Business Beyond the Reef

• Turkey has a new export promotion program that I find kind of interesting.  Turkish companies can apply for a 50% reimbursement for up to three years for their membership fees on electronic commerce websites.  The stated intent is to help sell Turkish products in foreign markets.
• China is trying once again to join the WTO Agreement on Government Procurement.  This was a requirement of China’s accession agreement upon joining the WTO, but in 2007 the existing signatories of the procurement agreement said China’s offer wasn’t good enough.  The new offer from Beijing is better and answers many of the 2007 questions, but insiders say that it still may not be sufficient (meaning that China isn’t offering enough open access to its own government purchases to justify the other members letting China into their procurements).  One of the big sticking points will be that China’s offer doesn’t include their many thousands of state-owned companies.  But it’s a negotiation, and this is only a starting position.
• Asia Times had an article up this week about how the new trade agreement between China and Taiwan is changing how Japanese and South Korea companies do business in China.  Korean firms are pressing Seoul to launch FTA negotiations with China to minimize expected competition from Taiwan firms in the China market.  The Japanese, however, are doubling efforts to do manufacturing joint ventures in Taiwan so that the resulting products will qualify as Taiwanese and enter China under the new agreement.  Interesting to see the Japanese adopt a strategy that many U.S. companies have pursued for years.

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!

Are the Chinese buying this?

I posted about a month back about how the United States and Hawaii are doing at attracting investors from China.  Not very well, apparently.

Forbes published an article this week by Janet Carmosky, CEO and editor-in-chief of The China Business Network, in which Carmosky provides her ideas on attracting the Chinese.  Carmosky uses a somewhat psychological approach to what Chinese investors are looking for that may have implications for how companies, states or cities market themselves in China.  Let’s compare her ideas with how most American state officials go about investment promotion.

The typical state or city creates glossy brochures and videos that say how nice their community is, how business friendly they are (even if they are not), and they all (except Alaska and Hawaii) show a map of the United States with concentric circles showing how close every other part of the United States is to their location.  Most states don’t get much more detailed than that, though there are some good exceptions, such as the Carolinas, which have done an exceptional job of targeting specific industries and even individual companies.  Instead of the general stuff, you need research that focuses on the interests and needs of specific potential investors.  That means you have to know your target and look at the world through their eyes to successfully sell them on plunking down cash in your state or city.  I’ll never forget a Gulf Coast city that sent an investment mission to Taiwan, but had not looked at themselves through Taiwanese glasses.  They touted that their port has three (count ‘em, three!) container cranes.  The Taiwanese were glancing out the windows at possibly several hundred container cranes in the port of Kaohsiung.  Unimpressed.

Carmosky’s idea is that, not only do you have to do the research and target your investors, you need to tell the Chinese exactly what it is they should do in your city or state.  She approaches it from differences between American and Chinese views on how wealth is accumulated.  The Western concept is that entrepreneurship comes from the individual, from the bottom up.  We get the idea, then we figure out how we can do it, then we tell everybody else about it, using external communication to seek buy-in.  In China, most ideas are top-down in origin.  The center decides what needs to be done, then business figures out how to do it.  Communications, except for propaganda, are kept internal.  The Chinese, says Carmosky, are programmed to accept propaganda as an instruction for what needs to be done.

While Americans are out selling their ideas, Chinese tend to wait for an instruction on what they should do.  Her conclusion is that U.S. investment promoters need to stop selling ideas (my city is nice, my state is close to big markets) and start giving instructions: you need to invest in a new plant in my state, and here is a plan for doing it that has the full support of my government (and also academics, if you can get them).  Back that up with details and help to get a project done.

Counter to Western thinking, but she may have a point.  It’s also the old concept of making it easiest for your customer to do what you want.

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Following up on my earlier post, I have heard from a realtor friend that a private “investment mission” of Chinese real estate buyers recently purchased about a dozen properties in Honolulu’s ritzy Kahala neighborhood.  I haven’t confirmed it yet.  I do know there is a Japanese property owner in Kahala who is selling several properties.

The New York Times published an article last weekend, “China Uses Rules on Global Trade to Its Advantage,” that could easily be misconstrued.  The article rightly points out how China has aggressively used the rules of the World Trade Organization and the International Monetary Fund to achieve its export objectives.  I don’t have a quarrel with what China has done; other countries could take some lessons.

What I find problematic is the author’s description of a WTO that “wields strict, enforceable penalties for countries that impede trade” and an IMF that “has no power over countries … that do not borrow money from it.“  Let’s dispose of the IMF first.  At its core, the IMF is a bank, often the lender of last resort for countries whose economies are in the dumper.  Like any other bank, I wouldn’t expect the IMF to have any influence over somebody who doesn’t borrow from it.  Duh.

The point about the WTO is trickier.  Many people, especially American politicians, fear that the WTO can tell a country to do something it doesn’t want to do – and that the organization on the banks of Lac Leman has the power to back up what it says.  Nothing could be further from the truth.  The WTO, in and of itself, has no power beyond those of moral suasion.  And we know how far moral suasion goes with national governments.

