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.

Ah, the fun you can get up to with 700,000 condoms! Somebody in Malaysia broke into a shipping container at Port Klang and liberated more condoms than they could ever use themselves. The International Herald Tribune reported on the theft last week as part of an expose on cargo theft in Asia. In this case, the container was packed and sealed at the manufacturer’s plant in Malaysia, but the theft wasn’t discovered until it was inspected in Yokohama.

Cargo theft has been a problem throughout the history of transport and probably can be traced back to at least 3000 BC when the first Sumerian traders ventured forth. It is still a problem throughout the world, despite high- and low-tech defenses at ports, airports, rail yards, truck stops and everywhere in between. Amazing the ingenuity of man when he or she wants something.  Containerized shipping gave shippers an advantage for a while, until the thieves simply started taking the full container. The common denominator, however, is that the thief generally wants to know what is in the container before launching his attack. Blind marks and coded manifests help with that, but – in the case of the condoms – someone likely kept track of that container from the time it left the condom factory. Perhaps an inside job.

I first experienced cargo theft while working at the U.S. Maritime Administration. I was meeting with a shipping firm in Baltimore that had recently lost a full container of scotch whisky. The scotch had been shipped in bulk in a tank container to Baltimore to the Seagrams distilling company. Definitely an inside job, when the container was received in Baltimore it was placed next to an exterior chain-link fence at the port. During the night, thieves ran a hose through the fence from a tank truck outside and drained the container. Seagrams found an empty tank the next morning.

The Herald Trib reports that more than $22.7 million worth of goods were stolen by cargo thieves in Malaysia between 2007 and 2010. That strikes me as low, since Malaysia is home to an apparently efficient (and violent) criminal consortium that specializes in cargo theft. Cargo theft, however, is probably under-reported because no company will want to publicize internal shipments that are pilfered. Reliable statistics are hard to come by, but Malaysia is probably second to Hong Kong for the value of cargo theft in Asia. A distinguishing feature, however, is that the Malaysian gangs are more likely to use violence than are the Hong Kongers.

But it is not just Asia. Cargo theft is a global problem that tends to rise during recessions and it can happen anywhere. The FBI estimates that cargo theft costs us about $30 billion annually.

Those 700,000 condoms weren’t all used. Malaysian police arrested six suspects and have recovered 90% of the missing condoms. Of course, that means there are 70,000 condoms at large in fun-loving Malaysia.

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I was once in the condom trade. I helped a U.S. exporter sell several hundred thousand condoms to the Moroccan army. The Moroccans said they were perfect for covering rifle barrels while on maneuvers in the desert. Whadevah.

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.

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.