesh, Kyaukpyu in Myanmar and Gwadar in Pakistan.  China says the new ports are part of a strategy to pursue new business in a growing region, but India sees it as a potential threat to India’s security and economy, giving China bases to cover India’s shipping routes.  It’s an expensive strategy for China.  Hambantota alone is said to cost $1 billion.  Interestingly, Sri Lanka approached India first about taking on the project, but New Delhi turned them down.

Both China and India say their intentions are peaceful, but they keep getting in each others’ way as they grow.  China has downplayed conflict with India, but India has been more aggressive in taking trade actions against China and its own neighbors, driving the latter towards closer ties with China.  There is a price for ticking off one’s neighbors.

Coming between India and China?

The United States may be an unlikely beneficiary.  Sikorsky Aircraft may win up to $12 billion in Indian defense procurements in the next eight years.  They already have enough business to warrant investment in a plant in India to build Black Hawk helicopters on the spot.  The Indian military has ordered 16 Black Hawks and another twenty will be leased to the Indian coast guard.

Andy Xie published an analysis last week on Caixin Online about how the Obama Administration’s new export policy may heighten tensions with China.  Worth reading for his entire train of thought, I thought I would focus on the options Xie sees for increasing American exports.  In his State of the Union address, President Obama set a goal of doubling U.S. exports within five years.  Many pundits, including this one, have been skeptical, asking if such a feat is possible.  Xie lays out the options:

1. 

   Will U.S. Exports Bounce?

   Devaluation of the U.S. dollar.  Not highly likely.  The Fed has to begin tightening soon, which will put upward pressure on the dollar.  The dollar bottomed in May 2009, and has been steady or slightly rising since.

2. Exchange Rate Policy.  Xie argues that Obama will have to get more aggressive on China’s exchange rate, given the near unanimity of agreement that the yuan’s ties to the dollar have to be loosened, if not abandoned.  The assumption is that a rising yuan will make it easier to export U.S. goods and services, equivalent to a fall in the dollar.
3. Aggressive Trade Policy.  Obama has gotten a taste of the populist attractions of seeming to be tough on imports from China.  It started with tires, and has progressed to steel pipes, electric blankets and more.  More protectionist action will prove irresistible, especially since it can also be used to say the Administration is doing something about unemployment.

Like most macro thinkers, Xie ignores the less spectacular micro approaches of helping companies directly, educating and holding the hands of would-be exporters, taking firms that now sell to only one or a few foreign customers into new markets, introducing companies to international trade shows, and similar approaches.  The micro approaches won’t double exports in five years either, but they lay the groundwork for a permanent expansion of American exports.  Not just allowing exports to respond to exchange rate changes.

Some of Xie’s remedies are intriguing.  He advises China to open its capital markets to U.S. firms, taking some air out of China’s credit bubble and putting some into strained U.S. financial markets.  Allow big U.S. companies with China business to list on the Shanghai Stock Exchange.  Lower tariffs on U.S.-made goods to defuse opposition from American labor unions.  And open China’s agricultural markets to appease the politically-powerful American farm lobby.  Interesting stuff.

China & ASEAN

Economic diplomacy can be blatant.  China Daily carried a report this weekend about a huge aid package that Beijing is offering the ASEAN countries, collectively or individually.  Foreign Minister Yang Jiechi announced the package Sunday:

1. Launch of a $10 billion China-ASEAN investment cooperation fund to focus on infrastructure, energy, resources, communications and information technology.
2. $15 billion in credit lines to ASEAN countries over the next 3-to-5 years.
3. $39.7 million to Myanmar, Cambodia and Laos to meet “urgent needs“.
4. $5 million to the China-ASEAN Cooperation Fund.
5. $900,000 to another China-ASEAN fund that (confusingly) includes Japan, South Korea and China.
6. 300,000 tons of rice to the Emergency East Asia Rice Reserve.  And …
7. An additional 2,200 scholarships in government and public administration over five years.

I don’t know how much of this package is really new, since politicians tend to wrap old presents in new gift wrap many times.  And such gifts don’t often come without strings.  Even China Daily mentioned that the package will result in “profound and active influence” on China-ASEAN cooperation.  I’ll bet.

It will be interesting to discover what projects eventually emerge from this aid package and how procurements for those projects are managed.  I expect the lion’s share of the contracts will go to Chinese construction companies, but perhaps I am overly cynical.  There may a few dribbles for the rest of us.

