Business Beyond the Reef

• Business Beyond the Reef is still apparently banned in China, but I’m in good company – according to the South China Morning Post.  Harvard’s Isaac Mao Xianghui said last week that Chinese censors routinely block more than 95% of blog posts.  The researcher said there should be nearly 73 million blog posts daily, but Beijing only allows access to  about three million.  The blocked sites include FaceBook, Picassa and YouTube, so I am in good – if not exclusive – company.  A friend in Beijing tried again this week to see BBR, but no dice.
• I never considered a haircut as an internationally tradeable commodity, but apparently it is.  Noted Hong Kong coiffeurist (is that a word?) was recently flown to North Korea for a private meeting with Dear Leader Kim Jong-Il.  Apparently the true purpose of the trip, all at the expense of one of the world’s poorest countries, was a haircut for Kim Jong-Un, one of the Dear Leader’s sons.  I’d say it was the North Korean people who got the haircut.
• China is planning to end some of the export rebates that have caused so much of a trade policy headache for Beijing.  These are sizable rebates (9% on some steel products) that have prompted other countries to apply countervailing, antidumping or safeguard measures against Chinese products.  The steel rebates are to end July 15.  Additionally, the 5% rebate for corn starch, ethanol, copper products, lead products and zinc products will be ended.

• Yesterday’s post about the Chinese yuan – or renminbi (RMB) – was timely.  About an hour after the post, Chinese vice foreign minister Cui Tiankai was quoted as saying: “The RMB is China’s currency, so I don’t think it is an issue that should be discussed internationally“.  Just a tad defensive, isn’t it?  Do you suppose this means that China will refrain from discussing other countries’ currencies?
• While I was prowling around the Collier’s International website earlier this week for my post on the world’s top retail corridors, I noticed some other potentially useful stuff for companies looking to set up offices in other markets.  Take at look at their summary chart of worldwide leasing guidelines.  And you don’t want to try to park in London.  Don’t even think about it.
• China plans to make another offer next month in its negotiation to join the WTO’s government procurement code.  This code is vital to China because it would ease China’s access to the procurement markets of the world’s major nations.  At the same time, China must open up its own procurement market.  China tried this once before in 2007, but didn’t make a good enough offer to open its own market – and were turned down by governments that had already liberalized their markets.  Let’s hope Beijing is more forthcoming this time.
• Hawaii’s new Republican Congressman Charles Djou is getting into the trade game.  Djou has drafted a non-binding resolution that would ask the Obama Administration to negotiate a free trade agreement with the Philippines.  Hawaii has long had close ties with the Philippines and has a politically active Filipino community.  This puts Hawaii’s Democratic senators and one Congresswoman in a tough spot: support the Filipino community or continue to roll over for the Administration’s anti-FTA stance.
• Fedex, in a bit of good news, argues that we have been underestimating the recovery of world trade from the recession.  The company is seeing customers (and shipments) with stronger than expected exports.
• If you have any interest in Mongolia, take a look at my friend Jargalsaikhan Dambadarjaa’s blog post about unregulated “ninja” mining in Mongolia.

But can it float?

It strikes me, not for the first time, that Beijing has no confidence in its own currency.  Not to mention the ability of China’s exporters or the resiliency of the Chinese economy.  That seems strange, given the demonstrated strength of the economy and the growing international experience of Chinese companies.  But what else can explain Beijing’s seemingly schizophrenic currency policy?

We hear periodic diatribes from Beijing about how the U.S. dollar is long in the tooth and should be retired as a reserve currency or even as a currency for trade transactions.  It is always implied that the yuan should be the new reserve currency, or at least an important part of a basket of reserve currencies.

And yet the yuan has yet to prove itself as an internationally viable currency.  Why criticize the dollar when the yuan is effectively pegged to the dollar?  (Yes, there is a bit of movement allowed, but not enough to notice.)  And how can Beijing claim the yuan is an internationally accepted currency when it doesn’t even allow free use of the yuan by its own traders and companies?  This was highlighted in a Wall Street Journal article yesterday about China’s “trial program” to allow trade settlements in yuan.  Beijing has had such a lack of confidence in its own currency that it has not been allowing even Chinese companies to settle transactions in the yuan.  Now they are beginning to experiment with using their own currency.  If this is still a “trial program”, why should the rest of the world have any confidence in the yuan?

