Business Beyond the Reef

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

Perhaps there is a glimmer of sanity in Washington.  Federal Reserve Chairman Ben Bernanke told the House Budget Committee Wednesday that it is time for Congress to “push forward” with the three stalled free trade agreements with South Korea, Panama and Colombia.  Chairman Bernanke made the point that you have seen often on this blog, that the three FTAs can contribute materially to the U.S. economic recovery by encouraging exports and creating or protecting jobs for Americans.  The U.S.-Korea FTA should mean 345,000 jobs, Panama is a key market in Central America, and Colombia is the top Latin American market for U.S. agricultural goods.  That would seem to be a good thing.

The Obama Administration doesn’t appear to see it that way.  They periodically say nice things about the FTAs, but never get around to asking the Congress to approve them.  The longer this goes on, the more it reeks of resisiting agreements that were negotiated by the previous administration, no matter how much that resistance hurts American companies and workers.  Strange behavior for an administration that claims to be pro-labor and says it wants a fast-track to economic recovery.

Uribe & Clinton: Excited About Trade?

Coincidentally, while Chairman Bernanke was testifying, Secretary of State Hillary Clinton was in Bogota answering a question about the U.S.-Colombia FTA.  Secretary Clinton and President Uribe avoided mentioning the FTA during their opening remarks, though Uribe pointedly referred to Colombia’s improving labor rights and the fact that the International Labor Organization has seen enough improvement to remove Colombia from the ILO list of sanctioned countries.  That should make the labor union opposition to the FTA somewhat more comfortable.

Clinton took a question from Felipe Arias of RCN Television:

Madam Secretary, good afternoon…

I would like to ask you, you’ve made great efforts here by President Uribe in recent years to achieve the signing of the FTA with the United States. Can we expect more decisive support from the Obama Administration in order to get the signing of the FTA in the upcoming months? …

SECRETARY CLINTON: Well, first, let me underscore President Obama’s and my commitment to the Free Trade Agreement. We are going to continue to work to obtain the votes in the Congress to be able to pass it. We think it is strongly in the interests of both Colombia and the United States. And I return to Washington very invigorated by the dialogue that we have had and the questions and answers that we have shared to work with your ambassador, who does an excellent job for you in Washington, and your trade minister and foreign minister and others, to begin a very intensive effort to try to obtain the votes to get the Free Trade Agreement finally ratified.

So, the Obama Administration continues to blame a purported lack of votes in the Congress, while many in Congress say they are waiting for Obama to ask them to move the FTAs forward.  Stalemate.

Better than it might be, worse than it could be.

Yesterday I posted about a recent U.S. Chamber of Commerce study about the economic impact on the U.S. economy of free trade agreements.  The Chamber has been busy and has also published a new study of the impact of exports overall on America’s well being.  This study, The State of World Trade, looks at far more than FTAs, addressing protectionist tendencies around the world, opportunities in global trade, and success and failure in implementing trade agreements and obligations.

It isn’t surprising, during an economic downturn, to see many countries pushing protectionist policies.  We seem to hear about one restriction or another virtually every day (I have reported here about China’s many restrictions and everybody talks about the value of the yuan, but China is far from alone in such policies).  The remarkable thing, however, is that the world’s trade policy gurus have thus far avoided the slippery slope of protectionism that made the Great Depression so much worse than it had to be.  The WTO’s warnings appear to have had the desired effect of heading off the worst of it.

But not all is perfect.  The stimulus packages of some nations have resurrected “buy national” policies, including the infamous “Buy America” rules and China’s attempt to impose “indigenous innovation.”  Many countries are ignoring inconvenient obligations under their international agreements (for example, Washington’s refusal to admit Mexican trucks as required under NAFTA).

The Chamber is concerned, rightly in my opinion, that the United States is losing jobs and opportunities while our competitors negotiate free trade agreements and we sit still.  The Chamber estimates that the FTAs with South Korea, Panama and Colombia would create $40 billion in export sales and in excess of 380,000 U.S. jobs – if only we would grasp the prize.  The likely benefits dwindle with every day we refuse to compete with our major trading partners in these markets.  The European Union and Canada have FTAs or are negotiating them with all three, and China can’t be far behind.

Not so’s you’d notice.  Long-time readers know that I occasionally rant about the Obama Administration’s insincere approach to free trade agreements and apparent disinterest in using them to create or protect American jobs.  I’m not the only one.  Says Thomas J. Donohue, president and CEO of the U.S. Chamber of Commerce, referring to the overwhelming positive economic impact of past FTAs: “I defy anyone to name another budget-neutral government initiative that has generated anything like this number of jobs.”

