Category Archives: Russia

WTO Members Grilled On Import Licensing

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The Import Licensing Committee of the World Trade Organization (WTO) met last week to watch member countries trade barbed questions about import licensing requirements. Licensing, while it can be used for legitimate consumer protection, can also be employed to keep foreign competition out in favor of local producers. The Import Licensing Committee tries to resolve disputes before they become official cases in Geneva, but there have been 39 often raucous dispute settlement cases since 1995.

The WTO Import Licensing Agreement aims not only to prevent licensing requirements from being used to discriminate against foreign products, but also – realizing that uncertainty stops trade – to encourage countries to be transparent about their licensing practices. Member countries are often reluctant to give information about import licensing to each other or to the WTO secretariat. The WTO conducts an annual licensing survey that all of its 159 members are supposedly required to fill out. I haven’t seen the results for 2012 yet, but only 43 of the members bothered to complete the 2011 survey. Hardly a strong vote for transparency, is it? One has to assume that the 116 non-responding countries are up to something sneaky.

Russia only joined the WTO last year, but Moscow has already missed its first deadline for the import licensing survey and many countries want to hear what the Russians have to say. Canada, the European Union, Japan and the United States all asked questions about Russia’s practices, and were joined by Norway, Switzerland and Australia in expressing concern about the missing questionnaire. The Russian delegation answered some specific questions – describing its licensing rules as mostly applying to alcoholic beverages, drugs and drug precursors, toxics, medicines and radio-electronics – but gave the excuse of a re-organization of its trade agencies as the reason for its non-response to the annual questionnaire. Wonder if we will see a response to the 2013 questionnaire?

Vietnam was congratulated by the United States and the European Union for its decision to temporarily waive some of its import license requirements. That done, Washington complained that Vietnam has been a WTO member for six years now and still hasn’t presented – as required – a list of what products are actually subject to import licenses. The new waiver would have been more impressive if we had been sure of what was covered in the first place.

The United States, the European Union, Japan and South Korea are all worried about import licensing requirements in Indonesia. Seems Jakarta has imposed new rules requiring licenses for food and beverages, traditional medicine and food supplements, cosmetics, ready-to-wear clothes, electronics, footwear, children’s toys, mobile phones and other information technology products – but hasn’t bothered to tell anybody about it. The Indonesian delegation to the WTO must have been embarrassed when forced to admit that their bosses in Jakarta hadn’t filled them in either. The Indonesia delegates admitted that the new rules had caused “delays” in processing imports, but – in a CYA moment – tried to justify the regs as complying with technical regulations and human health and food safety requirements. Without knowing what the new regs are. Diplomacy has its humorous moments.

Perhaps not the right "ghost company"?

Perhaps not the right “ghost company”?

Switzerland raised a question about Brazil‘s RADAR import authorization requirements that are said to combat fraud by “ghost companies“. Brazil said we’ll get back to you, perhaps an admission that these rules had been off their radar. (Anybody out there know what these rules are or what a “ghost company” does?)

That wasn’t all, but you get the drift. Australia had questions for the European Union about licensing for motor vehicles and animals (not together). The United States jumped on St. Lucia about poultry and pork licenses. Washington and Brussels asked questions about coke and coal licenses in the Ukraine. India got questions from Turkey about marble, and from the United States about boric acid. The Turks raised the same question about marble with Thailand, and the EU pressed the Thais on nitrocellulose.

This is the sort of stuff that rarely makes headlines, but can kill or slow trade.

Crossing The Russian Border

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Fun at the Russian border.

Fun at the Russian border.

There is a reason that the Russian import market doesn’t see many small companies. Just wait until you see the problems the big boys have to put up with. The World Economic Forum/World Bank/Bain & Company study on supply chain problems in international trade makes it clear: it can be very tough to get your products into Mother Russia.

