Sister Acts

“Sister Cities” leave me underwhelmed. It seems as if every city, state or province has several - and yet one rarely sees anything come out of them. They seem to be negotiated when some member of a city council has a link to the other city or province. Such relationships are usually touted for their potential to create business ties between the two parties, yet such business rarely materializes. Some are more honest, hyping the opportunities for two-way cultural enrichment. Still, I have never seen one so upfront as to say it builds opportunities for boondoggles by local politicians.

There are exceptions to my cynical stance. Europeans tend to take this sister thing more seriously than do Americans and I have seen much activity within Europe between their “twinned cities”. Asians, too, seem to take this more seriously than their U.S. counterparts. And I have seen a few sister relationships that have actually benefitted the U.S. partner.

I once helped negotiate a “sister island” relationship between Hawaii’s island of Oahu (home to Honolulu) and China’s Hainan island. Hainan was looking to build a tourism industry and wanted Hawaii’s expertise. Hawaii firms wanted to sell architectural know-how for resorts and resort management expertise. The sister island agreement may have helped create a good atmosphere for doing that.

There was an immediate surprising benefit. Hainan is home to an immense pineapple industry – a business with which Hawaii has much experience. Hainan’s initial delegation to visit Oahu under the sister island agreement included executives and engineers from the pineapple fields. We took them to visit the old Dole pineapple cannery in Honolulu’s Iwilei district (this gives a hint about how long ago this was). The managers and engineers expected to be bored, assuming they knew everything about pineapple canning. Their stunned faces were priceless when they saw the Ginacca machines.

The first Ginacca machine

The first Ginacca machine

Invented by Henry Ginacca in 1911 when he was an engineer at Dole, the Ginacca machine remains the gold standard for peeling and coring a pineapple, and putting it straight into a can. The Chinese knew all about Ginacca machines, but had groused that the machines they had on Hainan weren’t working very well. When they saw Dole’s version, the penny dropped. The Ginaccas on Hainan were counterfeits, made from inferior materials to inferior designs. No wonder they didn’t work! We then took them to the factory where real Ginacca machines were made. Orders from Hainan soon followed.

Signing the sister province agreement between Hawaii & Bali

Signing the sister province agreement between Hawaii & Bali

I am hopeful about the potential for a new sister agreement signed this week between the state of Hawaii and Indonesia’s fabled island of Bali. Common interests abound in tourism and agriculture is similar. Of course, that makes them competitors, too. The glue that will make this agreement work, though, is cooperation between Indonesia’s military and Hawaii’s National Guard that has grown for several years. Hawaii and Indonesia not only share tourism and agriculture interests, but both face volcanoes, earthquakes and tsunamis. This means the two militaries want to train together to build disaster response capabilities. It may not be long before we see Hawaii troops helping out in Indonesia – or vice versa. Indonesia’s military is also experienced in United Nations peacekeeping, something that the Hawaii National Guard would like to learn about – and eventually take part in should Washington allow. We’ll see if this new “sister” agreement produces something, but it has a good foundation.

The Logistics Performance Index

Bad logistics cause nightmares for international traders. The trade policy community thinks of this in terms of “trade facilitation” – such things as the efficiency of customs clearance, application of nuisance taxes on imports or exports, or even the impact of corruption on the docks (or elsewhere). The World Bank takes a broader view and adds the physical problems of infrastructure to the mix, as well as payment systems, ease of communications or anything else that can slow down a supply chain. The World Bank’s economists came up with a Logistics Performance Index in 2007 to try to objectively measure how different countries are doing in their ease of moving goods. They issue the Index every couple of years and the 2014 version was recently published as Connecting To Compete 2014: Trade Logistics In The Global Economy.

I am not going to go into how the World Bank constructs the Logistics Performance Index (LPI). Suffice it to say that I haven’t seen formulas like that since I was a grad student. It is the conclusions I want to get to. Spoiler: Germany is #1 and Somalia is #160. There are some surprises in between.

Logistics Performance Index 2014

Logistics Performance Index 2014

The World Bank uses the LPI to develop policies for what projects seem suitable to help countries at different levels of development. While high-income countries are growing increasingly concerned about making logistics as “green” as possible, middle-income countries may be more focused on improving the efficiency of logistics services through, for example, outsourcing of warehousing, transportation or freight-forwarding services. The Bank is in the thick of supply chain improvements in low-income countries, requiring considerable investment in management and organization to go with massive infrastructure improvement.

In low-income countries, the biggest gains typically come from improvements to infrastructure, such as roads, bridges, or rail lines, and basic border management, including port reform. But we should caution that this is even more difficult than it sounds. Border management should not stop with reforming a customs agency, as customs agencies often get better marks from our survey respondents than other agencies at the border. Indeed, effective border management reform often requires improving efficiency in other agencies, including those responsible for sanitary and phyto-sanitary controls, and improving coordination between customs and those other agencies.

In addition, low-income countries hoping to improve their logistics performance will need to tackle the problems from multiple angles. Filling potholes and building bridges will not make a supply chain work better if an important border is still slow in processing goods in transit. Increasingly, governments in developing countries are facing a need to execute complicated, multi-pronged projects with varied interest groups and stakeholders.