Do we want jobs or not?

It’s been tough with my travel lately, but I finally got around to looking at the Chamber’s new study:  Opening Markets, Creating Jobs: Estimated U.S. Employment Effects of Trade with FTA Partners. Some of the stats in the study are eye-popping.  The Chamber study examined the agreements that the United States had in place with fourteen countries in 2008 and found that 17.7  million American jobs depended on trade with those countries.  More to the point, 5.4 million jobs were created by our much-maligned free trade agreements.  Can you think of any other way that more than 5 million Americans can be put to work with no adverse impact on the federal budget?  I can’t.  But this isn’t good enough for the Obama Administration which, while claiming to like FTAs, still doesn’t ask the Democrats in Congress to move forward the stillborn agreements with South Korea, Panama and Colombia.  The South Korea agreement is estimated to mean some 345,000 jobs. Our politicians should ask their voters if they would like a job or two.  And export-related jobs tend to be higher paying than other jobs in the U.S. economy.  Who besides an out-of-touch politician in Washington would say no to such a deal?

The fourteen FTAs that our politicians despise added 2.1% to our GDP in 2008, putting $3.4 billion into the hands of their constituents.  Our exports to these markets grew nearly three times faster than our sales to the rest of the world.  One wonders how this is bad?

The rest of the world has seen the light and is merrily negotiating and implementing new FTAs while our negotiators are left sitting on their hands – and while our exporters find themselves increasingly disadvantaged in foreign markets.  Yes, it would be nicer if our trading partners kowtowed to the wishes of our Congress on labor standards and environmental policies, but when did we get the right to legislate for other sovereign nations?  Would we allow another country to hold up an agreement if they wished to change, say, U.S. military policies in Afghanistan?  Somehow I doubt it, but that is what we are trying to impose on others.  By using FTAs as the tool, we are merely condemning U.S. export sales and killing jobs that our country desperately needs. Wake up, Washington.

• Having trouble finding a freight forwarder, or need a forwarder with special expertise in a market?  Take a look at Freightbook, a free on-line search engine for finding freight forwarders, couriers, customs brokers and many other types of international trade service firms.  Freightbook says they have more than 400 companies listed in 120 countries, which should be enough.  If you are a forwarder or similar firm, you can get your company listed, but that isn’t free.  Hey, they have to make money somehow.  (This is another tip from the Federation of International Trade Associations.)
• Little noticed, but with big potential, China has apparently agreed to consider signing on to the WTO’s government procurement code.  If so, this could solve a lot of issues that foreign companies have in selling to Chinese government agencies and could obviate things like the “indigenous innovation” rules.  If this develops, you’ll see more posts about it here.  I was one of the negotiators of the procurement code and will watch this one closely.
• More good news.  Russia could be in the WTO within a year, says the European Union.  This should loosen some things up.
• I really should do a post on the many “chicken wars”.  Hardly any other product has been subject to as many trade disputes as chickens and chicken parts.  My first one was the famous U.S.-EU chicken war decades ago.  The latest chicken war is between the United States and Russia and it appears to be nearing resolution.  Chickens were involved, too, in the great turkey ball war between the United States and Taiwan (read about it here).

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I’m still on the road, in Sandbridge, Virginia, this morning.  Posts will continue to be sparse for a while.  Our goddaughter is getting married and we are kneedeep in all the hoopla.  We are also waiting for our daughter to deliver our first grandchildren.  She is due to deliver twins at virtually any moment!  That takes precedence over blogging, so bear with me.