The study focuses on an unnamed U.S. computer company that sells desktop computers, laptops and spare parts, some of them new, some refurbished. The company is said to have the 6th largest market share of computer companies that sell to consumers in Russia, so they must be pretty big. But being big doesn’t save them at the Russian border where, depending on the products being shipped, documentation issues and import licensing requirements can cause delays ranging from ten days to eight weeks. That will put a dent in your profit margin.

Products built for wireless communications such as Bluetooth generally have an easy time of it. Shipments of wireless mice, keyboards and the like don’t require import licenses. But computers with wireless capabilities do need licenses, whether desktops or laptops. And, worse, you can’t apply for these licenses until the computers are at the border awaiting entry. First, they have to be “tested”. I don’t know if this is rigorous scientific testing – or border guards watching YouTube – but it can take two weeks. Second, your importer needs to get an import license from the Ministry of Industry & Trade. This, of course, requires presentation of copious documentation. Let’s see, there is a purchase agreement, a certificate of tax registration … Altogether, testing and licensing can take six weeks to negotiate. Your importer also has to pay $300 for the testing and another $80 for the import license.

Security fears on the Internet and elsewhere mean that many computer products today contain an embedded cryptography capability, which, in turn, attracts the Russian security apparatus. The security guys apparently want some of this stuff (routers, some computers, VPNs) because they have set up an “expedited” clearance process. It only takes about ten days to notify the Federal Security Service and get their approval, bypassing the Ministry of Industry & Trade. Others aren’t so lucky, meaning they take about four weeks to get approved by the security guys and then they can start on another four weeks at Ministry & Trade. Better allow for two months of down-time at the border before you can start selling your products. And it gets worse if you are selling something like a PC that is both wireless-capable and has built-in encryption.

Some products fall afoul of Russia’s reference pricing system. For these products, the customs inspectors ignore the actual prices on the invoices – which they assume are false – and rely on a schedule of minimum import prices on which they collect an ad valorem customs duty. This creates a price floor for applying duties and is applied on a discretionary basis, so your importer cannot predict when he will have to pay more than he had planned for based on the invoice value. The importer is in a double bind. He can challenge the use of the reference price, which will further delay the shipment and require a sea of supporting documentation to prove his original lower price (things like bank documentation, consumer price lists verified by officials in the exporting country, statements from the seller). Or the importer can just accept the reference price and pay the higher duty. But if he accepts the reference price too often, he is open to investigation for customs fraud for continually trying to sneak goods in at a lower price. It isn’t easy being a Russian importer.

Customs Can Ruin Your Day

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How long will this shipment take?

How long will this shipment take?

Every company encounters them. Even many individuals. Sometimes there are good reasons for customs delays, but they are always irritating – and sometimes they can kill a deal or even a whole line of business. While preparing the World Economic Forum/World Bank/Bain & Co. study on shipping logistics, the researchers interviewed a semiconductor manufacturer (unidentified, though I have my guess). They had other problems (e.g., export controls), but the conversation dwelt on customs delays and where they are worst. The company often sells to buyers who demand just-in-time delivery – and those deliveries can be defeated by a dilatory customs office somewhere. The company’s shipments are generally sent by air, but can end up sitting for several days in a customs shed.

The semiconductor company and its clients use bonded zones in China and often need to move product between those zones. Each time goods move in or out of a bonded zone, similar in concept to foreign trade zones elsewhere, they come under the purview of Chinese customs officials. China’s rules for shifting items from one zone to another are unclear and tracking of products is inconsistent. The company reports that each move in or out of the zone (import or export) typically requires half a day for clearance, but it is not unusual for clearance to take a full day or longer. The issue is usually how tolerant a customs officer may be when there are mismatches between shipping documents. Some see that a mistake is merely a typo and let the goods pass. Others are sticklers for perfection. This is the sort of thing that could be remedied by electronic customs documentation, eliminating much of the human error that has always plagued international shipments. There are also issues with the opening hours of the customs offices, apparently not long, despite the fact that the firms using the bonded zones are working 24/7. Sometimes it is quicker to export a shipment to Hong Kong and then to immediately re-import it to China.

