Business Beyond the Reef

• Why do new exporters always want to sell in China?  I see so many neophytes try to conquer the Chinese market and get their heads handed to them.  I have lost so many potential clients by telling them to go to Hong Kong or Singapore first – markets where they have some chance of understanding what is going on and actually getting some good business done.  Here’s another reason to hit these markets first: they have richer customers than China does.  A survey of affluent consumers by HSBC reveals that rich folks in Hong Kong have average liquid assets of US$301,289 and that Singapore’s wealthy have $183,145.  Rich Chinese, though touted in the press for their lavish spending, have average liquid assets of $126,537 – only 42% of Hong Kong’s richest.  The Chinese, too, are quite nouveau riche, averaging 36 years old.  The Hong Kongers are 48, the Singaporeans 44.
• One of Hawaii’s most delightful exports is its coffee, among the best in the world to this biased observer.  (I drink two mugs of Kona blend every morning.)  See these articles from the Honolulu Star-Advertiser, published this week: here, here and here.  Gotta try the one with bacon in it.
• I saw a new (to me) on-line scam yesterday.  I received an email, purportedly from Amazon, that looked a lot like Amazon”s usual order confirmation messages.  Except that the items ordered weren’t listed, and the message tells you to click on a link to see what is was you had “ordered”.  The first link, in a message loaded with links, was really to Amazon, but all the others were for a site called raceobject.ru8080, which I take to be a Russian mob site.  Beware.
• USA Today just noticed that Asia is a big market for U.S. companies.  Too bad they only talked to giant corporations who have already spent years and many millions to enter these markets.

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.

What are the biggest challenges facing small businesses that want to export?  A panel explored this eternal issue during Small Business Week in Washington back in May.  According to the U.S. Department of Commerce, most SME companies that export have no particular export plan or strategy, getting into exporting more or less by accident – responding to inquiries from overseas markets.  (This, I suspect, is partially due to the Internet.  Every company is in international marketing as soon as they put up a website, but few seem to expect that anyone outside their home market will ever notice.  Then they are surprised to receive an inquiry from some place they have never heard of.)  Commerce also says that 58% of small American exporters sell only to one foreign market (usually Canada or Mexico) – and most of those sell only to one customer in that market, further increasing my suspicion that this is exporting by accident.

Call your local USEAC

What are the challenges these small companies face to growing their exports?  The Small Business Week panel was composed of some of the winners of the Small Business Administration’s exporter of the year awards, and all had succeeded in growing their international business.  In no particular order, the challenges they faced and mastered include: (1) selecting which new markets to try and figuring out how to sell in those markets; (2) access to capital, seemingly common to all small businesses these days; (3) dealing with complex paperwork; (4) figuring out how to comply with foreign regulations; and (5) achieving clarity in communications in other languages and cultures.  The U.S. Commercial Service can help with each of these, except for access to capital – and SBA may be able to help with that.  One-third of American SME exporters have never heard of any of the U.S. Government’s export assistance programs.  That means that two-thirds of small U.S. exporters have heard of the USG programs!  Frankly, I’m surprised and impressed, since the agencies trying to help exporters are not given budgets for their own advertising and marketing.

So, what did the winners of the exporter of the year awards have to say about meeting and overcoming the challenges?  Dan Nanigian, president of Nanmac Corporation in Framingham, Massachusetts, says that you have to make sure you have quality products and then market “the hell out of them.”  Scott Green, CEO of Pucker Powder in Alabama, says his company maximizes their use of Commercial Service programs, working with their local U.S. Export Assistance Center.  Green is particularly enamored of the Gold Key program, which, he says, is growing exports to more than half of Pucker Powder’s sales.  Other winners pointed out the importance of overseas trade shows, maximizing face-to-face contact and developing the contacts made at trade fairs.  Some emphasized multilingual company websites, too.

“The cultural barriers—even with English speaking countries such as the U.K. and Australia—are enormous,” noted Amy Frey, president of ATC International. “You have to be incredibly clear about … different measurement systems and time and date conventions.”

Plenty to think about.

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I thought about outrigger paddling on Sunday.  Our regatta this weekend was at Maile, out on Oahu’s Waianae coast.  Beautiful broad beaches, bright sun and intense competition.  I had mixed results: I sat #2 in two crews, the paddler who calls the changes from side-to-side.  Our men’s 60s crew finished 5th and should have been better.  We did well with the mixed (men and women) 60s, taking 3rd place.  Next weekend, we’re racing in the surf at Waikiki.

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.

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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.

Business readers in Hawaii are reacting to my posts last week about the Jones Act (here and here), providing even more examples about how the Act hurts their profits.  A good friend, Tom Matthews, who owns Trade West/Nani Makana, a producer, importer and exporter of aloha party supplies, provided considerable detail about his company’s shipping costs.  Tom is also the current president of the Hawaii Tourism Wholesalers Association.  You have seen his products if you have ever entered one of the ubiquitous ABC Stores in Waikiki.  His are the top quality artificial lei.  His company also makes cosmetics, fragrances and plush toys, all with a Hawaii theme.