• I posted Tuesday about how difficult the Chinese market can be (Just Don’t Go There), so I read with interest an interview the next day with Winnie Lui, CEO of Hong Kong’s Patty Company, a maker and retailer of shoes that has been successful in China.  You can see it on the Hong Kong Trade Development Board’s site.  Patty uses its own shops to sell in China and opened more than 200 of them between 1982 and 1997, when the Asian financial crisis led to closing all but 30 of the shops.  Patty has had to re-develop its sales network and now has more than 100 shops.  Ms. Lui’s advice to new consumer goods companies trying to sell in China is to focus on the large existing department stores, paying for good space or opening up their own counters within the larger store.  Her reasoning: Chinese consumers trust department stores more than small shops for finding good quality products, so selling through department stores is sort of a seal of approval.
• One of my articles that questions how Hawaii does its tourism marketing was picked up by WorldTourismDirectory.com.  Unfortunately, they didn’t pick up the nice tables that give the real picture.
• The annual World Competitiveness Scoreboard is out.  The United States, which held the title for years, has been dropped to #3 by Singapore and Hong Kong.  At least we’re still on the podium, given the anti-business atmosphere among populist politicians.  Consider poor Venezuela, easily at the bottom of the rankings – again.  See the complete scoreboard here.
• The Obama Administration still can’t get its act together on free trade agreements.  Canada and Panama just concluded an FTA, while our FTA with Panama languishes.  The race is now on to see which FTA is ratified and implemented most expeditiously.  I’m betting on the Canada-Panama agreement.  Sigh.
• By the way, the European Union has re-opened free trade talks with Argentina, Brazil, Uruguay and Paraguay.  Where is the United States, one wonders?

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I will be traveling the next week or so, attending a wedding on the U.S. East Coast, staying with family and friends.  It’s always nice to see them, but it does mean that Internet connections are not always convenient and the time for blogging will be unpredictable.  I’ll try to post as usual, but there may be lapses.  Please bear with me.

I posted about a month ago about China’s stranglehold on production of rare earths and the possibility that Beijing could use export embargoes of these substances as an economic weapon.  I’m not the only one thinking that way.

James Bacchus, former chairman of the World Trade Organization’s Appellate Body – the ultimate stage in WTO dispute settlement, is worried about new cases coming to the WTO about export controls that may stretch the dispute settlement system a bit too far.  And one of those cases involves those rare earths from China.

Bacchus argues, rightly, that the WTO and the General Agreement on Tariffs and Trade (GATT) assume that trade disputes will be about import restrictions – not restrictions on exports.  The GATT (the organization was replaced by the WTO, but the agreement still stands as the basic governing document of international trade law) addresses export restrictions, but almost as an afterthought.

Bauxite

The first of the new cases likely to come to the WTO will challenge China’s alleged export restrictions on a series of raw materials, including bauxite, fluorspar, magnesium and coke (no, not the soft drink).  These materials are key to production of metals and chemicals, and restrictions on their availability have Mexico, the European Union and the United States mightily upset.  Bacchus anticipates, and I agree, that the United States, the EU, Japan and probably others are very likely to launch a case if China tries to restrict its rare earth exports.

The GATT is somewhat ambiguous about China’s rights to restrict exports.  Bacchus notes that the General Agreement prohibits quantitative restrictions on exports (e.g., embargoes or quotas), but allows taxes, export duties or other financial actions to hinder those exports.  I expect China, should they place an embargo on rare earths exports, will drive a truck through GATT Article XI(2)a, which – after stating the general prohibition on quantitative restrictions – allows an exception for “Export prohibitions or restrictions temporarily applied to prevent or relieve critical shortages of foodstuffs or other products essential to the exporting contracting party.“  Nowhere are “temporarily” or “essential” defined.  China merely has to argue that their measures are temporary and apply only to essential products.  The challenging countries won’t accept this, but the argument can go on for a long, long time.

Bacchus also notes Article XX(g), which allows a general exception from GATT rules for measures “relating to the conservation of exhaustible natural resources” if the export controls are accompanied by equivalent restrictions on domestic consumption of the same items.  I’m not as sure that China will be able to demonstrate that, but could be proven wrong.  Either way, some big arguments are coming.

This post may not be music to your ears, and may seem esoteric, but it addresses a very practical feature of international trade that, improperly done, can put a company into hot water.  How do you make sure that your product is properly classified for customs purposes?  That may not seem like a big thing, but a mistaken classification can mean vastly higher customs duties or taxes that have to be paid by either you or your overseas customer.  Either way, the mistake likely comes out of your bottom line.  And I’ve seen estimates that products are misclassified between 30% and 50% of the time.

My friends at the Federation of International Trade Associations (FITA is in my links to the right) put out an article this week about how goods are classified for international shipments.  I’ll summarize, add some comments from experience and provide an additional link or two you may find useful.