Our semiconductor company has to cope with exceptionally long customs delays in Russia, where clearance can take from two to three weeks. The company sends its products first to Finland where they can be safely stored while deals are done with Russian distributors. The distributor gets caught in the middle when arguments erupt, due to unclear and fluctuating rules, between Russian customs agents, the company’s clients and the distributors themselves. Thus, the company’s Russian distributors have to maintain higher than normal inventories to please the customers. Customs hassles also lead more clients to reject shipments. Russia, however, applies an export tax that is costly enough for our company to tell the distributors to destroy 98% of the rejected goods rather than go through the hassle of shipping them back.

The company also puts Brazil, Argentina and India on its naughty list for customs clearance issues. Security and corruption are endemic in these countries and all feature uncertain rules that are “flexibly” applied at the border. Customs clearance in India, for instance, is supposed to take no longer than 48 hours, but customers usually allow for a week to actually get their goods.

India is also one of the most risky destinations from a security perspective, with the most theft in Asia. The main point of risk is at the warehouse monitored by customs. The forwarder or importer cannot see the cargo when it arrives. The consignee (customer) often receives paperwork indicating the shipment is there, but when it gets through customs it may be in bad shape or partly stolen.

It doesn’t have to be this way. Our semiconductor manufacturer praised Vietnam, where great strides have been made in building an electronic customs clearance system. Still being put into place, the automated system has sped up most clearances to only two hours. Some shipments are cleared in only 20 minutes! The system has been designed by the Vietnamese, the semiconductor company and some of its suppliers. Now, Japan is joining the effort, making grants of $40 million to Vietnam to extend the system and have it fully operational by this time next year.

Is there a message in Vietnam’s experience for China, Russia, Brazil, Argentina and India?

[The photo is actually of Indonesian customs officers intercepting an illegal shipment.]

“We try to avoid China”

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I am a sucker for data, so I was jubilant when I received the results in Washington last week of a survey of experienced American exporters about the trade barriers they face in foreign markets. The survey was done by the Department of Commerce and canvassed about 400 exporting companies about the most bothersome trade barriers they have run into over the last five years. Some of the respondents, like me, are consultants who responded in behalf of their clients. Companies of all sizes were included, but most were small firms, though with considerable experience. The survey did not address the experiences of new exporters, who might be more inclined to let a foreign barrier stop them in their tracks.

The trade barriers that excited the most complaints were the pedestrian ones of customs barriers and disagreements about customs classification (seen by a bit over 15% of the respondents), or product standards testing, labeling or certification requirements (also about 15%). About 12% of the companies complained about excessive or unfair government requirements and fees (I am surprised this isn’t higher). Rules of origin issues come in at about 8%. The headline issues of bribery and corruption were mentioned by 6.5%, closely followed by government procurement barriers (6%) and intellectual property concerns (5.8%). Import licensing requirements and having to compete with state-owned companies both came in at over 5%. Fewer than 2% of the responding companies said they hadn’t run into any significant barriers.

Another BRIC in the Wall?

Where were you most likely to hit a road block? China, hands down. Taking your products to China is a risky business, cited by 17% of the respondents. The next most likely country to do you wrong was deemed to be Brazil (12%), followed by Russia and India at 8%. Gives BRIC a whole new meaning, doesn’t it! South Korea was next up (6%), accompanied by the European Union (as a whole), France and Germany (individually), and Mexico – all at 5%.

Most of these markets tend to specialize in the types of barrier they use. The EU, Germany, France, China and Japan all like to stop imports by using standards restrictions. Brazil is especially prone to use tariffs, customs classification and other barriers at the borders, though Russia, India, China and South Korea aren’t shy about this. China seems particularly tight on invoking rules of origin to keep products out. China and India were the most often criticized for their government procurement restrictions. It won’t surprise you that these two are also top of the list for intellectual property violations. Excessive fees and bureaucratic restrictions also feature Brazil, China and Russia. It is China and Brazil yet again for imposing import licensing requirements. China, Russia, India and Mexico lead the way on corruption. (I was pleased to see only one complaint about bribery in Indonesia.) Notice that China appears in almost every category, employing the full arsenal of trade restrictions.

