Business Beyond the Reef

• Hawaii Congressman Charles Djou has reiterated his support for the U.S.-South Korea free trade agreement.  Djou is Hawaii’s only Republican in Congress.  The rest of the Hawaii delegation continues to tow the line drawn by the White House and those unions that oppose the FTA.
• You win some and you lose some.  This time, it appears that China has won a WTO dispute with the United States.  China challenged Washington’s rules that appeared to limit Chinese exports of poultry products to the U.S. market.  Details of the WTO finding are not yet available.
• Sometimes the Congress does things that make sense.  The Senate has approved the Miscellaneous Tariff Bill, which allows temporary duty-free entry for several hundred products that are important inputs for U.S. industry, but do not compete with American-made products.  The Republican leadership opposed the MTB as being too much like an earmark package, but the Republican rank and file decided that the bill was healthy for American workers who might want their jobs back.  Keeping my fingers crossed that the President will see it the same way and sign the bill into law.
• I sat in on a webinar yesterday that took a look at the National Export Initiative and the President’s goal of doubling American exports in five years.  Everybody is saying we are on pace to do it, but few seem to be aware that the rise in U.S. exports is the result of recovering economies elsewhere.  There simply hasn’t been time for any of Obama’s export proposals to find traction yet.  I’ll give him credit for proposing an increased export promotion budget, but a proposal is all it is until Congress passes the FY 2011 budgets.
• Another U.S. – China spat.  The Congressional Steel Caucus is doing its best to block a Chinese investment in a new American steel company.  Steel Development Company (SDCO) is being established to build up to five small steel plants in the United States to manufacture reinforcing bar.  China’s Anshan Iron & Steel Group would own 20% of the new company.  Rebar is hardly a sophisticated, high tech product, but the Steel Caucus wants to block the deal on “national security” grounds.  What are these people thinking?  Shouldn’t we be welcoming new investment in a struggling industry?
• It isn’t trade, but there are times when it could be useful.  Check out Prieur du Plessis’ “When Insults Had Class”.  Here’s a sample:

An exchange between Churchill & Lady Astor:

She said, “If you were my husband I’d poison your tea.”

He said, “If you were my wife, I’d drink it.”

SME Export (photo: Abhijit Tembhekar)

Yesterday, I posted about a new report from the U.S. International Trade Commission about the problems faced by small U.S. exporters.  My post was broad-brush, the best you can do when summarizing a substance-filled 314-page study.  Today, we’ll get into some of the solutions that SMEs have come up with themselves.

First off, the Small and Medium-Sized Enterprises (SMEs) interviewed by the ITC staff were overwhelmingly in favor of negotiating new and more trade agreements, whether completion of the Doha Round or, more likely, new free trade agreements (FTAs).  They see competing countries negotiating FTAs all over the world and they have experienced the stiffened competition that results – in the form of higher relative customs duties – for the countries that don’t play the FTA game.  For now, the United States is the primary trading nation that is ignoring or hindering FTAs, to the detriment of our own exporters, their workers and our general economic well-being.  SME exporters told the ITC that the “playing field” is fast tilting against them.  So when will the White House and the Democratic “leadership” in the Congress get off their okoles (that’s Hawaiian for posterior portion of one’s anatomy) and get back into the negotiation game?

Why do SME exporters want new FTAs?  Obviously, equal tariff treatment with competitors who enjoy FTAs is a big attraction.  NAFTA is the prime example of an FTA that has helped America’s SME exporters, while the lack of implementation of the FTAs with South Korea and Colombia has boosted competition with countries that do have FTAs with them.  Non-tariff market access has improved under the U.S. – Dominican Republic – Central America FTA – and SMEs want more of this in other markets.  Our FTAs with Singapore, Australia and Chile have demonstrably improved market access, SMEs say, for products such as cellphones, auto parts, computers, medical equipment and many others.  FTAs can also facilitate trade by making the trading and shipping process easier, a key benefit seen by SMEs from the NAFTA agreement.  Agreements to improve intellectual property protection are also important.  SMEs told the ITC that they are more likely to do business with the European Union, Japan or Singapore than with China because of IPR concerns in the the latter.

The ITC study then looks at exporting in seven sectors that feature competitive SME exporters: apples, wine, chemicals and nanotechnology, textiles and apparel, medical devices, computer services, and professional services.  They all face limited access to capital and daunting regulation, both foreign and domestic.  Apples and wine must cope with phytosanitary restrictions and high tariffs, and must overcome small production capacity.  Computer services, nanotech and chemicals each must confront export control issues.  Everybody runs into cultural and language barriers (services more than most), labeling or advertising restrictions, foreign support for their own industries and much more.

