Who Is the World’s Baddest Pirate?

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Ukraine, that’s who! Ignoring the fact that China produces close to 3/4s of the world’s counterfeit goods, the Office of the U.S. Trade Representative has handed the title of Pirate King to the Ukraine. I’m trying to figure how that happened. Must be something like giving the Nobel prize to the wrong person, though I am not sure that Beijing will complain that they didn’t get the title this time. USTR released the annual Special 301 report on intellectual property rights last Thursday, 58 stirring pages about who cheats whom around the world.

We’ll get the good news out of the way first. Won’t take long. The Special 301 Report sets up two categories of bad guys. Those that are just somewhat bad, perhaps merely an irritant, are put on the Special 301 Watch List. The really bad guys are featured on the Special 301 Priority Watch List (sort of a “Most Wanted” list of IPR violators). The good news is that Brunei and Norway are in the clear and no longer on either list. And Canada has been downgraded from the Priority Watch List to the Watch List. The Bahamas, China, Israel, Laos, Panama, the Philippines and Russia all worked on new IPR laws in the last year. Taiwan granted more IPR protection on pharmaceuticals. And Turkey beefed up its enforcement on IPR. That’s it.

While we are at it, the inmates of the Priority Watch List are Algeria, Argentina, Chile, China, India, Indonesia, Pakistan, Russia, Thailand and Venezuela. Not many surprises there. The plain old Watch List contains Barbados, Belarus, Bolivia, Brazil, Bulgaria, Canada, Colombia, Costa Rica, Dominican Republic, Ecuador, Egypt, Finland, Greece, Guatemala, Israel, Italy, Jamaica, Kuwait, Lebanon, Mexico, Paraguay, Peru, Philippines, Romania, Tajikistan, Trinidad and Tobago, Turkey, Turkmenistan, Uzbekistan and Vietnam. Naughty, naughty. But not as bad Ukraine – now IPR Public Enemy #1 and in a category all by itself.

I regret that the Government of Ukraine has earned the first new Priority Foreign Country designation in 11 years due to its severely deteriorating climate for IPR protection and market access, and call upon that government to reverse recent backsliding and swiftly resolve the problems identified today.
~ Demetrios Marantis, Acting U.S. Trade Representative

Ukrainian pirates in action!

Ukrainian pirates in action!

What did the Ukrainians do to deserve this special tribute? A lot apparently. USTR seems miffed that Kiev has ignored earlier agreements and negotiations to clean up its act. The “collecting societies” that are supposed to collect and transmit royalties to foreign rights holders aren’t doing the job fairly or transparently. Ukrainian government agencies are openly and merrily using pirated software, making no secret that they are doing so. And the country is making next to no effort to combat online piracy and copyright infringement. At least the Chinese pay lip service on such things before they go back to pushing out more counterfeit goods.

The collecting society dispute has an interesting twitch. Ukraine pulled the license for the reputable Ukrainian Music Rights League last year. “This action has been credibly characterized as an attempt to empower rogue collecting societies, including a rogue collecting society that reportedly has strong ties to government officials.” Sounds like Ukrainian officials found a new source of income, one that is spreading beyond the music industry now that Ukrainian courts have abolished the previous rules for accrediting collecting societies. The country has reverted to ad hoc licensing and the rogue societies are winning. USTR says that this legalizes misappropriation of royalties. And the Special 301 report certainly hints that the pockets of Ukrainian officials are being lined.

Kiev has told USTR that they want to begin using legal software in government ministries, and that $12.3 million was budgeted for this purpose in 2013. The actual value of the pirated software in official use far exceeds that amount – and there is no indication that any of the money has actually been spent – or is likely to be spent – on legal software.

Online piracy is a thriving business in the Ukraine. One Ukraine-based pirate website, ExtraTorrent.com, bills itself as “The World’s Largest BitTorrent System” and is among the top 200 most-visited websites in seven other countries, including the United Kingdom, India and Australia. Ukrainian authorities did make a brief effort, early in 2012, to close a pirate website, called EX.UA, which sold pirated music, videos and software and had become Ukraine’s 12th most-visited website. EX.UA was quickly back online, following an uproar by Ukrainian consumers and celebrities. [Both EX.UA and ExtraTorrent.com are up and running today. I checked.]

