Business Beyond the Reef

• A WTO dispute settlement panel issued its findings this week on a long-standing row between the European Community and the United States on aircraft subsidies.  Washington (meaning Boeing) has long held that European “launch support” for new Airbus models is an illegal export subsidy, and a WTO panel of experts has now largely agreed.  This causes consternation in European capitols and a renewed emphasis on negotiation to forestall a U.S. request for retaliation.  Since there is a similar case, brought by the EU, that says that U.S. military purchases and NASA research contracts constitute the moral equivalent of “launch support” for Boeing, and panel findings are due by the fall, there seems room to negotiate.  But I’m not holding my breath.  These issues have been around since the birth of Airbus in 1970.

"Euro Leaf"

The European Union is requiring European firms to use a new organic food products label, beginning July 1, 2010.  It is optional for imported products.  From what I saw of the “Green Dot” when it started, it would be a good idea for anybody selling organics in Europe to see if their products qualify for the new label.

• It’s nice to finally see a crack in China’s stonewall on exchange rate manipulation.  The central bank and the Ministry of Commerce are going head-to-head – and I’m pulling for the bankers.  The central bank is saying that tying the renminbi to the U.S. dollar is a “special” response to the recession, implying that the policy might be changed when global economies are healthier.  The Commerce Ministry, of course, represents the Chinese exporters, many government-owned, that benefit from tying the renminbi.  They are hardly going to tell the central bank to stop giving them so much money.  So, the fight is on in Beijing.  See my post from Monday about the revaluation battle.
• If you need an excuse to fly to Paradise, come on out to Honolulu for the May 14 U.S.-Hong Kong Business Forum.  Full disclosure: I’m chairing a panel.  More info at www.ushkforum.org.
• I ran across a succinct statement of the dilemma Europe faces on bailing out Greece: “Greeks work fewer hours than Germans, have more days off and retire at an earlier age. Germany is going to step in and rescue this?” That’s Vincent Farrell, Jr. on RealMoney.com (subscription required).
• It’s a spirited dispute.  The United States yesterday asked the WTO to form a dispute settlement panel to hear its complaint against the Philippines taxes on distilled spirits.  While not overtly discriminating against imported spirits, the Philippines achieves this by applying far higher taxes to spirits distilled from grains or other sources not used by Filipino distillers.  Spirits distilled from local products, such as sugar or palm, are taxed at 13.59 pesos per proof liter.  But imported spirits made from other products may face taxes as high as 540 pesos per proof liter.  Guess there are not many scotch tastings in Manila.
  

I must have caught a wave this week.  Not surfing or paddling, but anticipating trade policy proposals.  I blogged a little over a week ago about how well the WTO’s dispute settlement mechanism works, and then Monday about the controversy over revaluing the yuan.  On Tuesday, the South China Morning Post published an op-ed piece by Kevin Rafferty that proposed combining the two: taking exchange rate disputes away from the IMF’s rather ineffective system and putting the WTO in charge.  Rafferty acknowledges that he got the idea from Simon Johnson, former chief economist of the IMF, who has pushed it on numerous occasions.  Here’s one for the New York Times last fall.  Johnson is pretty cautious, but makes a good case, while recognizing that such a shift would require long drawn-out negotiations.  I worry, too, that it might overload the WTO’s dispute settlement system.

I am not alone in that worry, as I discovered yesterday morning when I read an opinion piece in the Asia edition of the Wall Street Journal.  Titled “Don’t Push The WTO Beyond Its Limits,” it is an article by a fellow in a position to know how much political weight the WTO’s dispute structure can withstand: James Bacchus, a former U.S. congressman and trade negotiator, and – most importantly – a former member of the WTO’s Appelate Body.  And that is exactly Bacchus’ point: the WTO process may crumble under an all-out fight between the United States and China over exchange rates.  Bacchus outlines two scenarios, both dire.

