Business Beyond the Reef

China says U.S. actions unfair! Brazil retaliates against U.S cotton subsidies! Everybody says China’s currency is unfair!

Despite those headlines, most countries have behaved themselves on trade.  But that isn’t newsworthy.  Editors thrive on threats and unfairness, whatever that is.  I hate to disappoint them, but a study released over the weekend concludes that major trading countries have shown remarkable restraint during the recession, keeping protectionism at bay for the most part.  The study is a joint production of the World Trade Organization (WTO), the Organization for Economic Cooperation & Development (OECD) and the UN Conference on Trade & Development (UNCTAD).  Those three outfits rarely agree on anything, so I have to take notice.

They looked at new import-limiting actions among the G20 countries (the major trading countries) during the past six months, comparing them with the previous six months.  They found that new protectionist measures only impacted about 0.4% of world trade, roughly half of what happened in the prior six months.  The trend is good, but our friends at Global Trade Alert see no reason to relax.  At this point in a recession, there is always pressure to protect damaged industries.  Still, it’s good to put such things in perspective.

Habitat of Punished Consumers

To continue with the good news, Canada last week announced that it is unilaterally lowering customs duties on 1,541 tariff lines of industrial equipment.  This was part of the annual budget proposal to Parliament, so it isn’t a foregone conclusion, but it prompted a surprising (to me) op-ed piece in the National Post, asking that the Harper government go even further to help the Canadian consumer in tough times.  The editorial noted that Canadian manufacturers will get a boost because the lower tariffs will make it less costly to invest in new equipment, and that the lower duties will cut Canada’s customs revenue by only about 1.4%.  The author, Terence Corcoran, then wonders about cutting Canada’s tariffs on consumer goods, arguing that customs duties represent $4 billion a year of “consumer punishment”.  Corcoran is right, of course, but even in enlightened Canada, it may be tough to find a politician willing to look at things that way.  Still, it’s wonderful to see the argument made, even if it will be a cold day when U.S. senators line up to speak against “consumer punishment”.  Most politicians seem to think consumers are masochistic non-voters.

Congress is showing signs of waking up on trade.  U.S. Trade Representative Ron Kirk had to listen last week to a chorus of senators saying that its time to finally implement the free trade agreements with South Korea, Panama and Colombia.  The White House may not have noticed that the European Union, among others, has redoubled its efforts to negotiate new FTAs – and that the United States is idly standing by while its competitors win advantages over American exporters.  And, more astounding, some of these senators appear to have realized that exports create or maintain jobs in their states!  Will wonders never cease.

Baucus & Grassley Get It. Obama & Kirk Don't

The occasion was Ambassador Kirk’s testimony about the Obama Administration’s trade agenda, which merely paid lip service to the three stillborn FTAs while pandering to organized labor and other groups seeking to use the FTAs for non-trade purposes.  Senator Max Baucus, the Democratic chair of the Senate Finance Committee, started in by arguing that the Congress “should approve the trade agreements that we have already negotiated and signed.“  He added: “we must … recognize the consequences of further delay. Our competitors are signing trade deals that will put our farmers and businesses at a competitive disadvantage unless we act.“  Senator Baucus noted the EU’s free trade agreement with South Korea, and Canada’s agreement with Colombia.

It is less surprising that Senator Charles Grassley chimed in for the Republicans: “South Korea has already concluded a trade agreement with the European Union, and Colombia has reportedly just done the same. Such erosion to global US competitiveness concerns me … .  This delay in implementation hurts US credibility around the world, not just economically, but geopolitically as well.”

The Obama Administration seems stuck in the rut of not liking agreements negotiated during the Bush Administration, and they keep talking about reopening agreements to make them “perfect”: meaning forcing Koreans to buy American cars and allowing U.S. unions to determine labor policy in other countries.  There is clear bipartisan support for the FTAs in the Senate.  Go for it, Mr. Obama!

