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- Trading Up: Being Small and Going Global – Ideas Lab
- Next Big Player in U.S. Trade: Small and Mid-Size Companies
- State of SME Finance in the United States 2014: Year of New Providers
- Out of the Way, Congress
- Five World Trade Game-Changers for 2014
- Five Coming Geo-Commercial Game Changers
- RTA Exchange Announced
- ‘Aid for e-Trade’ Accelerates e-Commerce Revolution
- Forget about the Flat World: Globalization is Now 3D
- Why TAFTA is Even Better than NAFTA
My company TradeUp has a new White Paper U.S. SME Exporters as New Asset Class. Why would we ever claim that small business exporters are a big deal? For three reasons:
1. Record Numbers of SMEs Seek Growth through Exports
Small and mid-size enterprises with fewer than 500 employees are the backbone of the U.S. economy, and make up 98 percent of the 300,000 U.S. exporters. Most of these companies are small, with fewer than 50 employees. Just like in other economies, overall U.S. trade is still driven by large companies and multinationals, but SMEs have in the past few years gained ground and now make up over a third of U.S. exports.
Overall, U.S. SMEs are still focused on serving the domestic market only: merely 5 percent of the 6 million employment-providing SMEs export. The United States has tremendous latent SME export potential. In contrast to other advanced economies, U.S. SMEs appear to under-export – have a lower export participation rate than economies of comparable size, such as many European and East Asian and economies. For example, export participation rates for South Korean SMEs is 19 percent, and European SMEs some 25 percent.
However, the share of U.S. SMEs that export is poised to grow, possibly dramatically. Record numbers of U.S. SMEs are seeking growth through exports. In a 2010 HSBC survey, 72 percent of surveyed SMEs planned to increase their overseas sales in the coming years, up from 9 percent in 2008. In an HSBC survey in California, some 70 percent of exporters said they were seeking seek further export growth, while 22 percent of non-exporters planned to start to export. In UPS’s 2012 survey of 125 U.S. high-tech companies (of which 64 percent were likely to be SMEs, with revenues between $5 million and $1 billion, while the rest were larger), only 23 percent of companies had seen export growth in the prior two years, but 74 percent expected to see export growth in the next two years, in 2013-14.
In a 2013 NSBA survey, as many as 63 percent of small businesses responded yes to question “would you be interested in selling merchandise or services to a foreign customer in the future, if some of your concerns could be addressed?’, up from 43 percent in 2010. Concerns in the question here related to lack of knowledge about exporting and costs of exporting, among others.
A key cited factor driving interest in exporting is emerging markets’ growing purchasing power: the expansion in discretionary spending resulting from the rise of an estimated 1.5 billion middle class consumers in these nations in the coming decade is expected to add $10 trillion to the global GDP, a vast new market for American businesses. This will drive demand consumer goods, electronics, food processing, fashion, and entertainment. Also energy and water demand will soar on the back of urbanization and population growth, opening opportunities for energy, clean tech, and water technology companies.
Also driving business owners to export are the forthcoming U.S.-led free trade agreements with European Union and East Asian economies, and the coming investments in infrastructure and manufacturing capacity in the developing world, which drive demand in such sectors as industrial machinery, transportation equipment, IT equipment, and business and engineering services. Trade in infrastructure and manufacturing-related goods is estimated to soar to 54 percent of total global goods exports by 2030, from 45 percent today. U.S. companies are among the most competitive in the world in transport equipment and industrial machinery, which gives them an edge as exporters in the main demand centers – India, China, Vietnam, Malaysia, Indonesia, Bangladesh, and Turkey and Egypt.
2: Macroeconomic and Technology Drivers Favor SME Exporters
Trade forecasts speak to these macroeconomic trends. According to recent estimates, growth in world trade in goods is poised to reach nearly 5 percent in 2014, more than doubling 2013 growth figures. Global trade in services – such as engineering, legal, technical, accounting architecture, or any service where the provider is in one country and the buyer in another – continue growing robustly. These trends are very positive after the 12 percent plunge in world trade in 2009 and the lackluster growth in trade over the past few years.