To their credit, the exporters didn’t usually let the trade barriers stop them. Some handled the issue themselves, while others sought help from the foreign government or from the U.S. government, but most succeeded in doing business. Almost all, however, noted that they could have done a lot more business without having to run the barrier gauntlet. The countries where companies were most likely to give up were, of course, China (8 out of 42 that reported barriers), Brazil (3 out of 33), and the European Union (3 out of 23). Small sample, but intriguing.

There was a final question that tried to get at how many companies had not even tried to do business in a market because they were already aware of a deal-killing trade barrier. A huge 29% of the responding exporters said they had not gone to China because of its trade restrictions. 10% said the same about Germany! And 9% had stayed away from Brazil and Mexico.

Respondents were encouraged to comment, which produced a few gems. While most argued that India is tough to do business in, others made the point that you can’t consider India as a single market; if you pick the right state, you can do very nicely, thank you. One company, presumably with tech products, complained that the worst trade barrier they see is America’s own export licensing requirements. Individual companies commented that they refuse to do business in China, India or Italy (!). Another picked out eastern African markets as being good business, while different companies said they avoid Kenya, Nigeria, Ghana, Venezuela and the Middle East. Customs barriers in Italy and Turkey were hit, as were unexplained cargo seizures by customs agents in Russia, Belarus and Kazakhstan.

Protectionism is alive and well.

PNTR Time

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I have posted often about the need to ensure access to the growing Russian market for American exporters. I may have been early, but the issue is one that the mainstream business community is fast glomming onto. The situation is this: Russia is joining the WTO as a full member after years and years of exhausting negotiations to satisfy the demands of the United States and other WTO members. Russia will greatly cut its tariffs on both manufactured and agricultural imports, open its markets to foreign services firms (such as banking, securities, nonlife insurance, telecommunications, audiovisual, wholesale, distribution, retail, and franchises), provide greatly enhanced protection for intellectual property rights, cut its customs clearance fees by two-thirds, and subject trade disagreements to the WTO’s dispute settlement process. But some members of the U.S. Congress would stand on outdated principles and scrap all this for American companies.

Red skies could mean profits.

You see, negotiation is a two-way street. Russia has agreed to do all this to get into the WTO and be treated like an adult trading nation, but the flip side of the coin is that other countries also need to treat Russia according to the most-favored-nation principle. That means Russian goods and companies must be allowed into the United States on the same basis that we allow in anybody else. For decades, going back to the bad old days of the Soviet Union, we have denied MFN to the Russians, believing that doing so will prompt changes in the Kremlin. (This is kind of like our insistance that the Cuban embargo will prompt change in Cuba. We know how well that has worked.)

To apply MFN to Russia, and get all those benis for our companies and American workers, the Congress needs to pass something we euphemistically call Permanent Normal Trade Relations (PNTR). (We can’t just call it MFN like the rest of the world does.) PNTR is now being debated in the Senate and likely will be decided before the Summer Recess. I urge you or your company to ask your senators and representatives to support PNTR; that’s easy to do right here. If you run a business organization, you might consider signing on to the letter going to Congress from the U.S. Chamber of Commerce.

Russia Waits On The Americans

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The wheels of Congress wind slowly toward approval of Permanent Normal Trade Relations (PNTR) with Russia. Russia will enter the World Trade Organization in a few months as a full member, following many years of intense trade negotiations with the United States and other WTO members. The United States won’t see the benefits of that long negotiation unless we grant PNTR and, to do that, we need to repeal the antiquated Jackson-Vanik amendment. Go here for more details on this relic of the Cold War, and here for some of the state of play in the Congressional tussles over PNTR. Troglodytes in the U.S. Congress are convinced that ridding ourselves of a punishment for the old Soviet Union is somehow giving a gift to Russia. In my opinion, it would be a gift to American firms and workers. That’s certainly the way that Europeans view the pending opening up of Russia’s markets. Take a look at the salivating going on in Germany. Why shouldn’t Americans get a piece of this action?