• Things get done when contracts are at stake.  That’s the message of Apple’s review of labor violations by its foreign suppliers.  Apple and its Supplier Code of Conduct are pushing companies worldwide to clean up their acts.  Democrats in Congress want to do the same by inserting fair labor clauses in trade agreements and by holding up the FTAs with Korea, Panama and Colombia.  Which approach is more effective, do you think?  Apple seems a better example of good governance than the politicians.
• Recent headlines say that China is now the second largest producer of electronic waste, while others say that the developed world is “dumping” its e-waste on China.  A friend in China tells me that, au contraire, China is buying up e-waste as fast as it can find it – even sending freighters as far as the Bahamas to pick it up.  Good cheap source for exotic materials.
• Gee, there’s piracy in China?  This time it’s over video games.  See the Wall Street Journal. No surprises, but an interesting story.
• The federal budget is a bit off my trade beat, but this is a wonderful and quick visual representation of how little is actually being sought in budget cuts.
• Trade can be fruitful.  Mexico, under pressure from a NAFTA dispute settlement panel, ended its 47% antidumping duty on red delicious and golden delicious apples from Washington state.  The duty had added $10 to the price of a box of apples.  Despite the duty, Washington state has been selling more than 30% of its apple exports in Mexico, so that seems likely to surge.

I added a new page to the blog this week that is way cool.  Check out Travel Map, which shows where I have traveled.  You can get your own Travel Map for your blog or website, too.  And I have had the Visitor Map for several months now.  It shows where YOU are – also way cool.  No, I can’t identify you, but it shows where your ISP is located.

Is that the Agenda, Mr. Ambassador?

The Obama Administration’s 2010 Trade Policy Agenda was published Monday to almost no notice by anybody.  I guess it is just wonks like me who read such things.  The agenda comes out as part of the annual report to the Congress  of the Office of the U.S. Trade Representative.  It is probably skimmed by a few Congressional staffers and then put on a shelf somewhere, or saved as a .pdf file.  But it can contain some important clues for any company involved in international business.

Scott Lincicombe read the agenda before I knew it was out and does a good analysis of how inherently mercantilist the document is.  I’ll let his blog speak to that, but nobody should be surprised.  U.S. and other major country trade policies have been mercantilist for as long as I can remember.  How many members of Congress can you remember who advocated increasing American imports?  Occasionally we do it for altruistic reasons, such as the Generalized System of Preferences or the Caribbean Basin Initiative, but truly meaningful cuts in import barriers are pretty scarce outside of major trade rounds.  We did allow in some Brazilian pork rinds recently.  It tends to be smaller, perhaps more mature countries that see that free markets for imports are just as important for an economy as the same thing for exports.  In my experience, Singapore, Hong Kong, Chile come to mind.  An old friend, who headed up Austria’s Foreign Service, argued that if you start doing business in one direction, you will likely end up doing business in the opposite direction, too.  That’s my credo.

So what did I glean from the new agenda?  In order of what I spotted in a quick read:

• The Commerce Department says over ten million American jobs were supported by industrial exports in 2008, and the Department of Agriculture chimes in that ag exports supported 800,000 jobs.  Let’s see, industrial exports supports close to 93% of the jobs and ag exports support only 7%.  Now why, do you suppose, that the Administration and the Congress continue to throw 90% of the federal export promotion budget into agricultural exports?  Can you say “farm lobby”?  Can you say “misallocation of scarce resources”?
• 95% of the world’s customers and 80% of production are outside the United States.  Does this give you a clue as to where your company should look for growth?  The IMF says 87% of economic growth will be offshore during the coming five years.
• There is lots of boilerplate about reviving the Doha Round.  I hate to say it, because I am a believer in multilateral negotiations and a couple of former colleagues drafted the agenda, but businesses can ignore the Doha stuff for now.  Ain’t gonna happen soon.
• You can also ignore the lengthy section on enforcement of trade agreements.  That’s simply pandering to know-nothings in Congress who persist in believing that the United States is all righteous and correct, while everybody else cheats and takes advantage of our good nature.  I can assure you that we are just as tricky and slick as anybody else – but that truth doesn’t attract votes.
• Did you realize that USTR emphasized “deepening engagement with major emerging markets“, especially the BRIC countries, in 2009?  I didn’t either, but I have to question the choice of targets, apparently chosen by Goldman Sachs.  Why on earth would USTR want to push companies into the criminal morass that is Russia, or get them bogged down in figuring out how to do business in China?  Both markets make sense for a small sub-set of companies, but most should be heading for easier markets.  I have always preferred cash flow over potential.
• There is much about joining the Trans Pacific Partnership and working with APEC.  I am growing warmer about TPP, so I like this.  The language leaves the impression that we are negotiating a new TPP and gives scant notice to the fact that TPP has been around for several years and joining it involves talks and give-and-take with several other countries.  We’re not starting from scratch.
• Like Scott Lincicombe, I see no indication that the Obama Administration is prepared to ask Congress to ratify the free trade agreements with South Korea, Panama and Colombia.  Pity.  That’s several hundred thousand U.S. jobs down the tubes.  I guess they figure that Americans aren’t looking for jobs right now.  (Check out Public Citizen’s Eyes on Trade blog re: Ron Kirk’s testimony about the Trade Agenda. Kudos to Senators Grassley and Baucus.)
• What’s missing?  Trade in services.  Apparently Ron Kirk and his merry men and women haven’t noticed the overwhelming advantages that U.S. exporters have in services, or that services give a tremendous boost to our balance of payments.  (Services don’t show up in the balance of trade, the preserve of hard goods exports and imports.)  Perhaps the national trade agenda should include pushing our services exports?  Just a little bit?