The long-term view is even better. World trade in goods will grow 8 percent annually through 2030. This means that world trade will double between 2013 and 2022, and triple by 2028. Trade will yet again outpace global GDP growth, as it has over the past several years. In 1950-2005, world GDP grew about 5 times, but world trade grew 11 times. According to HSBC, 2016 is a major inflexion point: exports from advanced economies, particularly the United States, are set to expand very rapidly in 2016-2020.
Over the past few decades, the growth in trade has been driven by four main factors – global economic growth, trade liberalization, reduction in transport and communications costs, and the build-out of corporate global supply chains by such giants as Apple, Boeing, and IBM, which radically increased trade both in final products such as iPhones, and especially trade in parts and components.
These drivers will still be very important going forward. In the next decade, trade will be boosted by the global recovery and the above macroeconomic factors, trade facilitation, such as faster port clearance and customs procedures, further reductions in tariff and non-tariff barriers particularly in the context of regional trade agreements, and new technologies such as cloud computing, ecommerce, and high-speed travel that will obliterate distance and cultural barriers that still hamper trade. Already, a stunning 97 percent of American micro and small businesses that sell on eBay also export – vastly more than the 5 percent of small businesses that export offline.
These developments all favor in particular smaller companies seeking growth through exports: the costs of doing international business have never been as low; the opportunity never so large.
Yes, there will be Fed tightening that can lead to a stronger dollar. But taking a long-view, structural changes in the U.S. economy are also hugely propitious for SMEs’ export growth. A widely cited 2012 Boston Consulting Group report shows that by 2020, declining energy costs and increasingly competitive wages will give America as large as a 25 percent export cost advantage over Japan and several Western European nations, including Germany, a global export might. BCG estimates that the United States will experience a manufacturing renaissance and reshoring from such locations as China particularly starting in 2015, and will eventually add 2 million to 3 million jobs and an estimated $100 billion in annual output in a range of industries.
3: SME Exporters Outperform the Broader Market
Academic research has firmly established that exporters are more productive than non-exporters before they even commence their export journey. Compared to non-exporters, exporters are typically larger and more productive, have higher sales, pay higher wages, and are more skill-intensive. In the United States, for example, leading trade economists show that exporters are larger than non-exporters in employment (by 119 percent) and sales (148 percent), are more productive (by 26 percent in terms of value added per worker and 2 percent in terms of total factor productivity), and use higher levels of capital per worker (32 percent) and have higher skill intensities (19 percent).
This has two reasons: yes, exporting makes companies better, but it is also the case that better companies become exporters: in other words, high-productivity companies self-select into exporting. This is an impressively robust finding across studies, and implies that exporters are stand outs, not necessarily only because they export, but because they are better to begin with.
One reason for why better companies export is that only these companies are able to become exporters. Exporting has high sunk entry costs that only the best companies are able to manage. Consider a simple yet renowned economic framework to explore this further. In order to sell part of its output abroad, a company has to pay not only variable costs involved with the transaction (such as shipping and tariffs), but also a sunk entry cost (such as costs involved with identifying new markets and customers, adapting products to foreign customers’ needs, and meeting international standards). More productive companies earn higher profits, and hence are better positioned to cover these sunk costs. Thus only a subset of companies, those that are sufficiently productive and typically also larger, will be able to export.
What is more, such high-productivity companies are also likelier to seek export opportunities particularly actively and strategically. These companies typically have superior managerial assets and organizational capabilities to pursue international growth. Take a recent GE Capital and Ohio State University study on U.S. SMEs with $10 million to $1 billion in revenue: the top-10 percent best-performing companies are also ones that are most aggressively seeking international opportunities.
It is also the case that the act of exporting on a sustained basis makes companies more productive. In fact, there are at least five specific channels through which exporting can result into greater productivity:
- “Learning-by-exporting”: Exporters are poised to gain information from their international buyers, distributors and competitors, which leads to discovery of new market opportunities and improved management decision-making.
- Innovation: Exporting can increase companies’ propensity to innovate and invest in R&D, as exporters seek to improve products and processes in order to respond to customer demands and competitive pressures.
- Revenue diversification: Revenue diversification across different international markets often reduces the volatility of the company’s sales along with vulnerability to downturns in any one market.