There is much more in the Special 301 report including details on all the other pirates mentioned on the Priority Watch List and the Watch List. Go read about your favorite black hat.

The Battle Of The Sun

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Is it environmental one-upsmanship or old-fashioned protection of an infant industry? India’s Jawaharlal Nehru National Solar Mission (NSM) was created to boost domestic production of solar cells and solar modules – clearly a good idea for the environment, right? The rub is that this is done by requiring that Indian solar projects buy their solar modules, cells or thin film technologies only from Indian factories – effectively banning foreign competition for solar power gear from Indian soil. It is a tad subtler than an outright ban. An Indian solar project can use foreign kit, but they won’t get the sweet power purchase deal from the national power monopoly. Washington started asking questions in the WTO a few months back, saying that Indian policy is a local content requirement that violates multiple international agreements. I posted about it because it is a traditional trade spat, but in new bright green environmental clothing.

Please, local marble only.

Please, local marble only.

New Delhi struck back a couple of weeks ago. Not by defending itself, but by arguing that the United States also has illegal local content requirements (who knew?). The Indian argument seems to be “you do things wrong, so you can’t complain when we do things wrong“. That’s often a good political, but is not a recognized defense in international law. Quite the contrary. Canada is in the process of losing a WTO case brought by the European Union and Japan against local content requirements used for renewable energy projects in Ontario.

There is substance to India’s case, which relies on the concept that defeated the Canadians: national governments are responsible for what their state, provincial or local governments do that violates international obligations. India has now raised questions about water utilities, for instance, in New England, Pennsylvania, West Virginia and South Carolina that impose local content rules on iron pipes and fittings used in water projects. New Delhi sees discriminatory local content rules being used in solar and renewable energy projects in Michigan, California and Texas. And pipe procurements in Alabama, South Carolina and Florida that are restricted to local products. This kind of puts Washington between a rock and a hard place, because there is long precedent for asserting the legal primacy of international treaties over local or state law, going back at least to a case brought by Japan against “Buy America” procurement legislation in Mississippi in the 1970s.

This is all part of a larger picture. As customs duties have come down across much of the world, local content requirements have become a favored tool for restricting foreign competition. U.S., European and Japanese companies often find themselves the victims of local content rules, so their trade agencies are waging an aggressive campaign against such rules wherever they are found. There have been complaints against similar practices in Indonesia, Brazil, Russia and the Ukraine – and we are likely to hear about more.

For better or worse, India is telling us that perhaps Washington should make sure its own house is in order. Not a bad idea. But just try selling that to local and state politicians egged on by local producers. In any country.

WTO Members Grilled On Import Licensing

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

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

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

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

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

Perhaps not the right "ghost company"?

Perhaps not the right “ghost company”?

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

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

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

Coming Attractions In Congress

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IMG_0007Playing with numbers seems irresistible to most governments, but today I’m not talking about the sort of shenanigans that, say, Beijing plays with growth and trade figures. No, it is the peculiar way the United States has of designating which Congress did what. We can’t just say that Congress passed some bill in 2011. That may be accurate, but the official designation is that the bill was passed in the 112th Congress – which means nothing to most Americans, even less to those of you beyond our shores. You see, Congresses are numbered according to the 2-year terms of the House of Representatives. So if something happened during the 112th Congress, that could be in 2011 or it might be in 2012. That’s a long-winded introduction to a discussion of the trade issues likely to be taken up, for better or worse, by the 113th Congress that began earlier this year. That is, issues that could come up either in 2013 or 2014. Confused yet?

The Congressional Research Service (CRS), part of the Library of Congress, functions as an in-house consulting firm for Congress, responding to requests for information from any senator or member of the House. CRS reports may be indicative of the interests and bills likely to come up in the near future. The CRS website (www.crs.gov) was down when I worked on this post, but the Department of State provides a convenient list and copies of the CRS reports that impact international affairs, most of which concern international trade or investment. It is somewhat comforting that our Congressional leadership is asking about so many international issues.