~ World Bank press release, March 20, 2014

The World Bank report concludes that global logistics has improved, but slowly, from 2007. The biggest gains have been in improved infrastructure in the developing world. Logistics services, and customs and border management, have not improved at the same pace. Supply chain gaps have narrowed the most in communications and electronic automation of port and clearance procedures. At the opposite extreme, almost any supply chain that incorporates rail transport is going to find problems somewhere. Road transport infrastructure can also be dismal, especially in poorer countries, while air and sea transport are generally better. All that said, there is incredible variation in the quality of both infrastructure and associated logistics services.

Both the Bank and the World Trade Organization have been leaning on customs agencies to improve their efficiency at borders, and the Bank now says that customs offices are usually the most efficient at any given border crossing. They (and the WTO) are turning to how other agencies impact trade flows, seeking better performance, say, from sanitary, phyto-sanitary and product standards agencies. The goal is to set up “single windows for trade” to make border crossings as easy and quick as possible.

So who are this year’s winners? The Top 10 (drum roll, please) are Germany, Netherlands, Belgium, United Kingdom, Singapore, Sweden, Norway, Luxembourg, United States and Japan. I was surprised to see Singapore (#5) and Hong Kong (#15) not doing better. But I was also surprised to see the United States as high as it scored (#9). The size of the United States greatly complicates internal movements – and there is room for improvement. America was marked down for efficiency of international shipments (#26), customs clearance (#16) and timeliness of deliveries (#14). Still, pretty good for a big complex country.

I was pleased to see China at #28 (out of 160). China has put a premium on moving international shipments (#22) and on building infrastructure (#23). Work needs to be done on efficiency of customs clearance (#38) and overall timeliness (#36).

The sad ten at the bottom of the rankings? Somalia ranks worst, followed by the Democratic Republic of the Congo, Afghanistan, the Republic of the Congo, Eritrea, Syria, Djibouti, Sudan, Cuba and Yemen.

Improving The Nuts & Bolts Of Trade

Applause came from Singapore and Taiwan, while a Korean looked askance and the U.S. delegation wasn’t sure what to think. I had spoken to a subcommittee on small business at the 2011 APEC meetings in Honolulu. When asked what sort of special treatment for small business should be put into the Trans Pacific Partnership (TPP) agreements, I apparently shocked the crowd when I replied: “None!” I made the point that the TPP negotiators need to focus on making trade simpler and easier. It makes no sense to do that for one size of business, but not for another. And small business would benefit greatest from simplification, just because they can’t afford the large staffs of specialists employed by multinationals. We call this “trade facilitation” in the argot of trade policy. Progress is being made, but I am under no illusion that my diatribe was instrumental. Just another voice.

How long to clear those boxes?

How long to clear those boxes?

We are still waiting to see what emerges from the TPP talks, but there was a huge development at the World Trade Organization (WTO) ministerial meeting on Bali in December 2013. The most important text to come out of the Doha Round trade talks is the new Agreement on Trade Facilitation. You can read the agreement here, but the short form is that it should lead to faster and more efficient customs clearance at borders around the world. We all know horror stories of cargo held up at border crossings, airports or seaports – or about “penalties” for a typo on a document – or “fees” to move your perishable goods out of the blazing sun. The new agreement won’t fix everything, but it will help once it is in place in most countries. If nothing else, the requirements for clear and available publication of each country’s rules and regulations will be a boon to efficient business.

There are special provisions in the agreement, though for developing countries rather than small business traders. Previous WTO agreements usually gave the least developed countries extra time to carry out the agreements (say five or ten years), but the trade facilitation agreement took the novel route of asking governments to detail exactly when they will implement which provision to the agreement. This serves the dual purpose of giving extra time to poorer countries while still holding their feet to the fire. To help out, both the WTO and the World Bank are setting up training and financial programs to make sure that these countries can meet their obligations.

While the WTO’s trade facilitation agreement focuses on customs clearance issues, the World Bank uses a broader definition: trade facilitation encompasses anything that impacts movement of goods, whether it is customs rules, port facilities, adequate highways or railways, or communications infrastructure. The Bank’s economists calculate that if trade could be facilitated worldwide to achieve just half of what Singapore has done, for example, world income would grow by $2.6 trillion! You could take all the world’s tariffs to zero and not achieve such a benefit. Trade facilitation means big money.

The World Bank spent $11.6 billion on trade-related development assistance projects last year – about half of which went specifically to trade facilitation. Why? Just as trade facilitation helps small business traders disproportionately, it also helps poorer countries to earn their income, which – in turn – makes them more viable markets for the rest of us. Here is an example:

Getting bananas from a farm in Cameroon to a super- market in Brussels is not just a question of good roads and shipping. The fruit can also spoil in transit be- cause of logistics failures: too many highway check- points, inefficient customs procedures at the port, slow inspections – all signs of inefficient bureaucracy that, in the end, hurts some of the poorest farmers in the world.

… global import tariffs could be reduced to zero and a Cameroonian farmer would still suffer from process-related hurdles such as filling out excessive paperwork, paying bribes at checkpoints and having goods wait for days at port. These types of barriers are particularly harmful to trade. In fact, reducing supply chain barriers such as border administration inefficiencies and certain infrastructure failures could increase global income up to six times more than removing all import tariffs.

~ World Bank, 2013

Fix problems like this and we go a long way towards fixing the global economy – and making trade easier for small businesses.