• Don’t know why these things surprise me, but it turns out that China’s water pollution stats are useless because they forgot to include agricultural runoff in the numbers.  With China’s huge agrarian sector and aggressive fertilizer, fungicide and pesticide use, that means that we can double the water pollution that Beijing claims as official.  See the New York Times. Or the Wall Street Journal. Hawaii’s water resource engineering companies have been trying to break into the China market for several years, with only middling success.  With their experience in the sugar and pineapple industries, maybe they are finally positioned to make some money (and do some good) in China.
• It’s easy to find lists of the best hotels, resorts, airlines and so forth, but rare to see lists of the worst.  TripAdvisor has published their 2010 lists of the Top 10 Dirtiest Hotels in the world.  There are separate lists for the Top 10 in the United States, Canada, Asia, Britain, France, Italy and an overall list for Europe.  Be warned.
• Old Singapore hands are still amazed.  The first of Singapore’s casinos opened just a couple hours ago as this is published, taking an auspicious start with the Year of the Tiger.  It’s not simply a casino, but four new hotels and a theme park, too.  And I remember when Sentosa Island was still somewhat empty, and I had delightful times at the Beaufort Hotel.  Guess I’ll have to take a look.
• Business occasionally trumps politics.  Taiwan ended long-standing restrictions this week to let its manufacturers of flat screen panels open production facilities in China. China is on track to become the world’s top market for flat-screen televisions next year, and Taiwan’s Korean competitors have been gobbling up market share using factories in China.
• Good news from NAFTA.  Canada and the United States have resolved a trade dispute over government procurement practices, Canada agreeing to open up government construction contracts and the U.S. allowing Canadian firms to compete for Stimulus Package business.  The two countries handled this through the WTO’s dispute settlement process.  And, word is out that the United States and Mexico are near agreement on the long-term problem of allowing Mexican 18-wheelers to operate on U.S. soil.  This one has soured relations for years now.

Monday is President’s Day in the United States, a national holiday.  That seems an appropriate time to work on my income taxes, so I may not post this Monday.  Of course, if some irresistible topic arises …  Otherwise, I hope to see you here on Tuesday.

Phoenix Talons

We have another chicken war!  The original “Chicken War” was a trade dispute between the United States and the European Union many years ago, and there have been several such trade spats since.  The latest chicken war is between the United States and China, and it concerns the price of chicken feet and wings.

China slapped antidumping duties on U.S.-origin chicken parts last Friday, saying that American poultry producers are selling feet and wings in China at grossly reduced prices, far below actual costs.  Computing a margin of dumping is an arcane and difficult business, but the dumping margins the Chinese say they found are astronomical.  Dumping margins vary by company and depend on the information they supply during the dumping investigation.  So, here’s the verdict from Beijing: out of 35 companies named in the dumping finding, Tyson Foods came off the best, assessed 43.1%.  Most of the other U.S. suppliers will pay 64.5%, though Pilgrim’s Pride got tagged for 80.5%.  Any unnamed U.S. chicken suppliers can get dinged by 105.4%.  That should play havoc with profit margins.  There is speculation that Tyson came off “lightly” (there is nothing light about a 43.1% duty) because the company has invested in China and has an active lobbying corps in Beijing.  These antidumping duties have not been finalized, so payments will essentially go into an escrow account in China while the companies have twenty days in which to appeal.  I wish them luck.

As trade disputes go, this is a small one – and nothing to match the original chicken war.  Out of $77 billion in Chinese imports from the United States, we are talking less than $800 million here.   Probably considerably less, because the $800 million is total sales of U.S. chicken products in China, and the case only addresses feet and wings.  Still, this has all the hallmarks of a case that Washington will want to take to the WTO.  The size of the dumping margins virtually guarantees that.  Of course, the U.S. companies may really have dumped feet and wings at those levels.  The U.S. market for chicken feet is nil and how many buffalo wings can you eat (now that the Super Bowl is over)?

That raises a curious issue, though.  If the chicken parts in question have only a negligible value in the United States, how can selling them at a presumably higher price in China be considered dumping?  There appears to be some curious accounting going on.

The amount of chicken parts involved is not significant for China’s internal market, which makes it doubly amusing that imposition of the duties was delayed until February 13, too late to impact prices for Chinese New Year.

[After drafting this, I saw a spot-on opinion piece in the Wall Street Journal about chicken feet and the unintended consequences of aggressive trade policies.]

China and the European Union are squaring off again.  Call it the “Shoe War”.

Has It Been Dumped?