I am also mystified that the “trial program” only applies to “most” of the country, apparently twenty provinces and cities.  Isn’t this something like allowing New York to trade in dollars while telling Rhode Island to try another currency?  It passeth understanding.

Perhaps due to the trial nature of the yuan program, or perhaps for competitive reasons, very little trading is going on in the yuan.  Using the odd period of July 2009 through May 2010, the total value of yuan-based transactions was about $6.5 billion.  If you consider that China’s imports and exports were more than $1 trillion in the first five months of 2010, the value of yuan transactions is trivial.  If the yuan is trivial in China, why should the rest of us care?

Aside from the question of whether or not the yuan is properly valued, no one should take the yuan seriously until it is allowed to float freely and has done so successfully for several years.  China has much to gain from flotation.  If the yuan is truly overvalued, then floating it will help China to contain its inflation by reducing the relative cost of imports.  If it should prove to be undervalued, which I doubt, then China’s currency critics will have been stiffled.  And, by dropping the peg to the dollar, Beijing’s economic policies and the value of the yuan will no longer be dependent on the decisions of the U.S. Federal Reserve – which cannot reasonably be expected to take China’s interests into account.  Or perhaps the Middle Kingdom now prefers to be monetarily governed by Ben Bernanke?  One wonders what Confucius would say.

It’s tough to negotiate in public.  As any politician can tell you, once you take a stand in public, you cannot back away or even slightly change that position without dire consequences. You’re called “wishy-washy” if you do.

Chinese flight landing at Taipei's Songshan Airport (That's the Grand Hotel in the background.)

Negotiation generally begins with two sides (or more) presenting “going-in positions”, i.e., a wish list of what your side would like to get.  Starting positions are always extreme and beefed up because you know that you are going to have to be able to give something up during the negotiating process.  The other side knows this, too, and presents an equally beefed up position.  When both sides finish chuckling, they can begin to talk seriously.  Somebody said that negotiation is the art of compromise, but you can’t compromise if you have made a public stand with your going-in position.  A successful negotiation meets the core needs of all sides, usually paring away all the extraneous stuff in the going-in position.  The goal is for all sides to be equally satisfied and dissatisfied, which is a concept lost on most media and definitely lost on political opposition.  They tend to view negotiation as a battle in which one side wins and one side loses.  The fallacy should be obvious; why would the “losing” side sign the resulting agreement?

I am not surprised that there is little information available yet about the Economic Cooperation Framework Agreement (ECFA) that is being negotiated between Taiwan and China.  Nor am I surprised that Taiwan’s press and political opposition are pressing for everything to be publicly released.  (Beijing has a somewhat tighter rein on its media and opposition.)  In fact, the opposition DPP says it will bring 100,000 people into the streets of Taipei on June 26 to protest against the agreement – apparently on the assumption that, if you don’t know what’s in it, then it must be evil.  I don’t know any of the negotiators involved, but I have worked closely with Taiwan’s vice president, Vincent Siew, who must be involved behind the scenes.  Vincent is an experienced and canny negotiator, and I very much doubt that an agreement negotiated under his guidance will be bad news for Taiwan.

What is known about the ECFA?  You can explore the many political debates, indeed the whole history of cross-Straits relations, but I want to focus on the business and trade implications of what, in essence, would be a free trade agreement between China and Taiwan.  Both are Contracting Parties of the World Trade Organization, and both say that ECFA is being designed to be kosher under the WTO’s rules on FTAs.  The objective of an FTA is to reduce trade barriers, something that generally brings net benefits to all parties.  Net benefits are just that: net.  That means that there will also be losers on both sides and a political and economic calculation needs to be made about which losses are acceptable when compared to the gains that will accrue.  It is the job of an opposition party to identify the losers and to raise a ruckus.  Most press also see that as their jobs, too, believing that bad news sells better than good news – even if the good news from a trade agreement far outweighs the bad.

