Business Beyond the Reef

Say “FTA” to the average American and you get a blank stare. The politically aware may realize that you mean “Free Trade Agreement” and will assume you refer to NAFTA or the U.S. FTAs with South Korea, Panama and Colombia. They are likely not aware of the fifteen other FTAs the United States has negotiated over the years. If it occurs to them that other countries might have FTAs, they probably think of the agreements that the European Union has negotiated, blissfully ignorant of the 214 agreements currently in force that have been reported to the World Trade Organization.

Those 214 agreements are not all with major developed countries. In fact, more and more of them govern trade among developing countries (so-called south-south FTAs). The WTO has a great database of these agreements that can be fun to play with. Who knew, for instance, that Peru has an FTA with Iceland, Liechtenstein, Switzerland and Norway? Or that there is a Pan-Arab Free Trade Area (PAFTA) covering much of North Africa and the Middle East?

Two south-south FTAs have been in the news. Thailand and India negotiated a deal back in 2004 that cut customs duties on 82 products to zero. They have been working to expand this FTA and expect to announce tariff cuts on another 1,000 tariff items in the near future. Thailand’s sales to India grew 36% in 2011 (over 2010) to US$5.18 billion, while purchases from India grew 30% to US$3 billion. You can’t say that all of that is due to duty-free access on a mere 82 line items, but it indicates that there is good growth potential for the new 1,000 items. Thailand expects that two-way trade will double by 2014 to about US$16 billion.

The Malaysia-Chile FTA is brand new and involves two of the parties in the negotiations for a Trans Pacific Partnership (TPP). Chile’s 2010 exports to Malaysia were only about US$200 million so it will be a while before the impact of this agreement is seen. Still, Chile anticipates that the FTA will lead to more projects in Chile by Malaysian South-South Corp Bhd (MASSCORP), a consortium of 86 Malaysian corporate leaders. And Malaysia expects the agreement to open the door to building Latin American sales for Malaysia’s Proton cars. Expect to see Malaysian solar panels arriving in Chile, and Chilean wines sipped in Malaysia.

By the way, the WTO’s list of trade agreements is about to grow some more. Not only will the three U.S. FTAs with South Korea, Panama and Colombia be added this spring, but a brand new FTA between Japan and Peru goes into effect in March, freeing up nearly all of their trade in both directions over the next decade.

Mexico has such a bad press. The U.S. media only covers the drug wars and illegal immigration. We eat Tex-Mex and think it is Mexican. The real secret never leaks out: nearly 50,000 small American companies export to Mexico!

Oh, down in Mexico
I never really been so I don’t really know
Oh, Mexico
I guess I’ll have to go

Oh, Mexico
I never really been but I’d sure like to go
Oh, Mexico
I guess I’ll have to go now

- James Taylor, “Oh, Mexico“

Sure, Mexico has problems. Surveys rank the country as 98th in the world for transparency and 66th for competitiveness. 52% of the population is poor or extremely poor. Those drug war headlines aren’t made up.

Jeff Hamilton, a U.S. Commercial Service officer in Mexico City, discussed all that with a business group in Honolulu just before Christmas. Jeff pointed out on a map how to avoid the drug wars (don’t go to certain northern cities, for the most part) – and argued that more than 80% of the casualties are members of the drug cartels, and 6% are police. Takeaway? They are not aiming at you. Use due caution and you’ll do all right.

Hamilton argued that Mexico’s extreme income distribution means that companies might want to think about products that will sell to the upper and upper-middle parts of the market. Yes, Mexico ranks behind Brazil and Panama for competitiveness, but it is also ahead of places like Colombia and Peru.

There are still those 50,000-some American companies selling in Mexico, so the story can’t be all bad. Perhaps you are missing a bet if you aren’t there. You can chalk it up to geography or NAFTA, but Mexicans have a liking for U.S. products, sourcing 49% of the their imports from the United States.

Hamilton turned to things that Hawaii companies might sell in Mexico. Hawaii is famous for its tropical agriculture, but that’s not going to cut it in Mexico, which grows its own coffee, papaya and other tropical crops. Some of our specialty prepared food products might go down better, but he wasn’t too excited.

He sees good prospects for Hawaii’s expertise in green tropical architecture, experience with green buildings, and for our wind power and geothermal companies.

Hawaii might do even better selling services, such as architectural design, education, and the big one – tourism. Mexicans are eager to get their kids into U.S. colleges and universities and never think about Hawaii, so this could be an opportunity for Hawaii schools to make some headway.

Tourism needs to be targeted to the people who can afford it and Hawaii is a tough sell as long as Mexicans think of it only as a place with scenery and beaches. They’ve got scenery and beaches. Hamilton, however, said that 14 million Mexicans visited the United States in 2010. Their favored destinations, unsurprisingly, are Texas, Florida, California, New York and – drumroll – Las Vegas. Their primary interests, says Hamilton, are shopping, good restaurants, museums and Disneyworld. Honolulu has restaurants, some of the shopping, world-class museums that few tourists venture to, and now we have the Aulani Walt Disney Resort and Spa. Might be time for a tourism campaign in Mexico, you think? Jeff recommended two ways to start: The annual Visit USA show in Mexico every February, and especially FITA 2012 (the Tourism Fair of the Americas) in Mexico City, September 20-23. With FITA, you can spread your message throughout Latin America.

As a general matter, Hamilton advised companies new to Mexico to focus first on at most three cities: Mexico City, Guadalajara and Monterrey. Decision-making tends to take longer than north of the border, so plan to be patient. Also expect drawn out negotiations on payment terms. While it might be a red flag in dealing with other markets, firms often ship to Mexico by sending their goods to an intermediate shipper in Texas, who then gets them across the border to their destinations.

I did some market research for a Hawaii company selling aloha-oriented products and was surprised to see a large number of hula halau (teams and dance schools) in Mexico, indicating a possible affinity for Hawaii. Hamilton didn’t think so. He said Hawaii is not well-known in Mexico, that most Mexicans only think of it as a tourism destination, maybe not even part of the United States. Incidentally, they don’t call it hula in Mexico, it is simply “Hawaiian dance”. We’ve got our work cut out for us.

Third Way, the moderate think tank, has issued a marvelous graphic that contrasts the relative impacts of U.S. oil imports and the net benefits of free trade agreements. Oil imports of $191 billion create approximately 1/3 of the entire U.S. trade deficit. Excluding oil, we have a $23 billion surplus with the 17 countries with which we have free trade agreements. If you were a politician concerned about the trade deficit, jobs or the economy, which of these numbers would you be worrying about?

Now that President Obama has finally sent the FTAs with Korea, Panama and Colombia to the Congress, I just thought you and your senators and representatives might want to ponder this. Which way would you vote?

Third Way also offers an 87-page guide to free trade agreements and what’s in them.