The agenda is a generally disappointing document.  I see little that is new or innovative, and I see a document just loaded with pandering to know-nothings.  As it is a mandated report to the Congress, perhaps that is appropriate.

• The mind boggles.  Club Med has invested in a ski resort in China.  Way up in the northeast, in Heilongjiang Province, Club Med has bought into a financially-strapped ski resort.  This may be an intriguing clash of cultures.
• President Obama’s approval of loan guarantees for two nuclear reactors in Georgia has split the unions.  Construction unions love it, but the approval is drawing fire from the United Steelworkers because some 20% of the package will buy critical components from steelmakers in China or South Korea.  The union is trying to create doubts about the safety of Chinese steel, but we are not talking about consumer goods here.  China has been successfully manufacturing reactors, while our own industry has been moribund for thirty years.  Why should we expect to be competitive on something with which we have little experience?
• We had the pasta war, several chicken wars, even the turkey ball war.  But the toilet paper war is just beginning.  Unions in Australia are challenging imports of cheap toilet paper from China and Indonesia, saying the product is being dumped (I’m not going to touch that pun).  Having had personal experience with cheap toilet paper in both Indonesia and China, this dispute is self-limiting.  Australian consumers are only going to buy it once.
• Brazil now exports more to China than it does to the United States, a reflection, of course, of the recession.  The problem is that China buys a vastly different group of products than Brazil sells to U.S. customers.  Brazil’s trade with the United States is mainly in industrial goods, but China is mostly buying commodities such as soybeans and iron ore.  This destroys the value-added business of Brazilian product companies and sends Brazil back to the days of simply being a commodity supplier.  This will presumably end when the U.S. economy moves into recovery.  In the meantime, not everybody is dancing in Brazilian streets.  For more, see the article in Asia Times.
• The recession also hurts the Cuban cigar trade.  Sales were down by 8% in 2009, reflecting reduced international travel (which, of course, cuts sales at duty-free airport shops) and Spain’s economic downturn.  Spain has historically been Cuba’s largest cigar market, but … up in smoke.
• A suit brought by Totes-Isotoner alleging gender discrimination in customs classifications was tossed out by a Federal appeals court this week.  The company argued that having different duty rates for men’s and women’s clothing (a time-honored practice around the world) discriminated against whichever gender got the higher rate on a particular item of clothing.  I would guess this is about gloves.  The court in New York disagreed.  Totes-Isotoner says they will appeal to the Supreme Court.  (note: these classifications are set, at the 4-digit level, by international agreement – not by any one country.)
• Shipping lines complain loudly about all the empty containers they have to move westbound across the Pacific.  So what do they do about it?  They raise their westbound rates. What a novel idea – raise prices to attract business.  Gotta think about that.

• W. Michael Cox, former chief economist with the Federal Reserve Bank of Dallas, published an op-ed piece in the New York Times Wednesday about the vast importance of services in U.S. export trade.  Drawing attention to President Obama’s gaffe of not mentioning services in his proposal for a National Export Initiative, Cox argues that the only way the United States can double exports in five years is by increasing exports of services.
• Fred Bergsten and Jeffrey Schott have released a paper giving strong support to the idea of the United States joining the Trans Pacific Partnership.
• ASEAN’s tariff cuts DO have an impact! Indonesia’s Sampoerna, a company that makes clove cigarettes, announced that it is closing a plant in Kuala Lumpur because the drop in duties makes it feasible to export their cigarettes directly from Indonesia to Malaysia.
• An Australian site, appropriately titled Import Export Made Easy, has a nice glossary of trade terms.
• I have posted several times about the lack of will, knowledge and interest in the Obama Administration and the U.S. Congress about the three already-negotiated free trade agreements with South Korea, Colombia and Panama.   These FTAs mean thousands of jobs for Americans – and yet they are ignored by politicians who say they want to create jobs.  Go figure.  Read the op-ed piece published in Friday’s Wall Street Journal touting the U.S.-Korea FTA.
• I’m happy to give credit to the Obama Administration for its new initiative to encourage U.S. clothing brands and apparel retailers to buy at least 1% of their total apparel requirements from Haiti.  Companies like Hanes and Gap are already on board.
• Enough of this serious stuff.  The New York Times tells you where to find a good brew in Vietnam.  It’s not just 888 anymore.

