Business Beyond the Reef

We are paying extra attention to APEC this year in Honolulu, only natural since Hawaii plays host this November to the APEC leaders’ meeting with its thousands of attendant hangers-on from governments and private sector around the Pacific. This means that local companies are starting to think about how to do business in the APEC markets. But they almost always go about it the wrong way.

What’s the right way for small companies to do it, you ask? Look for the simplest and easiest markets in which to do business. Generally, that means starting out in your home market, the one you are most likely to fully understand and be comfortable with. Then move on to others that are easy to enter, gradually building up to the hard cases. Think about it – in anything else you might do, do you start out with the hardest opponent, going into the most inhospitable environment? No, you start training easily, gradually moving to tougher opposition until you can handle the very toughest.

But that is not how Hawaii’s companies tend to go about it. True, they begin with the Hawaii market and then move on to the U.S. mainland. But then they want to tackle China because China is in the headlines and thus is sexy. They used to want to go to Japan for the same reason. And most get their heads handed to them. There is a better way.

Let’s look at the APEC markets to see where it is easiest to move your product. Notice that I did not say the easiest places to sell your product, though they often go hand in hand – but the easiest markets to physically get your products in to.

The World Bank has already done the heavy lifting for you with its series of “Doing Business” publications – one of the newest of which is Doing Business in APEC 2011. The report looks at all sorts of factors in the ease of doing business in particular markets, but what catches my eye is the small section on the ease of trading across borders. It assesses how easy it is to move product into or out of a market, focusing on the red tape – numbers of documents to file, the number of days it takes to get it all done, and the cost per container of moving your goods in and out. The practical stuff that can make business profitable – or a pain in the okole (that’s a Hawaiian anatomy term). The World Bank ranks countries on the number of required documents (bank or customs clearance, port or warehousing, transport documents), the time it takes to move goods (documentation, customs clearance, inland transport and port/terminal handling), and the cost of all this per 20′ container. They don’t include ocean or air transport, or bribes. Both can be significant – and the latter is hard to measure.

data source: World Bank, 2011

What does this tell us? It can help you begin to narrow things down and decide to hold off on certain markets while you go after easier prey first. I have marked the easiest in each category with green, and the hardest with red, but that leaves the rest as a judgement call. It is pretty clear that you might want to try other APEC markets before you get your heart set on Russia. It is equally clear that Singapore and Hong Kong look pretty easy to enter. China? Documents and cost aren’t bad, but that’s an awful long time sitting on the dock waiting for clearance. And the United States? We’re fast, don’t require too many documents, but, lordy, are we expensive.

I have rarely seen so many apples and oranges in one article. Hawaii state representative Roy Takumi had an op-ed piece in the Honolulu Star-Advertiser on April 8 that stands in stark contrast to my own March 6 editorial, taking opposite views about the impact on Hawaii of the U.S.-South Korea free trade agreement. I won’t repeat my earlier arguments, but I must respond to the myths and fallacies in Rep. Takumi’s article.

State Rep. Roy Takumi (D-Pearl City)

He describes the North America Free Trade Agreement (NAFTA) as job-killing and extrapolates that the new agreement with Korea will kill jobs, too. All trade agreements kill jobs, but – by reducing trade barriers – they tend to create even more jobs, providing net benefit to the economy. Plus, NAFTA became effective in 1993 and by the end of 2007, jobs in America had grown 24%. We all know what happened after that, but the recession was due to financial shenanigans and collapse of the housing market – not NAFTA. The “great sucking sound” never materialized.

I don’t know where the representative got the idea that the U.S. International Trade Commission (ITC) forecasts a rise in our trade deficit due to the U.S.-Korea FTA. The Office of the U.S. Trade Representative quotes the ITC as saying that the agreement will improve our trade balance by $3.3 to $4 billion. Mr. Takumi quotes the pro-union Economic Policy Institute as saying the FTA will cost 159,000 American jobs. That number was issued before the agreement was altered to care for U.S. auto companies and related unions, and does not take into account the jobs created by the agreement. The ITC, who Mr. Takumi quotes selectively, says that the U.S.-Korea agreement will create a net increase of 300,000 American jobs.

Mr. Takumi then implies that trade agreements are responsible for the loss of five million manufacturing jobs, the trade deficit and wage stagnation for the last 19 years. He ignores America’s conversion to a services economy and apparently thinks that our appetite for imported goods is due to cutting customs duties. It has more to do with an American penchant to buy products at a reasonable price. Mr. Takumi also blames trade agreements for problems with importing sub-standard products. Those reflect problems with enforcement and inspection. And, let’s not forget, the greatest product safety problems have come from China – with which we have no free trade agreement.

Mr. Takumi finally gets to Hawaii by telling our farmers they are not competitive and that it won’t make any difference that Korea’s customs duties go to zero under the FTA. On the contrary, I was contacted after my March 6 piece by a Big Island producer of processed food products. He told me that his business is booming in Singapore, a country with which the United States has an FTA, making sales of about $500,000 over the past two years. His company sold $300,000 in Hawaii food products last year in South Korea. And that was in the face of 35-40% tariffs and a competitor whose products enter Korea duty-free under the Australia-South Korea FTA. Imagine what the Hawaii company might do if our FTA is implemented and he doesn’t have to face those outrageous duties anymore!

What this really comes down to for Hawaii is this: South Korea is Hawaii’s 3^rd largest market. Is that important for our economy? I think it is and the U.S.-Korea free trade agreement will strengthen Hawaii, just as the similar U.S.-Singapore agreement did a few years ago. I urge our Congressional delegation to vote for the agreement.

FYI – This is the same Rep. Takumi who introduced a bill in 2007 that prohibited the State of Hawaii from following government procurement rules in international trade agreements without getting express permission from the State Legislature.

How much could they buy?

My editorial about free trade agreements in the Honolulu Star-Advertiser started a conversation with a Hawaii producer of processed food products about the impact of FTAs on his business. He notes that his business is booming in Singapore, a country with which the United States has an FTA, making sales of about $500,000 over the past two years. His company sold $300,000 last year in South Korea. And that was in the face of 35-40% tariffs and an Australian competitor whose products enter Korea duty-free under the Australia-South Korea FTA. Imagine what the Hawaii company might do if our FTA is implemented and he doesn’t have to face those outrageous duties anymore!

The same guy has worked in Bogota and also sees tremendous potential for Colombia if that FTA ever goes into place.

************************

Where's Hawaii?

I commented yesterday about Hawaii’s absence from ITB, the world’s largest and most important travel industry trade show. Got a report from a friend who is working this giant show in Berlin this week.

I just walked the America Hall. Africa has three large exhibition halls, the USA and Canada together have one hall. Canada occupies 2/3 of the hall. The only exhibitor from Hawaii is the Kona Village Resort. They are busy …

I asked the Visit USA people about Hawaii. They told me to go to the New York stand. Someone was at the NY stand and had visited Hawaii before.

Fiji or Tonga, Vanuatu, Tahiti, Samoa together have more space than the U.S. and are doing a lot of business. There is a line of people trying to talk to the 74 companies that occupy the huge Seychelles stand.

All the competition is at ITB and so are the buyers (e.g., tour operators). My contact says that China, Hong Kong, Macao and Taiwan are all very busy.

Hainan is spreading the Aloha.

*************************

I’ll be a bit busy next week, so posting might get sparse. Bear with me.