Author Article List

U.S. Investment in Developing Countries Spurs a Race to the Top, Not the Bottom

Published on Friday, November 01, 2002

Anti-globalists protesting American commercial investment in developing nations have a notably heavy investment of their own in misinformation.

They would have you believe, for instance, that U.S. foreign direct investment (FDI) in developing countries is harmful to host country workers and the local environment. But a careful look at the record reveals that nothing could be further from the truth.

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China Is Emerging as an Economic Powerhouse: Is It Part of Your 2003 Plan?

Published on Tuesday, October 01, 2002

China is rapidly changing. It is emerging as a global economic powerhouse, and with the new generation of leadership who recently took office, China’s geopolitical position in the world is likely to become more dynamic. Is China part of your 2003 strategic plan?

Chinese Leadership in Transition

In November 2002, during the 16th Chinese Party Congress, Chinese leaders announced the country’s most historic transition of power. Hu Jintao, 59, has officially succeeded Jiang Zemin to become the new Chinese Communist party chief. Jiang Zemin, however, will retain the position of Chairman of the Military Commission, a position now considered symbolic, since the military is no longer a major power broker.

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Congress Is Re-evaluating the Extraterritorial Income Exclusion Act

Published on Tuesday, October 01, 2002

It’s no secret that both the United States and European Union (EU) manipulate their tax structures to achieve specific results. In most cases, these practices don’t adversely affect bilateral trade relations. However, the growing crisis over the United States’ Extraterritorial Income Exclusion (ETI) Act of 2000 could change this, and cause big problems for both transatlantic trade and thousands of U.S. exporters.

Actions of the Past Are Haunting Us Today

The problems today are the result of a multitude of actions taken in the past. For example, the EU has exempted and continues to exempt its exporters from paying a substantial value added tax. Plus, for decades EU industries, such as aerospace and telecommunications, have been subsidized to boost their international strength or to shield them from global competition.

To counter these actions, in 1984, the United States created the Foreign Sales Corporation (FSC) tax code so exporters could compete fairly in global markets. This proved advantageous, as evidenced by a National Foreign Trade Council report that said 3.5 million U.S. export-related jobs benefited from FSC tax incentives in 1999. Unfortunately, the EU challenged the FSC rule through the World Trade Organization, and won in 2000. In an attempt to satisfy the global trade body, the U.S. repealed the law and in its place created the Extraterritorial Income Exclusion (ETI) Act of 2000. However, the new law still didn’t satisfy the EU, who again challenged the law, and won.

Consequently, the EU is authorized to impose sanctions of more than $4 billion annually on U.S. exports, which include steel, beef, sugar, wood and paper products, cotton, apparel, cosmetics, and electrical machinery.

Eliminating ETI Will Hurt Exporters

Europe’s tax loopholes and subsidies distort trade by falsely increasing the attractiveness of its goods and services on world markets. However, its indirect tax system is technically WTO-compliant, since WTO language doesn’t cover indirect taxes, only direct taxes like those used in the U.S. As a result, Congress needs to act. If it terminates ETI without establishing a suitable replacement, approximately 6,000 U.S. exporters who rely on ETI to compete will be hurt. And the majority of these firms, which are small, are already struggling just to survive the economic downturn. But small companies aren’t the only ones that stand to lose.

Aerospace giant Boeing estimates that repealing ETI will result in the loss of nearly 10,000 of its high-tech jobs, as well as 23,000 more jobs with its suppliers. Boeing’s heavily subsidized European rival, Airbus, has received more than $30 billion in EU financial support. This gives Airbus an unfair advantage, and affects the entire U.S. aerospace industry.

Pay Attention to the Congressional Response

The U.S. response to the ETI challenge, which is currently being debated in Congress, will affect many companies, industries and jobs. Most policymakers understand this and recognize that U.S. exporters need a level playing field. Consequently, it’s important that they craft new legislation that doesn’t hurt U.S. exporters. But Congress must act soon. If not, the EU may implement $4 billion worth of trade sanctions against U.S. exports.

Exporters who currently rely on ETI to boost exports need to reassess how their sales abroad could be impacted if ETI is eliminated, or if a substitute doesn’t offset the artificial advantages many EU exporters have.

Post September 11, 2001: Global Commerce Is Learning To Adapt

Published on Sunday, September 01, 2002

The horrific September 11, 2001 terrorist attack did disrupt global business temporarily. And now, a year later, it appears that the repercussions will force companies to permanently alter their trading practices and pricing strategies. Still unanswered is whether this new phase will have a negative influence on world trade overall.

One obvious and immediate reaction to the attack was tightened security measures by the United States and other countries for travelers and imported goods.

Questions and Concerns

The concern that heightened security measures would decelerate the pace of international business and slow the promise of globalization is valid. And the thought that long lines at airports could eventually persuade travelers to stay home or not use air travel has been legitimate.

Plus, many have come to realize that searching more of the millions of containers that arrive at U.S. ports annually could drastically slow down the flow of finished goods as well as increase their cost. And, this could affect the U.S. manufacturing sector that depends on supplies arriving “just-in-time” from overseas suppliers.

Terrorism Tax

To pay for the delays of importing and exporting goods, plus the added costs of implementing stricter security measures, companies have begun to shoulder a “terrorism tax.” While it is too soon to predict how much of a burden this tax will create, it is certain that all companies, large and small, will have to react to and assimilate these new security measures into their logistics and pricing structures.

Certainly, immediately after September 11, 2001, the supply chains stretching across oceans or land borders were seriously interrupted. Within a few months, however, U.S. firms began adapting new technologies to cope with the reduction of services from their usual carriers.