What do the SMEs in these industries do about all this?  Industry associations have been established for wine, apples, nanotechnology and professional services to join forces in overseas marketing, trade show participation and for promoting changes in trade policies that limit those industries.  Agricultural exporters have increased their use of the Department of Agriculture’s Market Acccess Program, while the others are turning more often to the Commerce Department’s U.S. Commercial Service for information about foreign markets, help in selling and lobbying for contracts.  Venture capital firms are helping medical device companies with finance and in finding overseas customers.

The devil is in the details, so I will periodically post about some of those over the next few weeks.  The broad brush is going back to my workshop.

*****************************

When I ran the commercial unit for the American Institute in Taiwan, we faced a hopefully unique problem in promoting U.S. apple exports.  The State of Oregon had hired our exhibition facility in Taipei to promote the state’s products – including apples.  Only the expected crates of Oregon apples never showed up, the freight forwarder having dispatched them to Thailand, not Taiwan.  I sent my staff out to markets all over Taipei to buy up as many Washington State apples as they could find.  We spent hours peeling the Washington labels off those apples and put them into the Oregon exhibits.  Nobody spotted the substitution and the show went on.

The source may be suspect, but they have a point.  The American Apparel & Footwear Association is campaigning for a bill called the Affordable Footwear Act.  Sounds like another bit of self-serving legislation, doesn’t it?  But read on, because there is some surprising substance in this one, supported by liberals and conservatives.  Bipartisan trade legislation – now that would be refreshing!

The Affordable Footwear Act comes out of a joint study by the normally left-wing Progressive Policy Institute and the usually right-wing Heritage Foundation.  The idea of these two even talking to each other, much less producing a joint recommendation for legislation is somewhat mind-boggling.    The PPI put out a paper in 2002 entitled Toughest on the Poor: Tariffs, Taxes, and the Single Mom that persuasively made the argument that tariffs and customs duties are a regressive tax because, by their nature, the tax rate does not vary according to one’s circumstances.  Further, the highest duties tend to apply to the goods that are most consumed by poor people.  Think about it.  The highest customs duties tend to apply to things like clothing and footwear, some food products.  Stuff that claims a higher proportion of a poorer person’s income than for a rich guy.  The worst case example is inexpensive sneakers, which face a customs duty ten times the average for manufactured goods entering the United States.  The 2002 paper looked at a hypothetical group of three women: a vice president at a hotel, her secretary and a hotel maid.  The result was that the v.p. worked 1.5 days every year to pay the tariffs on things she consumed, the secretary had to work three days – twice as long, and the maid had to drudge for an entire week.

Fast forward to 2007, by which time the Heritage Foundation has come on board.  Heritage and PPI jointly note, referring to 2006:

“Americans bought about 2.4 billion pairs of shoes last year.  …  The value of these shoes at the border was $19 billion, and the U.S. government collected footwear duties amounting to almost $1.9 billion on the shoes. While the average weighted U.S. tariff rate across all traded goods is 1.6 percent, tariffs on shoes begin at 8.5 percent for leather dress shoes, rise to 20 percent for running shoes, and peak at more than 60 percent for some grades of cheap sneakers.”

How many poor people do you know that are buying leather dress shoes?  How many are buying cheap sneakers?  PPI and Heritage looked at what happens when the tariff is applied to the sneakers.  By the time the sneakers had moved across the border and gotten through the retail supply chain, the footwear tariff  had an impact on price that was roughly three times the federal cigarette tax, four times the national gasoline tax and twice the federal taxes on distilled spirits.  You would think we want poor people to go barefoot!

Further, there are virtually no U.S. shoe producers or footwear workers that would be hurt by lowering or eliminating the tariff on cheap footwear.  We have about 16,000 jobs in our footwear industry, almost entirely in design, marketing or highly specialized niches that wouldn’t suffer from lower customs duties.

I blogged yesterday about tariffs we don’t need and the footwear tariffs are among the most egregious.  Tell your representatives and senators to vote for the Affordable Footwear Act.  Leave footprints on ‘em if they don’t.

Always a sexy read ...

The name isn’t sexy.  That’s why it is a surprise that the Miscellaneous Tariff Bill is getting attention.  MTBs are bills introduced periodically in the Congress to tweak U.S. customs duties, and specifically to legislate duty reductions or suspensions on goods that are needed by American factories, but are not produced in the United States.  In other words, we are talking cutting tariffs on non-competing products that are necessary to support jobs and profits in many U.S. industries.  Doesn’t sound controversial, does it?  But there are those in Congress who hurl the epithet of “earmark” at these tariff cuts.  They tend to be in the party that is out of power.