The hardest job for a trade negotiator is often not the actual negotiation with another trading partner, but the larger negotiation that secures acceptance and implementation domestically.  My toughest negotiations in the Tokyo Round were with other agencies in Washington, not with the French, the Indians or the Japanese.  Then came the fight to get those agreements through the Congress, brilliantly done by Bob Strauss by tying them into one huge package in which the many winners clearly outweighed the losers.  This is the job that Taiwan’s negotiators face in selling ECFA.

So, do we know who the winners and losers will be?  No, because that is still being negotiated.  This Sunday, Taipei and Beijing reached agreement on an “early harvest” list of products for which restrictions can be loosened in the near term.  Chinese culture loves round numbers, so the early harvest is said to include 500 Taiwanese products that will get better treatment going into China, and 200 Chinese products that will receive those benefits in Taiwan.  An early harvest list tells you that some real progress has been made, but that there is still substantial disagreement on many other products.  The tough nuts haven’t been cracked and this is where you still need to negotiate in private.  We don’t yet know what products are in the early harvest, but the opposition in Taiwan is already saying that automobiles are not included.  That’s no surprise; autos are always politically sensitive.  Look at the role of the U.S. auto industry and their associated unions in holding up the U.S.-South Korea FTA.  Ironically, some in  Taiwan’s media are reporting that automobile parts are included, along with petrochemicals and heavy machinery.

Progress is being made in other areas of cross-Straits relations.  Direct flights are starting up between Taipei’s Songshan Airport and Hongqiao Airport in Shanghai.  This connects the two dynamic city centers directly, while previous flights had been between the larger outlying airports at both ends of the route.  My Taipei office was across the street from Songshan and I could walk to my flights.  Convenient!

Designed by Circuit City?

It’s a success by definition, but look beneath the surface of the Shanghai Expo – and the associated U.S. Pavilion – and you would be forgiven for having some doubts.  The South China Morning Post reports today that Nick Winslow, CEO of the U.S. Pavilion at the Expo, unexpectedly stepped down this week.  Martin Alintuck, who succeeds Winslow, says the resignation is “completely unrelated” to recent suggestions of improprieties in procurements during construction of the pavilion.  Of course.  Nothing to do with Winslow’s purported conflict of interest when he awarded a $23 million contract to a company with which he has a “working relationship”.  Surely there can’t be a connection.

On May 31, Bob Jacobson published an article on the Huffington Post entitled “U.S. Pavilion in Shanghai Fails To Do It’s Job: San Antonio Threw a ($500,000) Party And No One Came”.  Jacobson points out that the Bush Administration knew since 2006 that this Expo was coming, made a decision early on not to use Federal funding for the Pavilion, but then failed to raise the private-sector funds needed to do the job.  The Obama Administration gave the fundraising job to Secretary of State Hillary Clinton who raised some $100 million in record time from about sixty American and Chinese executives and their companies.  Even Hillary was apparently surprised by how commercial the Pavilion turned out, though I’m not sure what she might have expected.  The Washington Post‘s Ezra Klein compares the U.S. pavilion to a Circuit City store.  The pavilion seems to portray America as the stereotypical land of giant companies, featuring, of course, the giant companies that paid for it: GE, Citibank (didn’t we just bail them out?), Pfizer, PepsiCo, Chevron, Johnson & Johnson, Disney and the like.

To be fair, the U.S. Pavilion is not all bad.  It is said to have attracted a million visitors in the first month of the Shanghai Expo, so there must be something people, mostly Chinese, like about it.  Still, the reviews are not glowing and one has to wonder if it is all worthwhile.  The City of San Antonio is certainly wondering.  San Antonio decided that the Expo was a great opportunity to promote Chinese investment in their fair city and signed up for three “San Antonio Days” at the U.S. Pavilion, including special exhibits, parties, press ops and more.  The three days cost the city a cool $500,000.  (Curious that corporations that paid $1 million get to use the Pavilion for a full six months, not just a few days.)  And what did San Antonio get for it?  A flock of new investors?  Not so you would notice.  The San Antonio News Express reports that the city put on a seminar for potential investors at the U.S. Pavilion – and eleven, count ‘em, eleven people showed up.  Now let’s see, that’s a bit more than $45,000 per person to get people to listen to your investment pitch.  Surely, there is a better way.

