Business Beyond the Reef

U.S. International Trade Commission

Wow!  I’m impressed.  Government studies often help me to take a nap, but here is one that has some eye-popping stuff in it.  The U.S. International Trade Commission has released the second in its series of studies about exporting by U.S. Small and Medium-sized Enterprises (SMEs).  I know, that sounds like a snoozer, but bear with me.  The first ITC report, released in January and reported upon here, was a scene-setter that examined the scope and role of SME exporting in the context of overall U.S. exports.  The major conclusion was that most SMEs sell to only one foreign customer in one foreign market, usually Canada, so there is beaucoup room for improvement.

The new report looks at specific issues faced by SMEs and compares U.S. programs and conditions with those our European Union competitors use to help their small companies.  There is so much meat in the report that the executive summary takes up a full eight pages.  I’ll attempt to hit the major points here, but I suspect I will draw on the ITC report for several more posts in coming weeks.

The ITC begins by disposing of a semi-myth, that SMEs are far more prominent in the European Union’s exports than in those of the United States.  That’s true, as far as it goes.  Using 2005 data, the latest comparable, SMEs sold 31% of the EU’s manufactured exports but only 13% of America’s foreign sales.  They say not to make too big an issue of this, however, because the U.S. market is so large and well integrated that America has tended to grow more big companies than has the EU, thus it is no surprise that big companies dominate our exports.  I agree with the impact of a large integrated economy, but I know from personal experience that the Eurocrats have being doing everything possible to grow Europe’s SMEs into something larger.  Both in meetings in Brussels and at a conference about SMEs in Copenhagen, Eurocrats made it clear to me that, in their opinion, being small is a disease and that Brussels has the doctors to cure it.

I was surprised to see the ITC’s conclusion that U.S. financing for SME exports is no worse than in Europe, given the moaning I hear from small U.S. companies.  In fact, U.S. pre-export and short-term credit appears superior to what the Europeans are doing for their firms.  European exporters, however, may have better access to help in foreign markets – and far better support for participation in international trade shows.  (I have seen EU exporters laugh out loud when they hear how little official assistance is available to Americans at trade shows.)  The ITC also notes that European countries attact foreign investors with a view to building new export industries, something the U.S. Government cannot do because investment promotion is largely the preserve of individual states and cities.

There is a major difference in the structure of U.S. and European SME exports.  In Europe most SMEs do their own exporting, while American SMEs tend to sell their product to middlemen who then do the exporting.  I interpret this as part of our firms’ absorption in the huge North American market, though I suspect it also reveals a lack of willingness to take on the perceived risks of exporting.  If you can sell most or all of your product in a market you thoroughly understand, then you are less likely to take on markets you don’t know.  That’s understandable, if perhaps short-sighted.

The ITC then looks at barriers to exporting.  Most SMEs, anywhere, have difficulties with obtaining good and sufficient financing.  Their size makes them appear higher risk to the  banks, and a focus on foreign markets makes them seem even riskier to the green eye-shade people.

The U.S. Government sets up its own barriers to SME exporting.  Export controls are front and center due to their complexity and immense paperwork.  Visa issues are equally important, hindering efforts to bring potential buyers to the United States for contract talks or for training, and for stopping immigration of specialized foreign workers that a company might need.  SMEs also complained to the ITC about poor coordination among government agencies and unnecessary tariffs on inputs they need for production.  I wrote about the latter last week before beginning to read the new ITC report.

Transport costs are a big issue, especially the relative lack of availability of containers on the West Coast.  Foreign regulations are a huge hindrance for a small company that lacks the staff to fully understand and ensure compliance in multiple markets.  IPR protection is a big concern, especially for those SMEs trying to do business in China.  Ditto delays at foreign ports for perishable products, such as foodstuffs or pharmaceuticals.  Increasingly U.S. SMEs see “unfair” competition from foreign competitors who benefit from free trade agreements their governments have negotiated, while the United States remains inactive in FTA negotiations (is anybody in the Democratic leadership listening?).   Language and cultural issues, and limited knowledge of foreign markets, are yet more consequences of our over-reliance on our huge domestic market.

What do American SMEs do to overcome these reasons not to export, and what does the ITC recommend?  Check in again tomorrow.

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Oh, Sunday was fun!  We had an outrigger paddling regatta at Waikiki, right in front of the Outrigger, the Moana and the Royal Hawaiian.  What a setting!  And the waves were great, though boats were swamped or flipped in most every race.  My first race was the men’s 60s.  We powered our way out through the surf, taking big hits from the waves but surviving.  We made perhaps our best turn of the season at the quarter-mile mark, then accelerated back to the finish line at the beach, riding the surf much of the way.  There is an art to riding waves and breaking surf.  The acceleration is exhilarating and a good crew can stay on a wave for a long ride.  We were good Sunday and finished a strong second.