CRS published a report a couple weeks back titled “International Trade and Finance: Key Policy Issues for the 113th Congress“, a forecast of what is coming in the next two years. It provides background material for Congressional staffers to use to educate their bosses and to draft bills, but also tells us which trade and investment issues are top-of-mind.

The 112th Congress (2011-2012), frankly, didn’t do much on trade. Sure, they passed the free trade agreements with South Korea, Colombia and Panama (leftover business from the Bush Administration) and finally authorized permanent normal trade relations (PNTR) with Russia, but most of their activity was simply maintenance issues for trade agencies and legislation. The CRS list for the new Congress is more ambitious. I am having a lazy morning with coffee on my lanai in the sun, so I will take the easy way out and quote the CRS’s own summary of the issues likely to grab Congress’ attention in the next couple years. Take a look at the full report for more details.

Among the more potentially prominent issues are:

1. Negotiations for comprehensive reciprocal trade agreements with major trading partners, including the Trans-Pacific Partnership (TPP) with 11 countries from the Western Hemisphere and Asia, and new negotiations with the European Union for the Transatlantic Trade and Investment Partnership (TTIP) Agreement;

2. Possible renewal of Trade Promotion Authority (TPA), allowing the President to enter into reciprocal trade agreements, and providing trade negotiating objectives and expedited legislative procedures to consider trade agreement implementing bills; …

3. U.S.-China trade relations including investment, intellectual property rights protection, currency reform, and market access liberalization;

4. International finance issues including implications of the ongoing Eurozone debt crisis for the U.S. economy, oversight of international financial institutions, and negotiations to conclude new bilateral investment treaties (BITs);

5. Oversight of the stalemated World Trade Organization (WTO) Doha Round negotiations and separate new trade negotiations (e.g. services) that some members of the WTO have undertaken;

6. Review of the President’s export control reform initiative and possible renewal of the Export Control Act (EAA), and review of trade sanctions;

7. Oversight of the President’s request for new authority to reorganize and consolidate the business- and trade-related functions of six federal entities; the Export-Import Bank, and the Administration’s National Export Initiative;

8. Reauthorization of U.S. Customs and Border Protection (CBP) and expiring trade preference programs (e.g., the GSP and the Andean Trade Preference Act).

Renewal of GSP and the Andean program needs to be done before July 31, 2013. Anybody’s guess as to when or in what form the others will come up.

Can You Hear Me Now?

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Many Americans don’t travel outside their country and, thus, have the ignorance to assume that everything in the United States is the best in the world. We see that in our Congress almost daily in things such as the refusal to consider health practices in places that have better outcomes then we do. One area we like to assume we own is telecommunications equipment and services. A symptom of that attitude is the requirement, annually since 1988, for the Office of the U.S. Trade Representative (USTR) to prepare the so-called Section 1377 Review about barriers in other countries to our telecom services and gear. USTR is not required to consider U.S. restrictions. If you have lived or worked overseas, you know that the United States is neither the best nor the worst when it comes to telecoms.

The 1377 Review is still a useful look at places that manage the industry worse than we do. But it is too bad that the Congress doesn’t require that the review look at best practices around the world, but only at the negative stuff. You can read the latest full review here, but I’ll give you some teasers.

Recent years have witnessed a growing trend among our trading partners to impose localization barriers to trade designed to protect, favor, or stimulate domestic industries, service providers, or intellectual property (IP) at the expense of imported goods, services, or foreign-owned or developed IP – and this trend is evident in the telecommunications sector. This year’s 1377 Review highlights the concern that U.S. equipment manufacturers may be disadvantaged by the growing use of local content requirements in countries such as Brazil, India, and Indonesia. It also outlines a range of other telecom barriers that USTR has spotted and intends to tackle with increased monitoring and enforcement in the coming year.
~ Acting U.S. Trade Representative Demetrios Marantis, 4/3/2013

Among the measures that USTR is concerned about, in no particular order:

* Local content requirements in Brazil as a condition for winning new mobile telecom licenses.

