Business Beyond the Reef

I have some odd reading habits and just took a gander at the new U.N. report on global sustainability. Released on Monday, the report is called “Resilient People, Resilient Planet: A Future Worth Choosing”. It was prepared by the Secretary-General’s High-Level Panel On Global Sustainability, composed of an impressive list of luminaries, chaired by the presidents of Finland and South Africa. Their mandate was “to formulate a new blueprint for sustainable development and low-carbon prosperity“.

The report is impressive and has some exciting (and some predictable) recommendations. Implications for business across the globe are profound, assuming the U.N. or individual countries can bring themselves to put the recommendations into play. There is one little problem evident to my critical eye. While the authors acknowledge how interconnected the world is (in fact, that is one of the prime assumptions of the report), there is almost no mention of international trade.

This is a huge oversight in my view. Trade can be one of the deciding factors in promoting positive change. I saw firsthand the impact of decisions in Taipei and Beijing to open up business across the straits. West Germany’s prosperity, which had more than a bit to do with trade, was a direct contributor to bringing down the Berlin Wall and changing the face of central Europe forever. I won’t deny that trade can be both positive and negative for societies, witness the Opium Wars. You can come up with other examples. The fact is, I don’t think we can ignore trade when concocting plans for global sustainability. It’s how materials and products move to meet demand.

Trade is mentioned in the U.N. report, but only in passing. Recommendation 10(c), for instance, points out that the economic status of women can be improved, in part, by “improving access to markets through trade and technical assistance“. Recommendations 11 and 12 almost deal directly with trade, saying that product labels and standards should be clear and scientifically-based and that standards and labeling requirements should not be used as barriers to trade. I was delighted to see Recommendation 27(f):

Phase out fossil fuel subsidies and reduce other perverse or trade distorting subsidies by 2020. The reduction of subsidies must be accomplished in a manner that protects the poor and eases the transition for affected groups when the products or services concerned are essential.

But, broadly speaking, the report seems to address a world without trade. A major portion of the report is about working towards a sustainable economy, but it seems to be just assumed that the products, raw materials and services will simply be where they are needed. Good report, and it should be studied by any firm with international ambitions, but some more work is needed to make it pragmatic.

Journalists in Hawaii live for the moments when Governor Neil Abercrombie goes “off script”. An intelligent man, the former college professor has a propensity for off the cuff remarks about things he doesn’t know much about. The nation’s least popular state governor often provokes hilarity and amusement.

Governor Abercrombie went off the reservation Monday when he delivered his annual “State of the State” address to the Hawaii Legislature. While discussing energy issues, he suddenly departed from his text to blame Singaporean speculators for Hawaii’s problems.

We are totally in the hands of oil speculators in Singapore.
- Hawaii Governor Neil Abercrombie

Rather than the usual giggles, the crowd responded with a collective “hunh?”.

There is a lot that’s just wrong here. First is the assumption that anybody in Singapore controls energy prices in Hawaii. Yes, Singapore is a sort of headquarters for oil companies in S.E. Asia, but I’ve worked with these folks and they don’t sit around discussing how to hurt Hawaii. Second, as Honolulu Civil Beat points out, Singapore doesn’t have a futures market in oil so any speculation isn’t happening there. Third is Abercrombie’s implicit assumption that speculation must, by its nature, be bad – an assumption made by politicians and beleaguered CEOs worldwide. Have you noticed, though, that politicians blame speculators when prices rise, but CEOs blame speculators when prices go down?

Fact is, “speculator” is merely a derogatory term for somebody who buys and sells stocks, bonds or commodities and doesn’t intend to hold them for a long time. They provide a lot of the liquidity that allows markets to function efficiently. Some bet that prices will go up, others make the opposite wager, and they often offset each other. If you sell stock in an oil company, there is a good chance that you sold it to one of those evil speculators. And what does that make you?

The price of oil in Hawaii was once driven by supply from the mainland United States, but not so much anymore. We always compare our gasoline prices to the mainland and we usually run about a dollar a gallon more than most Americans pay. Many in Hawaii haven’t noticed yet, but our oil prices now are more dependent on demand in Asia. Economic growth in China has driven the price up, but our local price surged when Japan shut down most of its nuclear reactors following the Fukushima disasters last year. That’s where the blame lies for our spiking electricity bills, but somebody on his staff needs to tell the governor.

I don’t usually post about anti-dumping cases, especially ones with high-profile coverage from mainstream press – like the case about solar panels from China. My assumption about an anti-dumping case, until proven otherwise, is that it is raised by companies desperate to find somebody else to blame for their own failures. That said, sometimes the dumping is real, but we don’t know that yet in the solar panel case against Chinese companies.

What does get me excited are authors who pose as experts, but clearly don’t know what they are talking about. That happened Monday in an article in the South China Morning Post about the solar panel case. Anything published by the SCMP can be important because it is often the most reliable source of China news and sometimes helps shape opinion in China itself. The on-line edition offers no way to comment on an article, so I can’t resist making a few points here.

The article is “China’s solar panel manufacturers are not out to undercut US competition” by John Gong, an associate professor at the University of International Business & Economics in Beijing, apparently an important source of training for Chinese officials. Not sure what Professor Gong’s field is, but it can’t be anti-dumping law. He argues that (1) Chinese companies offer low prices because of intense competition within China, and (2) the Chinese companies don’t mean to hurt the U.S. companies. The first is irrelevant to an anti-dumping case – and the second is absurd. If the Chinese don’t mean to compete, why are they competing? But Professor Gong appears to think that the intentions of the accused parties should be a prime focus of an anti-dumping case, a basic misunderstanding of what it is all about.

An anti-dumping investigation does not look at intentions, or whether pricing practices are “fair”. It looks solely at whether or not the goods are being sold in a foreign market at a price below the price that prevails in the manufacturer’s domestic market. [Determining those prices is an extraordinarily complicated business - hence the need for an investigation.] If the price in the importing country is proven to be lower than the domestic price in the exporting country, then it is dumping, and anti-dumping duties are then computed to offset the price difference (the “margin of dumping”). Nothing at all is said about why the two prices might differ. Why the price of solar panels might be low in China doesn’t matter. And, if indeed the price in China is low, that makes it less likely that Washington will find that dumping is taking place. So Professor Gong should hope that Chinese prices are very low.

Speaking of “fairness”, Professor Gong compounds his error:

The price decline is also partly driven by the tremendous excess capacity in China, which has mostly resulted from local governments’ overzealous policies to attract investment. The provision of cheap or even free land, inexpensive infrastructure, subsidised public utilities and favourable tax regimes were common during the boom in the solar industry a few years ago.

None of this is considered in an anti-dumping investigation – but they would be examined in a countervailing duty case. You don’t want to go there, Professor Gong.