- Capacity utilization: In companies and industries with opportunities for scale economies, selling in international markets increases capacity utilization and reduces average costs.
- Competitiveness: Exporters are generally exposed to intense foreign competition, which forces them to pursue greater efficiencies so as to survive in the global marketplace.
More generally, exporters can be incentivized to upgrade their technologies, improve distribution channels, and enhance the composition of their labor force so as to compete harder, increase market penetration, conquer new markets, and introduce new products.
Productivity is not the only aspect that improves with exporting. Research has also found that once companies export, they experience greater access to credit than domestic companies do – which suggests that exporting loosens companies’ credit constraints, perhaps by making companies more productive and by playing a countercyclical role when domestic markets flail.
When small businesses themselves were asked by NSBA what the benefits of exporting are, the top three answers were: increased sales and profits; diversified and expanded customer base; and increased economic stability in light of U.S. economic difficulties.
Gains from exporting are found to happen both overnight and over the course of several years. There are many reasons for the lag. For example, gains may kick in only after the sunk costs involved with new market entry and product launches are recouped, and after the firm has time to absorb and translate the many gains from exporting, from innovation to enhanced managerial capabilities. “Survival” in export markets is essential for the company to reap substantial growth gains from trade. Exporting once in one year and again once a few years later is not the best means to harness exports for growth: rather, sustained exporting is needed. Persistent exporters gain most.
Further, companies that are more export-intensive (have a substantial share of their sales coming from exports), and multi-product exporters that have diversified their export markets and products tend to see higher productivity gains from exporting than do companies with low export intensities or companies that are single export products and/or single export markets. The key factor by which a company becomes a multi-product, multi-market exporters is survival in its core export markets and export products. Recent research on U.S. and German companies finds that the number of products exported and the number of export destinations are significantly related to the firm’s total exports, exports of the firm’s largest product across all markets, and firm productivity.
In sum, the ranks of U.S. SME exporters are growing, and they are outperforming companies. They are also different: they make up an asset class with unique growth drivers and challenges than faced by the broader market. Paradoxically, they also cite lack of capital as the leading constraint to trade. That’s the gap that TradeUp is bridging.
At my consulting firm Nextrade Group, we just put out a new white paper on the state of SME finance in the United States:
This matters because SMEs are the backbone of US economy and an important contributor to U.S. exports – yet have been stifled by the insipid post-crisis credit environment. Why it made sense for us to put this together: data and analytics on this issue are very dispersed, and no one tracks all key indicators across areas (lending, VC investments, angels, crowdfunding, SBA and ExIm support) in one place. It also makes sense as we are working a great deal with clients on ideas to catalyze especially export finance to SMEs and want to keep our clients up to speed on SMEs in capital markets. In addition, in my other company TradeUp (coming soon), we are creating a crowd funding platform for financing export-driven SMEs and want to keep our investors abreast of the broader market. So here goes a summary –
State of SME Finance in the United States 2014: Year of New Providers
Small and medium-sized enterprises (SMEs), firms with fewer than 500 employees, are the backbone of U.S. economy. They make up 99 percent of all firms, employ over 50 percent of private sector employees, and generate 65 percent of net new private sector jobs. SMEs account for over half of U.S. non-farm GDP, and represent 98 percent of all U.S. exporters and 34 percent of U.S. export revenue.
To grow and globalize, SMEs need access to credit and cash flow. Credit conditions for U.S. SMEs deteriorated in the wake of the financial crisis, and are expected to continue depressed as Basel III capital adequacy requirements come into effect in 2015. Early-stage companies seeking equity finance have also faced challenges, as venture capital is increasingly focused on later-stage companies and available only to a handful of firms.
What is the state of SME finance in the United States today, five years after the financial crisis? This TradeUp white paper provides answers. We review trends in lending and equity financing to SMEs, discuss emerging financing sources for SMEs, and assess the future of SME finance in light of the rise of alternative, online lenders and crowdfunding. We will also analyze the specific financing issues faced by SMEs that seek growth through exports.
Our summary highlights are as follows:
• Overall, financing for SMEs appears to be recovering from the immediate post-recession years. However, the more traditional sources of SME capital – banks for loans and VCs for early-stage funding – are focusing on larger and less nascent companies. A number of instances and new delivery methods are taking their place, from online micro- and small business lenders to supply chains finance programs, angel investors, and crowdfunding platforms.