Hawaii is in Shanghai as you read this.  And Tennessee, Texas and Chicago are lined up.  Hawaii’s Governor Linda Lingle has led a delegation of 32 government reps, Hawaii musicians and hula dancers to do what San Antonio couldn’t accomplish.  Hawaii certainly got a better deal than San Antonio, budgeting $448,000 for a full week at the U.S. Pavilion.  Maybe the world’s largest aloha shirt (size 400-XL), coupled with macadamia nut handouts, will do the trick.  Or the Aloha Day dinner for 100+ VIP guests.  The venture is largely organized by the Hawaii Tourism Authority, so is naturally canted towards attracting tourists rather than investors.  Hawaii tourism, however, is already well showcased in Shanghai, HTA and the Governor having staged several huge Hawaii shows in Shanghai in the last few years.  This time, the delegation includes such stellar attractions as the Speaker of the State House of Representatives and a state senator.  When was the last time you decided to take a vacation because a politician visited your city?  Or were you enticed by an aloha shirt the size of a house?

So what are Chinese visitors to the Shanghai Expo and the U.S. Pavilion to make of all this?  The visitor counts are high, though China will do everything possible to make sure the numbers are high.  But reactions seem tepid at best.  A friend in China tells me that the Expo is something of a joke among the Chinese.  Shanghainese are said to be saying “if you want to break-up with your girlfriend, take her to Expo”.  The verdict is in: Expo is boring.

For those of you curious about the headline, shibai is a Japanese word that has become part of Hawaiian pidgen.  Loosely speaking, shibai refers to anything that is a bit shady, below the belt, not especially honest.  Bovine excrement.

I don’t know for sure, and I don’t have that many readers in China, but some of them have commented that they can no longer see Business Beyond the Reef.  I’ve heard from friends in several different cities that they can’t get on, that BBR times out or they get messages like this:

Internet Explorer cannot display the webpage

One succeeded in getting on by using a proxy server.

Of course, none of this means that BBR has really been banned, though I often criticize China.  I probably praise China just as often, and certainly criticize the United States more than I do China.  But China’s reactions to international business issues can be exceptionally childish and immature, and perhaps Beijing doesn’t like to hear that said.

It’s flattering to think my writing has been noticed.  That said, there are plenty of reasons that a blog might not be seen and this may just be a coincidence.  See China Geeks for more.  Interesting that they speculate that negative views about China’s behavior in the WTO are being blocked.  That might catch BBR!

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I’m still traveling, but will arrive Honolulu later today.  Should resume regular posts shortly.

• Business Beyond the Reef received a good review this week from friend Alex Olah, a former Australian trade commissioner, who told his readers:

“If you want to follow the ins and outs of US international trade policy and developments I can highly recommend a look at Steve Craven’s blog. Steve was head of the Commercial Section of the American Embassy when we were stationed in Singapore in the mid-1990s, and we have kept in touch over the years.

After a distinguished career with the US Department of Commerce, Steve (& Donna) retired in Honolulu where he acts as a guru on international trade matters when he is not racing dragon boats or paddling around the Hawaiian Islands.

If you like your international trade served with generous helpings of wit, insight and candour, have a look at Steve’s blog.”

High praise, indeed.  Mahalo, Alex.  Alex and his wife have spent almost a year teaching English in China and he has written a magnificent diary of their experiences that I am encouraging him to publish.  I’ll let you know if he does.