Andy Xie published an analysis last week on Caixin Online about how the Obama Administration’s new export policy may heighten tensions with China.  Worth reading for his entire train of thought, I thought I would focus on the options Xie sees for increasing American exports.  In his State of the Union address, President Obama set a goal of doubling U.S. exports within five years.  Many pundits, including this one, have been skeptical, asking if such a feat is possible.  Xie lays out the options:

1. 

   Will U.S. Exports Bounce?

   Devaluation of the U.S. dollar.  Not highly likely.  The Fed has to begin tightening soon, which will put upward pressure on the dollar.  The dollar bottomed in May 2009, and has been steady or slightly rising since.

2. Exchange Rate Policy.  Xie argues that Obama will have to get more aggressive on China’s exchange rate, given the near unanimity of agreement that the yuan’s ties to the dollar have to be loosened, if not abandoned.  The assumption is that a rising yuan will make it easier to export U.S. goods and services, equivalent to a fall in the dollar.
3. Aggressive Trade Policy.  Obama has gotten a taste of the populist attractions of seeming to be tough on imports from China.  It started with tires, and has progressed to steel pipes, electric blankets and more.  More protectionist action will prove irresistible, especially since it can also be used to say the Administration is doing something about unemployment.

Like most macro thinkers, Xie ignores the less spectacular micro approaches of helping companies directly, educating and holding the hands of would-be exporters, taking firms that now sell to only one or a few foreign customers into new markets, introducing companies to international trade shows, and similar approaches.  The micro approaches won’t double exports in five years either, but they lay the groundwork for a permanent expansion of American exports.  Not just allowing exports to respond to exchange rate changes.

Some of Xie’s remedies are intriguing.  He advises China to open its capital markets to U.S. firms, taking some air out of China’s credit bubble and putting some into strained U.S. financial markets.  Allow big U.S. companies with China business to list on the Shanghai Stock Exchange.  Lower tariffs on U.S.-made goods to defuse opposition from American labor unions.  And open China’s agricultural markets to appease the politically-powerful American farm lobby.  Interesting stuff.

Doesn't Guzzle, Says Tokyo

Perhaps it’s something in the exhaust.  You have seen the press coverage in the New York Times, the Wall Street Journal and elsewhere about Japan’s declaration that the Hummer H3 is “fuel efficient”.  Let’s take a look at the back story on this one, for it shows trade policy at work in strange and wondrous ways.

It starts a short while back when Tokyo created its own version of a “cash for clunkers” program.  Unlike similar programs in other countries, Japan excluded virtually all non-Japanese vehicles as eligible replacement vehicles.  The U.S. program, I’m happy to say, was wide open and Japanese carmakers benefited tremendously from it.  The Japanese program, as first announced, was a travesty of home-grown preference – a Buy Japanese law in disguise.  No American-made vehicles were included, while 90% of Japanese cars were covered as eligible purchases.  Hey, Detroit may have been down on its luck, but not all U.S.-made vehicles are gas-guzzlers.  Pretty blatant.

Tokyo argues that American cars just aren’t clean enough at low speeds, which is where Japanese pollution standards focus.  Washington didn’t buy this, so now Tokyo has opened things up to allow more foreign cars into their program.  All well and good, until you look at the bizarre list they came up with.  Apparently, Japan’s emissions standards are skewed to favor higher weight vehicles, so they have now approved the Hummer H3, the Chrysler Voyager, the Cadillac CTS and the Ford Escape XLT Limited – all of which seem to spend a lot of money at my local gas station.  One has to wonder if Tokyo is setting things up to allow the vehicles that the average Japanese is least likely to buy.

Japanese trade officials have a long record of thinking outside the box when it comes to import restrictions.  They have told American negotiators that U.S. rice and beef weren’t good for Japanese tummies, and the Europeans were told that same about Italian pasta.  My favorite was when Tokyo told Brussels that European skis wouldn’t work well on Japanese snow.  One has to wonder.