• Bank lending to SMEs has improved, but has yet to return to pre-crisis levels. In June 2013, the loan balances for commercial and industrial (C&I) loans of $1 million or less stood at $288.7 billion, $47 billion below June 2008.
• Federal government sources have played a complementary and to an extent countercyclical role during the past few years in SME lending. In FY 2013, SBA supported $29.6 billion in lending to small businesses, about the levels of the prior two years. The Export-Import Bank supported export credit insurances and export working capital for SMEs at $5.2 billion in 2013, somewhat below 2011-12 authorizations.
• The burgeoning market of online lenders has yet to be analyzed fully, but the success of several platforms indicates a new, strong, and relatively affordable source for financing particularly for small firms that lack access to sufficient bank credit.
• Expansion-sand Late-stage investments together accounted for $13.4 billion of VC investments through Q1-Q3 of 2013. Seed- and Early-Stage investments attracted 46 percent less investments during the same time period amounting to a total of $7.2 billion. The Software industry continues to garner the most VC dollars in the United States, while Silicon Valley continues to dominate the US VC investments by geography, leading the pack with 42 percent investments in 2013. Internationally, Israel and United States remain the hotbeds of innovation with the highest VC spending as a percent of GDP among the OECD countries in 2012.
• Angel investment is recovering and has become a strong complement to VC financing. In the first two quarters of 2013, angels invested a total of $9.7 billion, an increase of 5.2 percent over the first half of 2012 and 5 percent increase form 2007.
• Global crowdfunding volume nearly doubled in 2012 to $2.7 billion, of which over one-half, or $1.6 billion, was in North America. Crowdfunding is expected to exceed $5 billion in 2013.
As the U.S. economy recovers, 2014 appears to become a big year for alternative lenders and investors in the online and crowdfunding spaces, and see their expansion also to mobile platforms. However, bank financing to SMEs is expected to continue subdued as Basel III capital adequacy requirements come into effect in 2015. Because banks will have to hold additional cash in reserve to meet the terms of Basel III, they will have less money to lend compared to pre-crisis levels, which is expected to have a disproportionately negative effect on SME financing opportunities. This however will open up opportunities for new business models to accommodate the recovering financing demands by American SMEs.
From Foreign Policy, 14 January 2014
5 reasons U.S. lawmakers need to get on board with mega-regional free trade deals.
Last week, U.S. lawmakers took a critical step toward inking mega-regional free trade deals with Europe and 11 Asia-Pacific countries — deals that could generate hundreds of billions in revenue and keep the U.S. economy inching along the path to recovery. But passage of the Trade Promotion Authority (TPA) bill, which would allow the president to fast-track free trade deals, is bound to involve a bitter political fight as several Democrats and members of the Tea Party have already lined up in opposition to the law. On the left, TPA raises the usual concerns for labor and the environment, while on the far right it presents one more opportunity to jam up the president. Across the board, lawmakers have raised concerns about transparency.
But without a trade promotion authority, which expired in 2007, the United States will be unable to finalize the Trans-Atlantic Trade and Investment Partnership (TTIP) and Trans-Pacific Partnership (TPP), neither of which can be fully negotiated without an authority in place. (Europeans and Asians have indicated they are unwilling to negotiate the thorniest trade topics before they know TPA is in place requiring the U.S. Congress to vote up or down on future deals, rather than amending freshly negotiated texts.) So even if Congress is justifiably angry about the unprecedented level of secrecy surrounding recent trade talks, it needs to see the bigger picture: TPA is critical for American economy, entrepreneurship, and global leadership. Here are five major reasons why:
Growth and jobs. The U.S. economy is recovering, yet headwinds lurk on the horizon — from the Fed’s unwinding to stagnating key export markets. Europe is battling low growth and high unemployment; Japan’s Abenomics has yet to deliver promised growth gains, in part due to persistent protectionism that the TPP would undo; and China’s economy is set to expand at its slowest pace in 15 years. While serious economic turmoil may have been averted, the trillion-dollar question remains: Where is global growth going to come from in the future? Trade is a key place to look: The TTIP is expected to generate an annual $130 billion in gains for the United States and $162 billion for Europe. The TPP, meanwhile, will boost U.S. annual gains by $77 billion and Japan’s by $104 billion. As such, the TTIP will raise U.S. household incomes by $865 annually and create 750,000 new U.S. jobs, while the TPP would generate about $1,230 per household by 2025 — a significant windfall without a dime of deficit spending, and a strong bonus on the $10,000 in average annual income gains American households have already scored due to post-war trade opening. And by locking in first-rate rules and open markets, the trade deals will give U.S. companies the confidence they need to dip into their $5 trillion in cash holdings — enabling them buy American inputs and hire U.S. workers.