• Political buying power.  That’s what China is using to woo Taiwan, according to a June 2 article in Asia Times.  The opposition DPP party charges that China is sending provincial procurement officers to buy in Taiwan and thereby gain friends and supporters among Taiwan’s business community.  China’s provinces are said to be buying flat screen TVs and monitors, biotech pharmaceuticals, cosmetics, chemicals, electronics, textiles and more.  Shandong Province is said to have spent $620 million in Taiwan last month, and Hubei has ordered more than $25 million in Taiwanese goods.  Seems cheap if political influence is being bought.
• Remember the ballyhoo about a year ago when seemingly everybody was predicting the end of the U.S. dollar’s status as a reserve currency?  Some wanted the Euro, others promoted a basket featuring the Euro and the Yuan.  All is silence now.  The South China Morning Post even published an article this week about how China’s exporters, many of whom had switched their billing to the Euro last year, are now quietly, but quickly, moving their accounts back to the dollar.
• Take a look at my friend Jargalsaikhan Dambadarjaa’s blog post on business ethics.  Jargal is a Mongolian businessman with long experience in the United States.  I found it an interesting read.

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I hope to be back to regular blogging by next Tuesday or Wednesday.  Our travels have taken us to Wooster, Ohio – where our daughter delivered our first grandchildren last night.  That’s right: grandchildren, plural.  Twins, one boy, one girl.  The girl, Rosie, was born just before midnight, with the boy, Brack, not putting in his appearance until nearly two hours later – so our twins have different birthdays!

Mom and babies are due to come home Sunday.  I plan to fly back to Honolulu Monday, leaving the new grandma to help out for a while in Ohio.

Blowing bubbles ...

I have several friends and correspondents in China, and some have recently commented on the presumed bubble in China’s housing sector.  The nutshell summary is that these “insiders” don’t see a bubble.  I don’t either, though many Wall Street gurus do.  That’s not to say that China has no economic weaknesses.  But, as usual, weakness is not likely to come from the “obvious” source.

The comments come from friends in China’s largest cities and from smaller places (at least by China’s standards), people who brave the traffic in Beijing and Shanghai – as well as country roads.  Some are newcomers to China, while others are “old China hands” who have been there for decades.  Some are even Chinese!  In short, my sample – while unscientifc – covers a braod spectrum.  Here’s what they’ve got to say.

As with most everything in China, you have to put the residential housing market in a political context.  One of the things largely missed by Western analysts and media before Tiananmen Square in 1989 was that the prime mover for the protesters was the lack of decent residential housing.  This was focused on the major cities, as the agricultural areas had not yet realized how much better housing could be.  But people flocking to Beijing were dismayed at the hovels they had to live in.  Beijing’s leaders realized this at the time, but underestimated the depth of feeling – a major miscalculation, the lessons of which have not been lost.  They have been battling to increase the supply of housing ever since.  This isn’t altruism or the American-style dream of everyone owning their own home.  This is an attempt to the keep the lid on political fallout.

That is not to say that Beijing wants an unfettered housing market.  Beijing doesn’t trust anything that is unfettered, and they do see the dangers of a potential housing bubble.  Beijing is walking a fine line between bubble and stability, while growing the housing stock, and is doing a reasonably good job of it.  This spring’s tightening seems to have cooled off the residential markets in the big cities.  I’ve seen comments that sales dropped by 70% and that prices for housing in the major cities are down around 10% (I never entirely trust Chinese statistics, so take these as an order of magnitude only.)

What’s happening in smaller cities and in the countryside is less clear.  There are reports that housing continues to boom beyond the big cities and that some of the city money (up to Y300 billion) is moving into the countryside, into precious metals, and into commercial or industrial real estate.  Assuming overall demand has been dampened, however, still leaves Beijing with a huge problem, the problem they have faced for decades: the need to hugely increase the actual supply of housing.  Demand won’t stay down for long, so growing supply is the only long-term method of avoiding future political disturbance – Beijing’s real aim.