Switching from Air to Sea

Utilizing these new transportation technologies to ship goods across the oceans has resulted in increased inventory, insurance, and administrative expenses. In the general sphere of transportation expenditures, airfreight costs have risen an estimated 10 percent since September 11, 2001, according to the Organization for Economic Co-operation and Development (OECD). Yet, the costs of shipping by sea have risen only slightly. Consequently, importers and exporters are increasingly switching from air to sea transport.

However, if ship owners and port authorities are required to buy expensive equipment to inspect the millions of containers coming and going from U.S. ports, this will surely increase shipping costs, as well as delay delivery of shipments. Further adding to sea shipment costs is the requirement in some ports that a tug on each side accompany the ship as it enters the harbor. This is designed to prevent the ship from deliberately slamming into bridge foundations.

Increased Truck and Rail Safety

Measured by value, almost two-thirds of the goods transported between the United States, Canada and Mexico are hauled by trucks. Calculated by weight, trucks and ships each transport about one third of the total, according to the U.S. Department of Transportation.

Trucking firms have begun to take steps to protect their shipments by building fences around freight yards, conducting background checks on drivers, monitoring truck travel with satellite-tracking systems, and installing electronic devices to detect when a container is opened illegally. Train operators have begun more frequent inspections of tracks, switches, bridges, and tunnels, and have strengthened communications facilities.

Gaining a Competitive Edge

It would be wise for U.S. firms to view adapting to and adopting the new logistic systems as both an opportunity and a challenge. Those firms that quickly learn how to use the systems to their advantage will gain a competitive edge in international business.

Of course, the largest firms with their enormous volume, staggering clout, considerable capital, and resourceful personnel may have an early start on smaller competing firms, who must be especially creative to keep up.

Taking the Customs “Fast Lane”

Companies that obtain the Customs-Trade Partnership Against Terrorism (C-TPAT) certification will have a head start over their competitors. This voluntary program, created by the U.S. Customs department, requires U.S. importers to assess the ability of their supply chains to conform to security procedures and to make the necessary changes to boost security, if necessary.

Companies that have C-TPAT certification can use the “fast lane” to pass across U.S. borders in less time and with fewer inspections. This is a definite plus for keeping supply lines intact and running smoothly.

Closer Attention to Owners of Goods

Besides monitoring goods coming into the U.S., additional regulations will require precise identification of the imported product’s specific use and end user. Heightened attention to reconciling the variances between trade documents and customs forms also are increasingly becoming concerns of U.S. Customs.

Additionally, the Bureau of Export Administration and other agencies are working with U.S. banks to develop procedures to closely follow the money trail of import and export transactions.

Companies of all sizes will no doubt have to adopt procedures that improve their databases so that accurate information about products, shipments and final customers can be easily retrieved and evaluated. Otherwise, further delays will be encountered at borders, creating disruptions in the supply line, and adding to the final cost of the product.

Delays Could Cost Billions

Before September 11, 2001, the cost of delays in getting goods into the United States represented 5 to 13 percent of the final value of the goods traded, according to J. A. Leonard’s article in Manufacturers Alliance e-Alerts. If additional security measures add 1 to 3 percentage points to this figure, a figure projected by the OECD, Leonard estimates this could increase the costs of goods traded in the U.S. by $5.6 billion to $16.8 billion.

These estimates were made soon after the September attacks, and since then, the long lines at borders and delays at ports have lessened. Still, the new security efforts measured in time and money will affect the pricing of the final product. To compensate for delays, companies will have to stockpile more spare parts, which hikes inventory costs.

Insurance Premiums Move Up

Due to the September 11, 2001 attacks, insurance companies suffered their biggest loss ever, estimated as high as $50 billion. As a result, insurers began revoking policies covering airline liabilities, forcing many governments around the world to step in with coverage. Ship owners sailing into countries considered dangerous either had their war risk coverage cancelled, or the premium raised considerably.

Even before September 11, 2001, commercial insurance premiums were on the rise. Today, the reduction of insurance capacity brought about by the billions in losses will accelerate the rate increases. U.S. commercial insurance premiums, according to Business Week, are forecast to rise from $148 billion in 2000 to $210-240 billion in 2002. However, insurance costs still represent a small portion of total shipping costs.

Not a Strong Influence

As of 2000, the share of transport and insurance costs was 3.39 percent of the customs value of imported commodities, according to the OECD. While this figure may increase slightly in 2002, proportionally, it will not be a strong influence on the final price of goods.

But the considerable rise in workers’ compensation rates over 2001’s could influence the price of goods and services considerably. Insurers and reinsurers are now aware and concerned that a high concentration of employees in one building, especially a high rise, could produce losses similar to those they suffered from the collapse of the World Trade Center towers.

Global Commerce Coming Back

The global business community has reacted to the terrible destruction of September 11, 2001 with amazing resilience, proving that globalization is too strong to be crippled for long. Yet, world trade could become slower and costlier until it adapts fully to the threats of terrorism. While imports and exports fell in the last quarter of 2001, the setback seems to have been temporary.

For example, in May 2002, according to the U.S. Department of Commerce, U.S. exports of goods and services increased $0.6 billion to $80.6 billion, and imports rose $2.1 billion to $118.3 billion. This is far above year-end 2001 levels and is nearing the stellar highs of 2000. Also, U.S. imports from China at $9.8 billion were the highest since the $10.8 billion in October 2001. And U.S. exports to Canada were $14.6 billion, the highest since the $15.1 billion in June 2001.

These are encouraging signs. While overall economic growth is influenced by a variety of factors, it appears that global commerce has begun to succeed in its struggle to climb back from the appalling hit terrorism dealt it on September 11, 2001.