Russia ready?

The House Ways & Means Committee held hearings last Wednesday that included testimony from two American ambassadors, the CEO of Caterpillar, the president of the Michigan Farm Bureau, the president of Argus Ltd., and a senior vice president for Medtronic. You can read their testimony here, but I thought I would give you a few choice quotes.

Terminating application of Jackson-Vanik and authorizing the President to provide permanent normal trade relations is not a gift to Russia. Rather, taking such action will ensure that the WTO Agreement will apply between the United States and Russia, and that U.S. businesses and workers will have the opportunity to enjoy all of the benefits of Russia’s membership in the WTO. If, however, the WTO Agreement does not apply between us, then U.S. exporters and investors will be put at a competitive disadvantage in Russia. We do not want that to happen …
~ Ambassador Ron Kirk, U.S. Trade Representative

This summer, Russia will become a member of the World Trade Organization. Before this happens, Congress has a choice: it can extend Permanent Normal Trade Relations (PNTR) to Russia, giving American exporters and workers a level the playing field in one of the fastest growing markets in the world; or it can keep Jackson-Vanik in place, preventing American companies from reaping the benefits of an unprecedented opportunity to boost trade in a large and growing market.
~ Ambassador William Burns, Deputy Secretary, U.S. Department of State

The most significant pending opportunity the United States has to increase U.S. exports to another country is by approving PNTR with Russia.
~ Doug Oberhelman, Chairman & CEO, Caterpillar Inc.

Strikes me as a no-brainer, but you never know with Congress grandstanding in an election year.

Russians Are Coming, But Are The Americans?

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Our American Congress has a talent for masochism. Not that they willingly inflict pain and discomfort on themselves, but they seem to enjoy doing it to their constituents. U.S. politicians have a knee-jerk reaction, whenever another country does something we don’t like, of retaliating with trade sanctions. But they have never glommed on to the idea that trade sanctions are useless as intimidation if anybody else can supply the goods. Unless you have a total and absolute monopoly on supply, the impact of trade sanctions merely hurts your own exporters. Does this make sense? But the pols love to appear to be doing something, so their own exporters take it on the chin.

I once testified to a Congressional subcommittee about the ineffectiveness of sanctions. The subject was the U.S. embargoes on trade with Zimbabwe and South Africa. Congress felt all sanctimonious and that they were doing something for poor, downtrodden Africans. They did not want to hear my message that an embargo is useless unless all suppliers of a product agree and enforce it. I told some sleepy staffers that their precious embargoes would only create markets for French and Japanese companies that could ignore the embargo. That happened, but the politicians had their appearance of having taken action. Effectiveness of the action doesn’t matter. Appearance is all that counts.

We are in danger of doing the same thing today as Congressional leaders grandstand against permanent normal trade relations (PNTR) with Russia. Sure, Vladimir Putin’s regime does much we don’t like and has a hideous record on human rights. But there is little evidence that trade measures have ever improved human rights, and plenty of evidence that the presence of American companies has been generally and politically beneficial to local populations (just ask Nelson Mandela). Russia will shortly be a full member of the WTO and will throw its borders open (or more open) to other WTO members – except for the United States, which has thus far failed to uphold its end of the deal. The Jackson-Vanik amendment, a relic of a dead age, still stands in the way. For a fuller explanation of Jackson-Vanik, see my earlier post. 

Keeeping Jackson-Vanik, or enacting other trade restrictions for human rights reasons, will keep U.S. companies – especially SMEs – out of the Russian market just as their competitors joyuously charge in. This won’t hurt the Russians in the slightest, will help our competition, and will hurt our own companies. But our politicians will be happy and sanctimonious.