Ocean-going barge

Tom has shared with me actual recent quotes from his freight forwarder for shipping 8 cubic meters of goods from Shanghai to Honolulu.  The most direct route is to ship by sea from Shanghai to Long Beach, and then bring the shipment back west to Honolulu on a barge that is subject to the Jones Act.  The first and longest leg of the trip costs $440 on international carriers.  The back-haul from California to Hawaii costs nearly four times as much – $1660!  The total for the Shanghai-Long Beach-Honolulu shipment is $2100.  To be fair, we can’t charge all of the cost from Long Beach to Honolulu to the Jones Act.  That is a much thinner route than Shanghai to Long Beach, so you are not going to see the same economies of scale.  Still, a price nearly four times higher does seem a little strange.

Tom’s alternate route is to truck the shipment from Shanghai to Hong Kong ($728) and then ship it directly to Honolulu on NYK Lines ($1552), for a total shipping charge of $2280.  Needless to say, he takes the first route, Jones Act notwithstanding.  But it chafes that the price from Long Beach to Honolulu appears to be egregiously jacked up.

Tom also points out that he can ship a 40′ container from China to Colorado Springs for less than it costs him to ship a 20′ container from Honolulu to China, since the latter generally has to go to California (via Jones Act carrier) before beginning its journey to China.  Again, this isn’t conclusive evidence of the cost of the Jones Act, but it may be indicative.

A second company, an exporter of a Hawaii processed food product, exhibited at the huge ANUGA food show in Cologne, exciting interest from a potential large-scale distributor in Germany.  The Jones Act already hurts the firm’s bottom line by raising the cost of the glass bottles they have to bring to Hawaii from the mainland United States.  And to ship their products from Honolulu to Germany, the first leg of the voyage – from Hawaii to California – must be on Jones Act carriers.  The German customer took one look at the landed price in Germany and killed the deal.  Now the Hawaii company is looking into contract manufacturing on the U.S. East Coast to create products that are affordable to European customers – costing Hawaii jobs.

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On Monday, the Honolulu Star-Advertiser carried an op-ed piece in favor of the Jones Act, useful reading for either side of this issue.  The author is Robert G. Frame, an admiralty and maritime lawyer in Honolulu.  The one surprising thing I saw in his piece was mention of a 2003 study by the Maritime Cabotage Task Force that concluded that the Jones Act costs Hawaii residents only $5.52 each annually – or less than two cents day.  This is, of course, far below any estimates that I have seen by reputable economists, who tend to conclude the cost is upwards of $2,000 per person per year.  It turns out that the Task Force is hardly unbiased, founded by and composed of all the major players in the U.S. maritime industry, including both Horizon and Matson.  Their mission statement is clear enough:

“The Maritime Cabotage Task Force (MCTF) is dedicated to educating America on the economic, national security, environmental and safety benefits of the Jones Act and other U.S. cabotage laws so that domestic waterborne commerce remains a pillar of our national existence.”

Oh, and Mr. Frame’s law firm, Frame & Nakano, proudly lists Hawaii’s Jones Act carriers, Matson and Horizon, among its clients.  The Star-Advertiser apparently did not consider it important to mention that.

Fraudulent plastic?

USA Today had an article last week about the rampant spread of credit and debit card usage in Asia.  Card transactions in Asia, collectively, reached $1.8 trillion in 2009 – an increase of 158% in five years.  The point of the article was that credit and debit cards are likely to break down Asia’s historically high savings rates, boosting the market for consumer goods of almost all types.  And this will be accelerated by the new swipe cards and by the ability to do transactions on your cell phone.

Measured in cards carried per capita, the Japanese have already surpassed the Americans, carrying 2.5 cards each.  South Korea has caught up to the United States, each with two cards in their wallets.   But that doesn’t mean that Asian spending on cards has climbed anywhere near U.S. levels.  Debt per card in the United States is $1317.  The Chinese are the most profligate in Asia, with debt per card reaching $194.49, less than 15% of the American debt level.  So the flood gates of consumer debt have not exactly opened in Asia.

Hong Kongers and Singaporeans, who you might expect to be in the forefront of adopting credit cards, still only carry 1.33 and 1.15 cards each.  And, in the Philippines and giant India, cards are still rare, the average citizen carrying only .06 and .02 cards.

While USA Today focused on the consumer sales impact of credit and debit cards, they neglected a huge downside that has direct implications for exporters to Asian markets.  The Commercial Service office of the American Embassy in Singapore has issued a warning to U.S. exporters about fraudulent credit card orders from Asian “customers”. The Embassy warns that American companies are receiving orders from buyers “purportedly” in Singapore who pay by credit card and request delivery to a Singapore freight forwarder.  The “buyer” normally places an order, by phone or email, for between $5,000 and $30,000, but wants to split the “purchase” among several credit cards or has to make numerous attempts (with different cards) to get approval for the transaction.  Having worked through those delays, the “buyer” then asks for expedited air freight to deliver the goods.  The seller falls for this, the goods are dispatched to Singapore, the freight forwarders efficiently send them on to addresses in other countries – all before the seller discovers that the card numbers are all fraudulent.

The U.S. Commercial Service, America’s FBI and the Singapore Police Force are working together to stop the perpetrators, but – even if they are successful – you can expect the scam to move to other transhipment airports and continue.  The key warning sign is the use of multiple cards, usually from a first-time customer, and the eventual request for expedited air shipment.  Use all the security services provided by the credit card companies and use your common sense.

• 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.