Business Beyond the Reef

Tom Friedman’s latest op-ed piece in the New York Times, “Made in the World”, raises the possibility, but we have a long way to go before mercantilism disappears from national trade policies. A fascinating piece (including Fidel Castro’s accurate portrayal of our Republican primary debates), Friedman correctly points out the chasm in world view seen by politicians, on one hand, and multinational businesspeople on the other.

Victor Fung, the chairman of Li & Fung, one of Hong Kong’s oldest textile manufacturers, remarked to me last year that for many years his company operated on the rule: “You sourced in Asia, and you sold in America and Europe.” Now, said Fung, the rule is: “ ‘Source everywhere, manufacture everywhere, sell everywhere.’ The whole notion of an ‘export’ is really disappearing.”

Fung encapsulates the modern business view: you do business when, where and how makes practical sense. Very few nations or their politicians have glommed onto this because, says Friedman, their viewpoint is constricted to doing their best for only one specific geographic part of the world. In management terms, this inevitably leads to “sub-optimizing” – gains (profits, returns, however defined) for one unit or country, probably at the expense of others and the whole world.

A few, very few, politicians and countries see the folly of their approach. They cling to mercantilism because it is a simple concept, easily grasped by pols and voters in search of easy decisions. Though the elements have been around for millennia, mercantilism was first articulated in the late 1600s in disputes over the operations of the East India Company.

Mercantilist theory was simplicity itself: a nation’s wealth was measured by the amount of gold and silver it possessed.
- William J. Bernstein, A Splendid Exchange

Decisions on trade became easy. Boost exports, restrict imports, restrict the flow of capital. Trade policy for fun and profit. Now we can get back to important stuff, said the politicians. That is why countries fund export promotion agencies, but rarely encourage import promotion. Political leaders view trade as a zero-sum game in which increasing imports means that somebody else wins at our expense. They don’t realize that they could be telling their constituents that imports lower prices, thus helping everyday people balance their budgets and live better.

The multinational viewpoint is gaining strength. I recall conversations with the head of Austria’s commercial service (I was commercial minister at the American Embassy in Vienna, with a mercantilist mandate from Washington) in which we informally agreed to help each other promote trade in all directions. It had to be informal because our political masters would not have approved. But our mutual feeling was that trade in one direction inevitably leads to trade in the other direction, or with third parties – and that all this trade leads to investment for all concerned. This grows the pie all countries are seeking to divide. It’s not a zero-sum game. The mercantilists had it wrong all along.

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.

The State of the Union was kind of an anti-climax for international traders. President Obama didn’t enlighten us further on his trade reorganization plans, made several populist references to the adverse impact of trade with China, and proposed a new organization to ensure that foreign governments play nicely in the trade sandbox. And his speechwriter is smoking some really good stuff if he truly believes that the tire tariffs directed at China saved a thousand American jobs. All the evidence is that China may have lost some jobs and that producers of other low-cost foreign tires probably benefited. American are now paying higher prices for tires than they were before the tariffs.

Tonight, I’m announcing the creation of a Trade Enforcement Unit that will be charged with investigating unfair trading practices in countries like China. (Applause.) There will be more inspections to prevent counterfeit or unsafe goods from crossing our borders. And this Congress should make sure that no foreign company has an advantage over American manufacturing when it comes to accessing financing or new markets like Russia. Our workers are the most productive on Earth, and if the playing field is level, I promise you -– America will always win. (Applause.)

Either this is a clumsy attempt to get the anti-China forces off the President’s back, or the White House is blissfully unaware that the U.S. Government is already loaded with agencies whose task is to make sure that other countries behave as we think they should. (There are no agencies, however, to make sure that we behave in ways that we think others should.) I suspect the intent is to assuage the China bashers, but raising it implies that the federal government hasn’t being doing its job. In fact, the job of making sure that others comply with agreements has been a major thrust of administrations of either party for decades.

The Office of the U.S. Trade Representative oversees the Section 301 process, which refers to Section 301 of the Trade Act of 1974 – so it has been around for a while. In fact, it is our basic procedure for bringing and resolving international trade disputes. The whole of USTR is effectively a Trade Enforcement Unit.

So is the International Trade Commission, which is directed to “administer U.S. trade remedy laws … in a fair and objective manner“. It has been doing that job since 1916.

Less known is the Commerce Department’s Market Access & Compliance unit, specifically established to “defend, expand and promote market access for U.S. goods, services, and investment abroad“.

MAC executes this mission in two principal ways: 1) by developing specific and tailored country engagement strategies; and 2) by pursuing a range of cross-cutting policy initiatives to address international market access challenges, such as corruption, failure to enforce intellectual property rights, and discriminatory standards and regulations that unfairly restrict American exports.

Seems to me that we already have plenty of Trade Enforcement Units. Barry, did Punahou teach you what a “shibai” is?