In Brussels since 1953

There is an international scheme for classifying products.  There were earlier versions under other names, but the current one is called the Harmonized System and is maintained by the World Customs Organization.  The WCO is not to be confused with the WTO, though they work well together on customs and classification issues.  I participated in negotiating the WTO’s Agreements on Customs Valuation and on Rules of Origin (a subject we’ll likely take up one day), and WCO oversees technical aspects of both those agreements.  WCO is a forum for 176 customs administrations (that means nearly universal membership) to talk out their differences in administration and interpretation of customs-related issues.  It’s one of those unseen operations that keeps international trade going as smoothly as possible.

I won’t say that WCO’s work is riveting, but consider what they are up against.  Nearly every country levies customs duties and none that I know of has a simple across the board tariff that is the same for all products.  That means that each customs administration needs a method for classifying products and differentiating them so that the proper tariff is applied.  It used to be that this system was totally different for every country and that exporters often had little idea what to expect when their shipments got to another border.  The lack of any standardization meant that each company had to develop expertise in whatever crazy system a target market might use – and they often got it wrong.  (Many years ago, for a brief while, I was the U.S. Government’s expert on the foreign trade regulations of Ethiopia and received lots of questions on tariffs and customs classification.  Ethiopia had not yet modernized its system, and its tariff schedule had no logical arrangement.  Their duties were listed in the chronological order that the government had decided to apply a tariff.  A thorough nightmare.)  The Harmonized System is a brave attempt to bring order out of such chaos, something at which it has succeeded amazingly well.

Consider the problem.  How many thousands of products move in international trade?  I have no idea.  And classifying these products is akin to the problems faced by scientists in classifying species.  You need a system so that everybody knows what is happening.  The Harmonized System does this by dividing all products into 96 chapters and then subdividing those chapters to get greater and greater detail.  The HS uses a numeric system with each additional digit developing more and more detail.  I’ll give you an example: Chapter 95 covers “Toys, games and sports requisites; parts and accessories thereof.“  But that covers a lot and you are preparing a shipment of playing cards, so you look at Chapter 95 to see if you can drill down to what you need.  The HS goes to 95.04 – “Articles for funfair, table or parlour games, including pintables, billiards, special tables for casino games and automatic bowling alley equipment.“  That doesn’t quite do it, but you are in luck.  The HS goes to six digits and at 95.04.40 you discover your classification: “Playing cards.”

The fun doesn’t necessarily stop there.  Most countries use the HS, but for some products they want to break things down even further (perhaps wanting to separate playing cards for children’s games from cards used in a casino), so many countries use eight digits or even more, defined solely by that country.  But the HS gets you most of the way there with six digits and allows you to knowledgeably work with the tariff schedules of most countries, discovering what duty your shipment might face.  This can be vital to your pricing for a given market, plus it is your responsibility to identify the classification you think your product belongs in.  That does not mean that the customs officer looking at your shipment will agree with the classification you find, but it gives you a starting point for the ensuing discussion – especially if you can show a history of using that classification in other markets, too.  The whole idea is to make the movement of goods more predictable.

The harmony, however, is not complete.  For reasons of their own, some countries choose to use variations on the HS as the foundation of their tariff schedules.  The United States, for instance, uses its Schedule B classification system for exports and the Harmonized Tariff Schedule of the United States for imports.  The latter is almost identical to the HS, but adds more digits.  Schedule B does the same, but they don’t quite match up.  You can find a concordance between the two systems here.

There is also an automated on-line system that, for a small fee, helps you identify your HS classification.  I have had good luck with it – and the U.S. Bureau of the Census uses it as their on-line search engine for Schedule B.  That seems a fair recommendation.

I haven’t played policy wonk in a while, but I have been pondering a couple of op-ed pieces about free trade agreements.  One appeared April 22 in the Wall Street Journal, “America Misses Another Asian Opportunity,” by Bernard G. Gordon, professor emeritus at the University of New Hampshire.  The other is Frank Vargo’s April 19 piece in The Hill, “Free Trade Pacts Have Been Good For U.S.” Frank, who is vice president for international economic affairs at the National Association of Manufacturers, is a friend, former colleague and my one-time boss – so I am predisposed to like what he writes.