The problem is that Congress hasn’t passed a Miscellaneous Tariff Bill since 2006 – and that means that the reductions or suspensions for about 600 non-competing predicts, mostly raw materials or chemicals for industrial use, expired at the end of 2009.  The expirations immediately raised costs for many U.S. factories, helping to stall their recovery from the recession and hindering their ability to rehire laid-off workers.  There is an MTB working its way slowly through the House and the Senate that would restore many of the 2006 tariff suspensions, but the Republican leadership seem intent on making sure these “earmarks” don’t go through.  According to one study, the House version of the MTB would stimulate approximately 90,000 jobs and boost U.S. production by $4.6 billion.  I have often questioned the Obama Administration’s commitment to job creation, but this time I have to charge the Republicans with keeping 90,000 Americans unemployed.

The Minneapolis-St. Paul Star-Tribune recently noticed the importance of the Miscellaneous Tariff Bill in an editorial that argued the MTB is necessary for the future of Minnesota companies such as Target, 3M and Honeywell – and the jobs such companies supply to the local economy.

“… it’s common sense that politicians back up grand talk about job growth by supporting policies that actually help the companies that do the hiring.  Unfortunately, common sense seems in short supply when it comes to … the Miscellaneous Tariff Bill , which helps keep manufacturing jobs in the United States.  … in previous years … it garnered broad bipartisan support. But this year, its routine passage is jeopardized primarily because Republicans have recently redefined the term “earmark,” political slang for directing appropriations to favored programs or projects.”

The National Association of Manufacturers sent a letter in early May to Congressional leaders, pressing for passage of the MTB.  It was signed by 130 companies and industry associations, including many of the largest manufacturers in the country.

The New York Times ran an excellent editorial a week ago entitled “Waiting for a Trade Policy”.  Of course, any editorial that agrees with me is, by definition, an excellent piece.  But there do seem to be more and more of us who realize that President Obama’s trade policy is mostly smoke and mirrors.  The Times astutely summarizes the situation:

“… the Obama administration’s trade strategy has been limited to hoping that a world economic rebound and a rising Chinese currency would double American exports in five years. Beyond this new enthusiasm, Mr. Obama’s approach to trade still appears to be hamstrung by strong opposition from his party’s union base.”

That’s hitting the nail on the head.  I won’t repeat my rants about the National Export Initiative, but you can read the latest here.

Coming to America? Pricy.

Now comes word that the United States is shooting itself in the trade foot once again.  Effective tomorrow, consular fees are being hiked at American embassies and consulates worldwide.  The increases are part of laudable efforts to control budgets, though it appears that the State Department is try to recover the full fixed cost of having a consular section at an embassy or consulate, rather than charging for the variable cost of delivering the service, which would be much lower.  Here’s a list of the new fees, though the language is typically obtuse.

Let’s consider the potential impacts on business for the United States.  The most obvious impact may be the increase in prices charged to apply for a treaty trader or investor visa (an E visa), springing up from $131 to $390 – a rise of 198%!  I doubt that this will deter a major investor from applying to come to the United States, but they will see it as the sort of nickle-and-diming that is now practiced by American airlines.  It will be an irritant that smacks of price gouging, since most other non-immigrant visas will now cost $140 to apply.  Does processing an E visa really cost that much more than a visa for a normal business traveler?  I doubt it, but perhaps I am mistaken.

I am more worried about the new $140 charge to apply for a tourist visa.  The increase is only $9, but tourists can be extraordinarily price sensitive, so this one could have an adverse impact on the numbers of visitors the United States will receive.  It’s tough enough, for instance, for Hawaii to attract Asian tourists across most of an ocean, but even tougher when we charge for visas and competing tropical destinations do not.  And bear in mind that these fees are simply to apply for a visa.  There is no guarantee that you will actually get one.  The visa application fee is on top of the costs engendered by having to go to an American embassy or consulate for a personal interview.  Not all potential travelers live in or near a city where the United States has a consular office, so simply applying for a tourist visa can involve substantial expense and inconvenience for the applicant.  We don’t make it easy.  Why should an Asian gambler go through all this hassle to fly across the Pacific to Las Vegas when they can more easily and enjoyably hit the new casinos in Macau or Singapore?

Full cost recovery sounds a reasonable goal, but the unintended consequences can be killers.  It is really a clash between those who view entry to the United States as a privilege, and those who wish to attract visitors who pay for jobs in our country.  Most of our competitors come down on the latter side of the argument, and wonder why the world’s richest country can’t foot the bill for its own legal requirements.

• 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.

I thought I was the only one not praising President Obama for his National Export Initiative, so I was relieved to see the criticism leveled at the NEI by David Speer, CEO of Illinois Tool Works, in the Financial Times last week.  It’s not that the NEI is a bad thing – it’s not – it is just that it is largely ineffectual.