Beijing has lately focused on the demand side by trying to control credit and by jawboning the market down.  They now “recommend” that no one own more than two homes, one for your immediate family and another for your parents or children, in a valiant but belated effort to prevent speculative investment.  Unfortunately for policymakers, China already has more than a taste for speculation and this toothpaste simply won’t go back in the tube.  Too much money has already been made to stop it.  Again, only an increase in the housing stock can cure this.  And China hasn’t figured out how to do it.  Maybe they should invite Western housing developers to compete!  Don’t get your hopes up.

The bottom line is that residential housing is not a bubble.  When prices resume their rise, and they will, the focus for Beijing must be on solving an extreme supply problem.

• Having trouble finding a freight forwarder, or need a forwarder with special expertise in a market?  Take a look at Freightbook, a free on-line search engine for finding freight forwarders, couriers, customs brokers and many other types of international trade service firms.  Freightbook says they have more than 400 companies listed in 120 countries, which should be enough.  If you are a forwarder or similar firm, you can get your company listed, but that isn’t free.  Hey, they have to make money somehow.  (This is another tip from the Federation of International Trade Associations.)
• Little noticed, but with big potential, China has apparently agreed to consider signing on to the WTO’s government procurement code.  If so, this could solve a lot of issues that foreign companies have in selling to Chinese government agencies and could obviate things like the “indigenous innovation” rules.  If this develops, you’ll see more posts about it here.  I was one of the negotiators of the procurement code and will watch this one closely.
• More good news.  Russia could be in the WTO within a year, says the European Union.  This should loosen some things up.
• I really should do a post on the many “chicken wars”.  Hardly any other product has been subject to as many trade disputes as chickens and chicken parts.  My first one was the famous U.S.-EU chicken war decades ago.  The latest chicken war is between the United States and Russia and it appears to be nearing resolution.  Chickens were involved, too, in the great turkey ball war between the United States and Taiwan (read about it here).

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I’m still on the road, in Sandbridge, Virginia, this morning.  Posts will continue to be sparse for a while.  Our goddaughter is getting married and we are kneedeep in all the hoopla.  We are also waiting for our daughter to deliver our first grandchildren.  She is due to deliver twins at virtually any moment!  That takes precedence over blogging, so bear with me.

• I posted Tuesday about how difficult the Chinese market can be (Just Don’t Go There), so I read with interest an interview the next day with Winnie Lui, CEO of Hong Kong’s Patty Company, a maker and retailer of shoes that has been successful in China.  You can see it on the Hong Kong Trade Development Board’s site.  Patty uses its own shops to sell in China and opened more than 200 of them between 1982 and 1997, when the Asian financial crisis led to closing all but 30 of the shops.  Patty has had to re-develop its sales network and now has more than 100 shops.  Ms. Lui’s advice to new consumer goods companies trying to sell in China is to focus on the large existing department stores, paying for good space or opening up their own counters within the larger store.  Her reasoning: Chinese consumers trust department stores more than small shops for finding good quality products, so selling through department stores is sort of a seal of approval.
• One of my articles that questions how Hawaii does its tourism marketing was picked up by WorldTourismDirectory.com.  Unfortunately, they didn’t pick up the nice tables that give the real picture.
• The annual World Competitiveness Scoreboard is out.  The United States, which held the title for years, has been dropped to #3 by Singapore and Hong Kong.  At least we’re still on the podium, given the anti-business atmosphere among populist politicians.  Consider poor Venezuela, easily at the bottom of the rankings – again.  See the complete scoreboard here.
• The Obama Administration still can’t get its act together on free trade agreements.  Canada and Panama just concluded an FTA, while our FTA with Panama languishes.  The race is now on to see which FTA is ratified and implemented most expeditiously.  I’m betting on the Canada-Panama agreement.  Sigh.
• By the way, the European Union has re-opened free trade talks with Argentina, Brazil, Uruguay and Paraguay.  Where is the United States, one wonders?

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I will be traveling the next week or so, attending a wedding on the U.S. East Coast, staying with family and friends.  It’s always nice to see them, but it does mean that Internet connections are not always convenient and the time for blogging will be unpredictable.  I’ll try to post as usual, but there may be lapses.  Please bear with me.