* International termination rates for long-distance calls. This means that foreign telecom operators charge an inflated rate to the U.S. supplier for calls to their country. Of course, those added charges get passed on to American consumers. The review lays into Pakistan for this, but also names El Salvador, Ghana and Jamaica.

* Worldwide concerns about restrictions on cross-border data flows and Internet-enabled trade in services.

* China may be the most egregious example, but USTR is concerned that too many countries do not have effective telecom regulators that are fully separated from the interests of their telecom operating entities.

* Many countries impose limits on the percentage of equity in local operators that can be owned by a foreign company. The 2013 review emphasizes China in this respect. Canada and Mexico get kudos for progress on their foreign investment rules.

* State-owned or state-favored competition is always a concern. This year’s review focuses on China, Colombia and Mexico.

* China and India are particular concerns for U.S. satellite operators trying to sell in their markets. A common complaint is that governments force foreign satellite companies to sell capacity only through their state-owned telecom companies, not directly to the private sector.

* India gets mixed reviews for its handling of submarine cable landings. Access for users has been greatly improved, but there are still questions about fees levied on foreign telecom companies using the cables.

* Trade in telecommunications equipment has long been plagued by differing product standards which, when combined with testing and certification regimes, can slow down market entry or simply make it not worth the cost of entering some markets.

* Brazil, India and Indonesia each maintain local content requirements for telecom equipment.

* China has extreme security requirements (including incorporation of a Chinese encryption algorithm in some equipment), and redundant and less-than-transparent testing rules and product standards. India, though not as bad, is right behind the Chinese.

* Mandatory certification and local testing requirements are problems in China, Brazil, Costa Rica and India.

All this gives USTR’s trade negotiators plenty to do and think about during the coming year.

Of course, USTR’s mandate is to look at restrictions that other countries impose on trade and investment – not at U.S. practices. That falls to the Federal Communications Commission, which may or may not have any interest in liberalizing U.S. regulations. Things have loosened on possibilities for foreign companies to buy a controlling interest in American telecom companies, but foreign investors must be vetted by the FCC. I am not sure what other U.S. practices might attract the ire of foreign suppliers. It is up to them to figure that out and then try to open negotiations with Washington.

Sampling Bias

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I reported in March on the latest annual survey of U.S. business in China by the American Chamber of Commerce in Shanghai. There is also an annual business climate survey released by the AmCham in Beijing last month. The AmChams have been doing these surveys for years and they have been extraordinarily useful in working with officialdom in Beijing and in briefing Washington’s politicians about what is happening in China. There is some sampling bias, however, that you need to take into account.

Is there a bias?

Is there a bias?

By sampling bias, I mean that such surveys are naturally focused on the AmCham’s members – who are likely to be companies well-established in the market. These members probably have a well-staffed office and may even be among the host country’s major manufacturers. These are companies with a lot of skin in the game, not so much the small newcomer to the market. I have served on the boards of five AmChams (or equivalent business organizations) and it is the larger, more influential member firms who get the attention. It is to be expected that AmCham surveys will be biased towards the views of their larger, older members. The questionnaire for the most recent survey was sent to about 1,100 AmCham members and 325 responses were received, a pretty good response rate. We can assume, however, that the responses will be biased in favor of companies with staff large enough to take the time to fill out the questionnaire. That means a bias towards companies with something to lose in China and incentive not to rock the boat.

I have been corresponding with a couple of friends with long business experience in China. One of them has filled out the survey questionnaire several times in the past; the other isn’t American. They say that when businesspeople get together over a couple beers in China, they will tell you that the AmCham surveys have a positive bias. That they tend to emphasize the good stuff and minimize the bad about doing business in China. To the extent the surveys criticize Chinese practices, the situation for smaller firms, new to the market, is likely to be worse than the surveys might lead one to expect.

There is another reason for the positive bias. If you are an executive for a publicly-held U.S. company and your company has been touting the magic of the China market to its shareholders, you want no part of creating negative publicity for operations in China. That risks taking your share price down and may even jeopardize your job. Thus we can assume a positive bias in AmCham surveys. That doesn’t make such surveys any less useful. In fact, given the sampling bias, any bad news that is found in such surveys should raise red flags for anybody thinking about going into the market.