My second race, the mixed 55s, was even more exciting.  We never even made it to the turn.  I was stroking (that’s the first seat, the paddler who sets the pace), and we got hit three times in succession by big waves.  We kept going and were moving fairly well, though the boat was full of water.  Then I saw the monster.  Had to be twice the size of the others.  I shouted to apply all the power we had, but it was no good.  I was knocked into the lap of the second paddler (a rather petite woman) and then, in an instant, our canoe was upside down.  Our race was over and our focus turned instantly to making sure everybody was safe and unhurt.  Jetskis got us safely back to the beach and towed the boat in.  Our coach, standing on the beach, told me he saw that fourth wave and knew we didn’t have a chance.  Exciting!

• Trade stinks.  That’s the conclusion one might draw from Sweden’s seizure of 28 tons of smuggled Chinese garlic.  The garlic was hidden (how can you hide 28 tons of garlic?) in a truck crossing the Swedish border from Norway.  Norway has no duties on garlic, but Sweden is in the European Union, which has a 9.6% customs duty on the stuff – giving incentive to the smuggling trade.  The seizure, however, is only a small part of the 1,200 tons of garlic that Brussels says came in through Norway in the past year.  China, by the way, produces about 75% of the world’s garlic.
• Special for trade policy wonks: the Peterson Institute for International Economics has examined protectionism by the G20 countries – and finds most of them wanting.  Here are the rankings for most protectionist actions implemented or proposed between July 2008 and April 2010:

Who knew that Saudi Arabia would be the G20's best free-trader?

• I didn’t watch President Obama’s latest speech about the National Export Initiative until after yesterday’s post about the NEI was published.  But I didn’t hear anything to change my opinion.  The NEI is mostly good rhetoric, but the same rhetoric that has been used by every president since Lyndon Johnson (and probably earlier).  An increased export promotion budget is the main event here, and possibly better availability of small business export credit.  Obama reiterated that he plans to reopen the FTA with South Korea to renegotiate something that has already been negotiated twice.  Bet the Koreans hang tough this time.
• The Federation of International Trade Associations (see link to the right) had a couple of interesting links in its weekly e-newsletter, both dealing with living and working abroad.  One was to a site called International Business Etiquette, which is self-explanatory but with some good stuff in it.  The second site, International Living, takes a bit more explanation.  The site is aimed at people considering retirement overseas, but there is a lot of cost and other information that might be useful in investment decisions, or for marketing if your company targets lucrative expat communities.

Pooh understands it.

Second best is often the best you can do – and it sure beats finishing further back.  “Second best” is a concept that, simply put, says don’t let your pursuit of perfection defeat the possibility of doing good.  It’s the pursuit of perfection that is defeating the Obama Administration’s trade policy.  I speak, once again, of free trade agreements.

FTAs are on my mind again because the European Union and India are on the verge of signing an agreement that has been in negotiation since 2007.  Trade between the giant of South Asia and the Europeans has reached €53 billion – and negotiators on both sides say the pending FTA could help triple that in the coming five years, bringing jobs to Europe and boosting India’s development.  Achieving agreement, and it isn’t finished yet, has not been easy.  India and the EU have had nine rounds of talks, and both say that they would have preferred a successful Doha Round.  But they have come to realize that a Doha agreement isn’t going to happen any time soon, and that an FTA is the best “second best” option they have if they want to grow their economies.

That’s what the Obama White House and the Democratic Party have not discovered.  I see an approach to trade that is perhaps more typical of a trial lawyer’s viewpoint: you go full tilt toward the perfect outcome, no matter what the cost of doing so.  For Obama and the Democrats, I fear that the “perfect” outcome has more to do with the wishes of certain trade unions or environmental organizations than the world trading system can support.  It’s not that I oppose environmentalism or better working conditions, or that I am a Republican.  I’m not.  It’s just that the world trading system is not the appropriate vehicle to carry all that water.  You solve those issues on their own merits or demerits, not because Washington threatens to raise tariffs on cut flowers.  Obama’s failure to pursue free trade agreements is a classic example of not seizing the opportunity of the “second best”, of continuing to pursue perfection at the cost of the good.  And the good in this case includes jobs for Americans.

“Second Best” is often the best you can achieve and it is no small accomplishment.  We have three good trade agreements waiting for a decision from the White House.  We have no others in the pipeline, despite interest in better trade by most of the world, because Obama and the Democratic Congress have not authorized our negotiators to work on more.  Besides, given that you never know what American politicians will insist on including in a “trade agreement”, I suspect most of the world is reluctant to go through the effort of talking to Washington.

Stick to the subject, and go for the second best if the best is not obtainable.