The most effective thing about the NEI is the added funding it gives the Commerce and Agriculture departments to promote U.S. products in foreign markets.  This goes part way to restoring the massive cuts to the U.S. Commercial Service that they have endured over decades.  The rest of the NEI has nice rhetoric, but that is mostly all it is.  Headlines were made out of Obama resurrecting the President’s Export Council and his creation of an Export Promotion Cabinet.  Similar things have been done by earlier administrations and few of them are remembered.  The Administration’s new-found interest in the Trans-Pacific Partnership is interesting and laudable, even if we already have free trade agreements with most of the TPP’s current members, from whom there is not much more to be gained.

Listen to your chairman, Mr. President

Regular readers of Business Beyond the Reef are more than aware of my views about the Obama Administration’s refusal to implement existing FTAs or negotiate new ones.  I was happy to see that Boeing’s CEO, Jim McNerney, is pressing the White House to push now to pass the South Korea, Colombia and Panama FTAs.  McNerney was named in March to chair the new President’s Export Council, created as part of the NEI.  It would be nice if the President would listen to his own Council, wouldn’t it?

The Administration tries to sell the NEI by saying that it will create or preserve two million American jobs, which is pleasant to hear during a jobless recovery.  But exactly how is the NEI going to get that done?  Mr. Speer says it won’t be through America’s industrial companies, of which his firm is a prime example.  While our politicians like to say that the NEI will bring jobs back to the United States, Speer argues that we must look at the reasons why manufacturing operations have moved overseas in the first place: generally not because of lower costs, but to be closer to their customers.  If that is the case, the NEI will have no impact on large company decision-making and thus no effect on jobs.  I’m not sure I go that far.  Exports do create jobs, though often among the service companies that move the goods, rather than among the manufacturers.

The one creative approach I see under the NEI is a decision made at staff levels in the U.S. Commercial Service to focus their efforts on helping companies that presently sell in only one or a few foreign markets to enter new markets.  These aren’t the big companies, like Illinois Tool or Boeing, but small companies that have a bit of experience but haven’t fully exploited their export potential.  In other words, these are the companies who can most likely grow exports quickly and create at least some of those jobs that the NEI touts.  The vast majority of America’s small exporters sell to only one customer in one foreign market, typically Canada or Mexico.  Now’s the time to get them moving out.

**************************

The U.S. Department of Commerce is looking for your views and ideas for how to implement the National Export Initiative.  Here’s what they are looking for:

Specifically, we are interested in input from exporters, other private businesses, trade associations, academia, non-governmental organizations, and other interested parties regarding:
1.     identification of Federal government programs or regulations that impede the ability of U.S. companies to export;
2.     effective foreign trade promotion programs and activities that could inform U.S. Federal government program development;
3.     identification of the most (or least) effective Federal government programs that support U.S. exports, including specific experiences with such Federal government programs;
4.     steps that the Federal government could take to improve its programs to support U.S. exports; and
5.     more generally, how the Federal government could better help U.S. businesses export.

This link is to the federal register announcement, which tells you how you may respond.

• President Obama said again this week that he wants to press ahead with the U.S.-South Korea free trade agreement.  Pardon my skepticism, but I’ll believe him when he goes to the Congress and tells them he wants it passed now with no changes.  I often disagree with the Heritage Foundation, but Anthony Kim got it right, fearing that Obama merely wants to re-open this FTA for negotiation a third time.  When do you think the White House will realize that their union buddies are requiring them to sacrifice more than 300,000 American jobs by not implementing the Korea, Colombia and Panama FTAs?  What was that about a jobless recovery?
• Pickled almonds with chili peppers? Yum!  It takes creative marketing to sell nuts in China, but American companies are getting it done.  A marketing friend, resident in Beijing, breaks the lessons down as follows:

1. Well-funded promotional campaign (US 3.3 million).

2. Continuous, uninterrupted marketing campaign.

3. Appealing to Chinese women who make most purchases in China.

4. Appealing to the Chinese desire for a “healthy and radiant life” instead of relying solely on taste appeal.

• I’ve posted several times about this negotiation, but the China-Taiwan trade agreement has been signed.  That’s good news on both sides of the Strait.
• How big is the World’s Largest Aloha Shirt, made by Hilo Hattie and exhibited at the U.S. Pavilion at the Shanghai Expo?  400XL!  That’s 168 inches at the chest and a 60 inch neck.  It took 26 yards of fabric, which is the amount, Hilo Hattie says, it takes to make shirts for thirteen sumo wrestlers.  You can see the shirt back in their Honolulu store on Nimitz Highway.  Big fella.

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.

• 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.