Back in 2006, the EU found that China and Vietnam were dumping (roughly, selling at lower than cost) leather shoes in European markets, causing havoc for European shoe manufacturers.  There are plenty of them, of all sizes, scattered throughout the EU, and they have clout.  Not surprisingly, it was the Italians that really pushed Brussels to act.  The EU applied up to a 16.5% antidumping duty to the Chinese shoes, and aimed less of a punch at the Vietnamese, who now suffer from a 10% penalty.  (Antidumping duties can vary by country and manufacturer, depending on how much they are judged to have underpriced their product.)  Beijing complained mightily at the time, but their cries came to nought.  In fact, Brussels just extended the antidumping duties for another 18 months in December.  That’s when the shoe hit the wall in Beijing.

China filed a formal complaint with the World Trade Organization in Geneva last Thursday, triggering the WTO’s dispute settlement process.  Brussels now has 60 days in which to reach a bilateral compromise with Beijing – or the WTO will convene a three-member panel of exports to review a case that observers think China has a good chance at winning.  I expect that Vietnam will want to sign on to China’s complaint at some point in this process.  The pressure is high for Brussels to reach a compromise.  A group of European retailers, including some shoe manufacturers, has coalesced to lobby Brussels to end the antidumping duties.  The European Footwear Alliance, which includes, Ecco, Adidas, Hush Puppies and Timberland, says that continuing the duties will cost European consumers and retailers hundreds of millions of Euros.  They note, says the Associated Press, that the antidumping duties bring €1 billion (nearly $1.4 billion) into European official coffers, a powerful incentive to keep them in place as long as possible.  I’m not sure I quite believe that number.

Brussels, of course, doesn’t accept Beijing’s arguments and says the impact on Chinese shoe sales in Europe is minimal.  They argue that the average price for a pair of imported shoes is €9 and that the duties add about €1.50 on top of that.  That, says the EU, is swamped by retailers marking the shoes up to €50 a pair.

I’m encouraged by this case.  China, because of its aggressive export growth, has become the most “popular” target for disputes in the WTO.  This case and others show that Beijing is learning how to push its own interests as a WTO member, not just as the vociferous bleats of the past.  China’s trade policy is maturing and they are now trying to resolve trade disputes within a system that works.  They won’t win every case, but they know the WTO’s mechanism is fair and reasonable.  The Wall Street Journal says that China has opened new offices just down the street from the WTO headquarters in Geneva (just like the United States did years ago) and that they are bringing in high-priced talent (read: trade lawyers) to pursue such cases.  Look for more.

• The cupcake craze has hit Asia.  Launched on the U.S. East Coast by an episode of “Sex and the City“, cupcakes have been spreading ever westward.  (We even had cupcakes for our daughter’s wedding reception in Honolulu a couple years back.)  Now cupcakes have hit Hong Kong, says the South China Morning Post, creating stiff competition for the city’s egg tarts.
• Hawaii has a long history of contact and trade with Russia, going back to Russian traders (and, yes, a few opportunistic imperialists) building forts on Kauai and Oahu.  Ruins of the fort on Kauai can still be seen, and the legacy on Oahu is downtown Honolulu’s Fort Street Mall.  A few Hawaii companies have tried exporting to Siberia, but without notable success.  But the Russians are coming back.  There are reports this week that Tesoro, which has a refinery on Oahu, has done a deal to buy some of the first oil to come out of the eastern end of Russia’s ESPO pipeline.  One hundred thousand metric tons of Russian oil are to be delivered to Hawaii by the end of February.
• Little noticed by most U.S. media, investment by Chinese companies in U.S. companies in 2009 surpassed the value of U.S. companies’ investments in China for the first time.  Chinese business investment in the United States (as elsewhere) is highly focused on resource acquisition.  It will be interesting how American politicians will react (remember, these are the same folks who stopped CNOOC’s purchase of Unocal), even though the Chinese investments are likely raising U.S. employment.  Already, some of our pols are raising questions about letting a Chinese firm buy GM’s Hummer division, even though the purchase will keeps plants operating and employ plenty of American auto workers.
• The Wall Street Journal carried an article this week about competition among Switzerland’s cantons to lower corporate income taxes in order to attract multinational corporations.  The moral of the story, of course, is that – all else being equal – the canton that offers the lowest rates gets the business.  I was intrigued by a graphic that compared the corporate tax rates of several countries.  Switzerland and Ireland had the lowest rates (21.2% and 12.5%, respectively).  The highest rates were the United Kingdom (28%), France (33.3%) and – you guessed it – the United States at a staggering 40%.  And American politicians say they want to attract more productive investment.
• The U.S. Department of Agriculture awarded grants worth $234.5 million Friday to agricultural trade organizations for export promotion.  Hawaii got a rather small piece of the action: $134,400 to the Hawaii Papaya Industry Association.

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.