• It’s always good to be up to date on local happenings when you are doing business around the world.  Knowing what’s happening when you get off the flight in a foreign market can be valuable to your business dealings, can help you get to know locals quickly, and can be vital to your personal security in some places.  Knowing the local hot topics can’t be bad, but it can also be tough to find out before you are on the ground.  Check out World-Newspapers.com, a site that provides links to local, English-language newspapers virtually everywhere in the world.  Some are subscription, of course, but most offer considerable reporting for free.  This way, you can check out the Brunei Times before your meeting with the Sultan!
• The European Union and the United States finally got around to signing the agreement they initialed back in December to end the Banana War trade dispute.  You can find more about this slippery issue here.
• The United States is hosting the second round of talks next week to build the Trans Pacific Partnership.  The talks will be in San Francisco and will include trade representatives from Singapore, Chile, Australia, Peru, New Zealand, Brunei and Vietnam.  The Obama Administration says it wants TPP to be a “21st Century” trade agreement, which leaves one wondering what that phrase means.  My buddy Frank Vargo, at the National Association of Manufacturers, wonders too, hoping that it means we will go for maximizing trade, but fearful that it is code for using trade to enforce labor and environmental objectives.  Perhaps Obama is walking a fine line here, because Thea Lee of the AFL-CIO comments: “An odd thing about the Obama trade policy is that it seems to engender a lot of discomfort on both labor and the business side…”

• Europe’s prospects have rarely seemed so important for the world, what with the Greek drama and associated fears of contagion.  So take a look at this neat interactive map of the European Union that shows all kinds of growth forecasting data for every EU member.  Judge the danger spots for yourselves.
• I have posted a few times about the U.S. military build-up on Guam, making room and building facilities for 8,000 Marines and 1,000 U.S. Army personnel, plus their families and support staff.  Contractors are salivating over the prospects, but the local community is having doubts.  Read about in detail here.
• For your weekend entertainment: the New York Times collection of strange and wonderful signs from around the world.

'Nuff said

• 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.
  

Power-Hungry Germans? (photo: senator86)

Businesspeople want to hear about politics, while politicians like to hear about business.  At least that has been my experience as a public speaker.  I suppose that is the attraction of an outfit like Stratfor Global Intelligence.  I check them out once in a while to see what what they are warning about lately.  A friend sent me Stratfor’s latest commentary about how Germany should react to Greece’s financial crisis.  There are some good points, but it is a good example of the sort of paranoid thinking Stratfor and its competitors indulge in.  My friend commented that Stratfor’s analysis is more like a James Bond novel than the Wall Street Journal.

The paper begins in true Germanic style with a “gesamtkonzept” – a lenghty prologue that enables the authors to tell you exactly where they are coming from in history.  I have attended two-hour speeches in Germany where it took the speaker until the last fifteen minutes to get to the subject we thought the speech was about.  Here’s an example from the Stratfor report:

“The heart of Germany’s problem is that it is insecure and indefensible given its location in the middle of the North European Plain. No natural barriers separate Germany from the neighbors to its east and west, no mountains, deserts, oceans. Germany thus lacks strategic depth. The North European Plain is the Continent’s highway for commerce and conquest. Germany’s position in the center of the plain gives it plenty of commercial opportunities but also forces it to participate vigorously in conflict as both an instigator and victim.”

At least they didn’t go all the way back to the Gutenberg Bible.

The article continues in this vein and analyzes Germany’s possible responses about Greece in security and power-projection terms.  Their conclusion is that Berlin will bail out Athens, not for any economic reason, but because this will allow Germany to project the most power within Europe.

Machiavellian stuff.  I suppose that is why the corporate world is attracted to this sort of analysis and pays top dollar to hear, read or meet doomsayers.  Such analysis has to be gloomy to attract the big bucks.  You wouldn’t want to be accused of paying good money for good news, would you?  It’s like my friends in the security business – they are paid to be paranoid.

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.

I finally finished reading a study published December 16 for the European Parliament about the economic impact of non-tariff measures (NTMs, as they are known in the trade biz) between the European Union and the United States.  The study can be fairly dense and methodology is always open to dispute, but the authors quantify the issue and make some striking findings.  The main conclusion is that if all non-tariff measures possible could be removed from North Atlantic trade, the U.S. and the EU could expand  their economies by €163 billion every year.  That’s nearly $226 billion.

Can They Reduce NTMs?

The impact is uneven, of course, depending on the characteristics of the NTMs and the two very different economies.  Europeans would see their GDP go up by €122 billion ($169 billion) annually, while America’s GDP would only rise by €41 billion (almost $57 billion).  That’s because exports make up a smaller percentage of the U.S. economy than Europe’s.  Seen as a percentage of export sales, the United States stands to benefit the most from reducing NTMs across the Atlantic.  U.S. exports to Europe would spike by 6.1%, while EU sales in the United States would go up by only 2.1%.  One could argue that this means that America’s NTMs are less onerous than Europe’s, but that would be jumping to conclusions.

The authors also looked at which business sectors stand to gain the most from liberalizing trade, NTMs in particular.  We can expect Europe’s automotive, chemicals, pharmaceuticals, food product and electric goods companies to support liberalization.  The same goes for the U.S. electric goods, pharmaceuticals and chemical industries, but we would find sales by our insurance and financial services firms soaring.  Yes, folks, that means big banks and companies like AIG.

The authors comment that there isn’t much to be gained from a Trans-Atlantic free trade agreement unless NTMs are the centerpiece.  Tariff cuts between Europe and America have gone so far that further cuts in duties, while appreciated, won’t make much difference to overall economies.  Thus, trade policy officials on both sides of the Atlantic need to focus on NTMs, and that means reducing regulations on business.  I kind of like that.

You can browse a 7-page summary of the study, “Non-Tariff Measures in EU-US Trade and Investment“, here.

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.