This may explain why Beijing rarely, if ever, criticizes the annual survey findings in public. It is close to sensational that a spokesperson for China’s Ministry of Commerce commented publicly last week that the AmCham Beijing survey results are “debatable” because the AmCham under-represents foreign firms doing business in China. The argument is disingenuous because an American Chamber of Commerce is composed of American firms or companies closely tied to the United States, and does not pretend to represent all foreign firms in the market. It also ignores the positive sampling bias of the surveys.

The proximate cause of the Ministry’s reaction is that, even with the positive bias, the latest survey reports that only 28% of participating U.S. companies think that China’s investment environment is improving, a precipitous drop from the 43% who thought the same that last year. The Ministry is also unhappy that more than 25% of the respondents said they have had data breaches or theft in their China operations, hardly a confidence builder.

Such results will mislead the decision-making process of international investors considering China’s market conditions and investment opportunities, the official said, adding that some foreign media have already sent false signals to the business community by citing the conclusions of the survey.
~ Xinhua

Xinhua and the Ministry of Commerce inadvertently hit the nail on the head – though what is debatable is whether the AmCham findings are misleading “false signals“. Given their positive sampling bias, these are red flags that any company should pay attention to. I read the Ministry’s bleat as a confirmation that American companies, and probably others, are seriously looking at putting new investment in the United States, Mexico and elsewhere – not in China. The positive sampling bias of AmCham surveys almost guarantees it.

Export University In Honolulu

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Want to learn how to export? Need to train employees about getting into foreign markets? Interested in doing it in America’s tropical paradise?

The Export University course will be to starboard.

The Export University course will be to starboard.

The Hawaii Pacific Export Council (HPEC), both a non-profit and an advisory committee to the U.S. Department of Commerce, has announced its 2013 schedule for its acclaimed and comprehensive Export 101 training seminars: Exporting From A-Z. This will be a 4-part course offered May 20, May 22, May 28 and May 30 in the afternoons, conveniently located at Foreign Trade Zone #9 on Honolulu’s waterfront. The course will cover all major aspects of the export business and will help you develop a global strategy for your business. The course will be taught by true experts in their fields who will help you build business plans for attacking your best potential markets. Our faculty includes international marketing experts, lawyers working in foreign practices, bankers knowledgeable about export finance, and state and federal officials who can help you enter foreign markets.

Export 101 costs $150, but small businesses may be eligible for a 50% discount if they can meet the requirements for SBA’s State Trade & Export Promotion (STEP) grant program. You will find out how to qualify for the discount when you register. Whether you pay half or full fare, it is a decent risk. Small business exporters who have taken Export 101 in Hawaii have already generated more than $1 million in extra sales!

One of the best decisions I’ve made in the last year. Export University changed our LIVES.
~ Hawaii small business owner & Export University 101 graduate

BREAKING NEWS! Small businesses that complete Export 101 and an export business plan may qualify for up to $2,500 to help with the their next foreign marketing trip. This will be funded through a cooperative agreement with the U.S. Small Business Administration in partnership with the Hawaii Department of Business, Economic Development & Tourism. The funding comes from SBA’s STEP grant program which HPEC is helping to implement in Hawaii.

A special Export University 201-level course – E-Commerce For International Sales – is scheduled for May 31, also in the afternoon at the Foreign Trade Zone. James Kerr of SuperGeeks, Katie McMillan of TEDxMaui and Peter Kay of Your Computer Minute will give you pointers for using websites and social networking to help build international sales. Remember, as soon as you put up a website, you are in international marketing so you might as well take advantage of it. The cost of this seminar is only $15. And, again, you may qualify for a 50% STEP discount.

theme462_logoYou can get more information on our Export University course schedules here. Better yet, just go ahead and sign up at www.tinyurl.com/EUMay2013. If you have questions, send them to Lesley Harvey. And, should you need further incentive, there is a combined price for both the Export University 101 course and the 201-level seminar of just $155. I’ll see you there! In fact, I am teaching part of the 101-level course.

HPEC’s Export University programs are among courses that are offered nationwide by export councils. If you can’t make it to Hawaii next month, check out what is being offered elsewhere.