Legislation has already been introduced in Congress that, if passed, would characterize China’s undervaluation of the yuan as an export subsidy and would require the Obama Administration to apply “countervailing duties” to all imports from China.  Aside from the disaster this would create in all those American companies that use Chinese inputs and parts, this would massively increase U.S. unemployment as Walmart and other importers find their cost of doing business quickly rising.  Interesting to see if a Democratic, pro-labor Congress will do this during Congressional election campaigns.  (There I go again, just not able to resist the lure of rationality.)  But, should the Congress be nuts enough to do this and Obama crazy enough to go along, the resulting “countervailing” duties against Chinese goods will be speedily taken to the WTO by the Chinese.  And on excellent grounds.  I helped negotiate the WTO’s rules on export subsidies and countervailing duties – and currency valuation is not covered by those rules.  Regardless of what a member of Congress from East Podunk says, an undervalued currency is not prima facie evidence of an export subsidy.  Therefore, duties to counter the undervaluation are not warranted.  Should the WTO take the case, it will speedily decide for Beijing, leaving Washington to choose between backing down or ignoring the decision.  If the latter, China will eventually be allowed to retaliate – and on a huge scale, further destroying American jobs.  Is this really what the Congress wants?

The Big Mac Index - as good as any.

The second scenario that Bacchus lays out is more subtle, based in the original General Agreement on Tariffs and Trade (GATT), which has been subsumed by the WTO.  Article XV:4 (which addresses the impact of exchange rates on trade) says that signatory governments “shall not, by exchange action, frustrate the intent of the provisions of” the GATT.  The United States could, theoretically, bring a case in Geneva that relies on this provision, but that will open a political and diplomatic can of worms that could rebound for decades.  Neither the GATT nor the WTO have ever had a dispute using this clause, so there is no case law to be consulted.  A case would call into question how to measure over or under-valuation of a currency versus other currencies, should the WTO measure it or should the IMF, what sorts of currency controls need to be governed by either organization and how, and at what point, a currency is so out of line that further cases can be launched.  This is a morass we really don’t want to get into, especially with the economic power of the United States and China pushing in different directions.

To get a feel for how far this could go, take a look at The Economist‘s Big Mac Index (which, frankly, is as good an index as anything published by the IMF or by government agencies).  The March 16 edition of the BMI shows the Chinese renminbi (or yuan) nearly 49% undervalued when compared to the U.S. dollar.  It also shows the Malaysian dollar as nearly 41% undervalued.  Should the United States take action against China, but not Malaysia?  The same index shows the U.S. dollar nearly 48% undervalued against the Norwegian kroner, so should Washington expect a suit filed by Oslo?  See where this is going?  Chaos.

Did you ever wonder how countries go about collecting trade statistics?  I didn’t think so.  But it is actually kind of interesting.

They add it all up in Suitland, Maryland.

I attended a seminar last week in Honolulu that was staged by the U.S. Bureau of the Census, which doesn’t just count people every ten years.  Census is America’s data collector and national bean counter.  Actually, I don’t know that they count purely domestic beans, but they would if they enter or leave the country.  And it is important to count those beans that enter international trade.  At the macro level, exports add to our national production when we calculate GDP, and imports subtract.  Economists can come up with any number of reasons why this is or is not desirable, but Census does the numbers so we can all argue from the same data.  On micro levels, trade data is vital for spotting trade problems, and as input for companies’ marketing plans.

The seminar was about the Mandatory Automated Export System, which is the vehicle through which Census collects U.S. export statistics.  But AES has objectives other than mere number collection.  It is the primary means by which the Commerce, State, Defense and Homeland Security Departments figure out what is going on with “controlled” U.S. exports.  Under AES, exporters or their agents (such as freight forwarders or services such as FedEx) must file export documents prior to the goods leaving the United States.  Among many other things, the documents must indicate if the product is subject to export licensing requirements and if the license has been received from either State or Commerce.  The wrong information can trigger an inspection by U.S. Customs to make sure you aren’t shipping the wrong stuff to the bad guys around the world.  That’s a no-no.

Most exports have nothing to do with such controls, but Census still wants to know what you are shipping and where it is going.  You can’t file this data the old fashioned way.  It’s pretty much got to be electronic, but Census has a nifty online filing system that seem fairly straightforward.  If you are a heavy or frequent exporter, somebody in your firm already knows all this, but if you are a small, sporadic exporter go the Census AES site and study up.  One thing you should know is that you generally don’t have to file documentation on AES if your shipment is worth $2500 or less.  But there are exceptions, so take a look at the Census site anyway.  Besides, I’m hoping your export business will grow and you will have to become an expert on using the AES.