The “strict, enforceable penalties” that the Times refers to have quite a different source.  Realizing that total freedom to retaliate on trade matters has led to more than one war in human history, the member states of the WTO have willing subordinated their powers to retaliate to an organized dispute settlement process.  The process is managed by the WTO secretariat in the sense that the secretariat provides support staff, statistics, keeps records, prints and distributes documents – that sort of the thing.  The director-general of the WTO can’t wake up one morning and say “let’s be hard-nosed” against China or the United States or any other country.

This is where the action is.

The dispute settlement process begins when a WTO member, or several members, decide they have had enough of another member’s restrictions on some specific product.  They notify the WTO of their complaint, which lets everybody know what is going on and starts a clock on resolving the issue.  First, the two (or more) sides must talk bilaterally to try to work things out.  If that doesn’t happen according to an established schedule, the WTO is asked to assemble a panel of experts to review the facts of the case.  These experts work in their individual capacities, are recognized specialists and are from neutral parties.  The parties to the dispute may object to an expert, but that is rarely done because the secretariat is pretty careful about who they nominate.  The panel gets down to work, exhaustively reviews the facts, talks to all the parties.  The parties are also continually encouraged to resolve things between them.  Again, the panel of experts has a strict timetable for finishing its work.

Assuming the dispute still stands, the panel sends its report to the parties and to the WTO’s General Council, composed of all the members.  The report makes recommendations for resolving things, which generally requires a change in one of the parties’ rules or regulations.  Assuming that country doesn’t agree to change its ways, it has one month in which to appeal the panel’s findings.  The WTO has a standing appellate body of seven well-respected trade experts to review panel findings, experts chosen by the WTO membership for four-year terms.  If they deny an appeal and a country’s practices aren’t changed, then the aggrieved parties may request permission to retaliate (often by increasing customs duties on products of interest to the recalcitrant party).  More negotiations ensue but, again, there is a timetable, which generally means that we reach the retaliation stage after about 18 months.  At that point, if the country deemed to be at fault still will not change its ways, the other parties may be authorized to retaliate by the General Council.

Notice that the WTO has no power of any sort throughout this process.  The dispute settlement mechanism is launched by member states, carried out through a process designed to protect the interests of all parties, usually resulting in a compromise agreed between those parties.  It is a rare case that goes all the way to authorizing retaliation.  And the retaliation is carried out by member states – not by the WTO.  Any teeth come from the members acting in their own self-interest.  And it seems to work.

I’ll take some flack for this one.  We have a prevailing ethic in the Western World that says that nothing, absolutely nothing should be talked about behind closed doors.  This is often fostered by the media, whose denizens naturally want an easy way to gather what passes for news.  Or it is pushed by organizations and individuals, usually not elected, that think nothing should happen without their input (often thought of in terms of a veto).  You might call this a pet peeve from an old curmudgeon (are there curmudgeons who aren’t old?).

Aside from curmudgeonly tendencies, I’m here to tell you that meaningful trade agreements cannot be negotiated in public.  I was reminded of this when I was researching yesterday’s post about the draft Anti-Counterfeiting Trade Agreement.  I found endless diatribes online because ACTA is being negotiated by governments behind closed doors.  The total-freedom-of-the-Internet folks have their knickers in a twist because those evil government negotiators are trying to think of ways to limit online sales of pirated goods.  MarkMonitor expects that Internet counterfeit sales will top $135 billion in 2010, so “freedom” is actually pretty costly to consumers.  I don’t know about you, but I don’t feel the need for busybodies to protect my freedom to buy fake pharmaceuticals or other life-threatening products online – or anywhere else.

"What do you do, sir?"

But can you negotiate a good trade agreement of any sort out in the glare of publicity?  Or in the “sunshine” as its supporters prefer to call such openness?  I don’t think so, and I have tried it both ways.  The core issue is that once a country, a politician or an executive has gone on the public record as having a certain position, our society tries to remove the possibility of changing your mind.  If you can’t change your mind or position, then you are going to take the most extreme position you can get away with – even if that position is not what you need to have at the end of the day.  We have all seen how often politicians and public officials are attacked for changing their minds, charged with being “wishy washy”, not sticking with their values or “waffling”.  The same goes for a trade negotiation.  If you say it in public, you are stuck with it – even if common sense argues that compromise might be reached with just a bit of flexibility.  The “pro-sunshine” people thrive on public debate and generally have no interest in compromise, the essence of a negotiated agreement or settlement.  Negotiation prompts flows of ideas, different perspectives, maybe even new information.  Public posturing does not.  As John Maynard Keynes said: “When the facts change, I change my mind. What do you do, sir?”  That process is less likely to happen in a public debate.

Two of the best negotiators I have known were Bill Kelly for the United States and Rod Grey for Canada.  We were negotiating a code of conduct about export subsidies, a truly contentious issue – and, yes, we were behind closed doors in Geneva.  Kelly stated the U.S. position on a particular point, but Grey, a great student of negotiating history, interjected that the United States had taken the opposite position in talks decades earlier.  Kelly shot right back: “the United States reserves its right to change its mind every quarter of a century or so!”   The whole room, Ambassador Grey included, dissolved in laughter.  Can you imagine that in front of a TV camera?