• Don’t know why these things surprise me, but it turns out that China’s water pollution stats are useless because they forgot to include agricultural runoff in the numbers.  With China’s huge agrarian sector and aggressive fertilizer, fungicide and pesticide use, that means that we can double the water pollution that Beijing claims as official.  See the New York Times. Or the Wall Street Journal. Hawaii’s water resource engineering companies have been trying to break into the China market for several years, with only middling success.  With their experience in the sugar and pineapple industries, maybe they are finally positioned to make some money (and do some good) in China.
• It’s easy to find lists of the best hotels, resorts, airlines and so forth, but rare to see lists of the worst.  TripAdvisor has published their 2010 lists of the Top 10 Dirtiest Hotels in the world.  There are separate lists for the Top 10 in the United States, Canada, Asia, Britain, France, Italy and an overall list for Europe.  Be warned.
• Old Singapore hands are still amazed.  The first of Singapore’s casinos opened just a couple hours ago as this is published, taking an auspicious start with the Year of the Tiger.  It’s not simply a casino, but four new hotels and a theme park, too.  And I remember when Sentosa Island was still somewhat empty, and I had delightful times at the Beaufort Hotel.  Guess I’ll have to take a look.
• Business occasionally trumps politics.  Taiwan ended long-standing restrictions this week to let its manufacturers of flat screen panels open production facilities in China. China is on track to become the world’s top market for flat-screen televisions next year, and Taiwan’s Korean competitors have been gobbling up market share using factories in China.
• Good news from NAFTA.  Canada and the United States have resolved a trade dispute over government procurement practices, Canada agreeing to open up government construction contracts and the U.S. allowing Canadian firms to compete for Stimulus Package business.  The two countries handled this through the WTO’s dispute settlement process.  And, word is out that the United States and Mexico are near agreement on the long-term problem of allowing Mexican 18-wheelers to operate on U.S. soil.  This one has soured relations for years now.

Monday is President’s Day in the United States, a national holiday.  That seems an appropriate time to work on my income taxes, so I may not post this Monday.  Of course, if some irresistible topic arises …  Otherwise, I hope to see you here on Tuesday.

I was underwhelmed about President Obama’s announcement in November that the United States would think about joining the Trans Pacific Partnership (TPP), a free trade agreement that counts Singapore, Brunei, Chile and New Zealand as current members.  But a paper released in December  (I’m catching up on my reading) by the American Enterprise Institute (not known as friends of the President) has me rethinking my stance.  The authors of “Tales of the South Pacific“, Claude Barfield and Philip Levy, make a good case that joining and growing TPP may be the best option for the United States to build trade across the Pacific.  They acknowledge the somnolent reactions that I and others had: “At first blush, the TPP is remarkable mostly for its small size and its redundancy with existing U.S. agreements” – exactly the points I made in my earlier post.

Barfield and Levy cogently review the alphabet soup of trade agreements in Asia and across the Pacific, worthwhile reading for those like me who can’t keep it all straight.  They then look at the available options for the United States.  Bilateral FTAs, while they can be helpful, require that others wish to negotiate and that the Congress is in a mood to approve them (neither is a given).  We have three negotiated FTAs (with Panama, Colombia and South Korea) that have been hung up in Washington for years, two stillborn negotiations (Thailand and Malaysia) that might be re-opened, and for anything else we start from scratch.  Another option is to push for a single FTA for the entire region, perhaps the long-talked about but never started Free Trade Area of the Asia-Pacific (FTAAP), which might take as long or longer than the Doha Round to complete.

Current TPP members (green), those talking about it (orange)

The Trans Pacific Partnership, they argue, is the best option.  TPP is a comprehensive agreement, covering most areas of trade policy, not just customs duties.  It is open to new members whenever they are ready to join.  And it has the added benefit, though Barfield and Levy don’t say this, that it is not something created or proposed by the United States.  I spent enough time in Asia during the old “Asian values” debate to realize that it is an asset for something not to be proposed by the superpower.  This applies to recent trade proposals by China and Japan, too.  If a superpower proposes it, it is dead meat from the beginning.

OK, I still have my doubts.  So do the authors: “The TPP could shape the debate about the future U.S. role in Asia and offer prospects for a new bottom-up approach to striking global trade deals. The agreement could be significant for an administration with a strategic vision for Asia and sufficient enthusiasm for trade as a vehicle to achieve that vision. Without such enthusiasm, though, the TPP is just a mostly redundant agreement among a small group of small nations.“  With the same caveat, I can get behind this.  Let’s go for TPP.