Gordon shares my doubts, and hopes, for President Obama’s infatuation with the Trans-Pacific Partnership.  The United States, as much by its own inaction as the intentions of others, has been largely left out of the major economic discussions in Asia.  Yes, we are a force in APEC and we sit in on some other Asian or Pacific groupings, but we are completely out to lunch when it comes to participating in Asia’s burgeoning network of trade agreements.  Washington is desperate to offset China’s influence in the region, but without negotiating – and implementing new free trade agreements – we have little opportunity to do so.  Congressional cave dwellers have tied the President’s hands by refusing to take action on the three negotiated FTAs that await passage (South Korea, Panama and Colombia).  And the Congressional caucus against FTAs has Obama so scared that he won’t even ask the Congress if they would think about implementing the agreements.  Yes, he mentions them from time to time, but what is needed is a clear and explicit request from the White House to pass the things.  And, during Obama’s inaction, perhaps a result of his dithering, more than 100 members of Congress have come out to say they will oppose any future free trade agreements.  This is what passes for leadership.

How Asia is organized, but where is tiny TPP?

Gordon points out, too, that Obama’s National Export Initiative, while great domestic politics, has raised fears elsewhere of a new mercantilism in America.  The emphasis on doubling exports is straight from the mercantilist playbook that assumes a zero-sum game in trade.  It leads other countries to assume that Washington intends to build U.S. exports at their expense – never a good way to launch a negotiation.  It is a rare product that is unambiguously from a single country anymore, so the focus simply on U.S. exports is economic nonsense.  Gordon quotes India’s Trade Minister, Anand Sharma: “We are worried about the U.S.“.  I can’t do better than to quote Gordon’s conclusion:

“For a country that almost singlehandedly launched the General Agreement on Tariffs and Trade and then the World Trade Organization, America’s newfound support for a pitiable “Trans-Pacific Partnership” is quite a letdown. All the more so when, if the WTO’s Doha Round were completed, its “most favored nation” clause would render moot most of the preferential trade agreements that have cluttered the world trading scene during the past decade. And yet only the TPP will be pursued because that’s all the boss ordered.”

Frank Vargo is a numbers guy.  If the numbers don’t support an argument, he won’t go for it.  So, when Frank uses statistics, I believe what he has to say about them.  And what he has to say is that during 2008 and 2009, the United States had a $50 billion trade surplus in manufactured goods traded with our partners in FTAs.  That means a lot of U.S. jobs and is a good indicator that free trade agreements have been a strong net benefit for the country.  The clincher is that we suffered an $820 billion deficit with the countries with which we do NOT have free trade agreements.  Shouldn’t Congress insist that we negotiate FTAs with everybody?  Seems only logical, but that is the problem in Washington.  Logical reasoning just doesn’t cut it in the capital of populist sound bites.

Will he believe this time?

Good news on the Russian front!  I am always leery of doing business in a system I don’t understand, and I am no expert on Russia.  I’ve been there but several years ago.  But this week, the country is grabbing my attention – for positive reasons.

One piece of good news is Moscow’s decision to delink its application to join the World Trade Organization from its neighbors Kazakhstan and Belarus.  Trying to join as a customs union was always going to be complex and long struck me as a delaying tactic by those in Moscow who didn’t really want to subject themselves to the WTO’s rules of behavior.  Now they seem to be getting serious – possibly a sign that more forward-thinking power brokers are gaining an upper hand.  We can hope.  In any event, applying alone can only speed things up, especially now that Washington has apparently agreed to be Russia’s champion to make things happen in Geneva.

And American companies are taking a rosier view of Russia’s prospects as a decent place to do business.  Dunkin’ Donuts is re-entering the market after giving up eleven years ago – planning to open twenty coffee and donut shops in Moscow this year.  The company couldn’t get the Russians interested in donuts the first time around, plus they had to cope with a rogue franchisee who added vodka and meat pies to the menu.  Wasn’t the right image, apparently.  McDonalds has survived in Russia for twenty years, but Burger King joined the fray only in January.  Starbucks has been in Moscow for three years and now has 26 shops in the Russian capital.

The big bet, however, is John Deere’s decision to invest half a billion dollars in Russia! The tractor company opened a huge new plant in Russia Tuesday, banking on strong growth in Russian agricultural production.  The company plans to assemble tractors, combines, backhoes, graders, loaders and forestry equipment.  That kind of investment shows confidence though I am bemused by the reasoning.  Says John Deere’s CEO, Samuel Allen, himself quoting a Russian poet: “Russia cannot be understood by the mind alone. … In Russia one can only believe.”

Believing is sometimes tough.  Witness yesterday’s New York Times article about Russian investigators simply ignoring evidence, presented by Germany and the United States, about Russian agencies seeking and accepting corporate bribes.  Until Russia takes corruption seriously and does something about it, it’s going to hard for the rest of us to take Russia seriously.