Geocommercial edge. As gatekeepers of markets with two-thirds of total global spending power, the TPP and TTIP will amount to giant magnetic docking stations for current outsiders, especially emerging and frontier markets. Most remarkably, China, the world’s largest trader and a TPP skeptic, is seriously considering joining the deal, now seen by various domestic interests as a means to counteract the economic slowdown and drive much-needed reforms, especially of state-owned enterprises. Likewise, Brazil, the world’s seventh largest economy, is being pushed by its business lobbies to consider the TTIP and TPP — a 180 degree turn for a country that completely missed the global wave of trade integration. With Brazil opening, the long-awaited U.S.-led Free Trade Area of the Americas (FTAA) idea could eventually become a reality. The bottom line for Congress: Once done, the U.S.-led deals will forever alter the strategic landscape of the global trading system, with even some cantankerous BRICs falling in line. America will have positioned itself to set the tone and tempo of global trade politics for decades to come.
Digital economy gains. The old U.S. trade agenda — immortalized in such deals as the North American Free Trade Agreement (NAFTA) and Central America Free Trade Agreement (CAFTA) — prioritized corporate supply chains: It removed barriers to trade in parts, components, and final products; opened foreign markets for U.S. investors; and sped up customs procedures. These objectives still matter, but physical supply chains will be less critical as 3-D printing and nanotechnology expand. Manufacturers will increasingly be able to print parts and components right off the Web. Meanwhile, the arrival of the industrial Internet, e-commerce, e-invoicing, and online payments all mean that the global economy will increasingly run not on ships but on the cloud.
Few nations are as well-placed to profit from this new order as the United States. Yet barriers are sprouting. Countries such as TPP member Vietnam are forcing U.S. companies to locate servers in their nations as a pre-condition for market access, while Europeans, incensed about the Snowden scandal, are bent on limiting the data that U.S. companies serving European customers can access and transfer back to America. Too many developing nations are now cracking down on Web users for political and protectionist reasons. Ensuring a fair and unfettered digital economy requires enlightened rules on cross-border e-commerce and data flows, intellectual property protections, dispute settlement mechanisms, and so on. The TPP and TTIP offer Washington an opportunity to establish such rules. But unless Congress passes TPA, there will be no new rules — at least not ones that are Made in the USA.
Boost for Main Street exporters. Big business may be spearheading the TPA lobby, but small businesses — the backbone of U.S. economy — also stand to gain. Giant corporations like Apple and GE still dominate U.S. exports, but small businesses are on an export roll, riding the wave of past U.S. trade deals like NAFTA: Some 300,000 small- and medium-sized enterprises (SMEs) collectively generate one third of U.S. exports. Studyafter study shows that these export-driven SMEs are the nation’s fastest growing and most productive companies. They also happen to be among the most vocal of TPA proponents.
Moreover, as e-commerce, 3-D printing, nanotechnology, and other DIY technologies expand, Americans of all walks of life can become one (wo)man-multinationals — designers, assemblers, and sellers of goods and services exported around the planet. This export opportunity will explode between now and 2025, as 5 billion new Internet users log-on across the developing world. In the process, millions of new American jobs can be created and thousands of new businesses launched — but only if smart trade rules are established that open markets and level playing fields globally. The mega-regionals are a perfect venue to start this process.
Restore American leadership. The United States has for decades been the world’s quarterback, brokering differences between nations and providing critical global public goods: a global reserve currency, deep financial markets, vigorous economic growth, and an open trade regime. Today, the devastating financial crisis, disappointing growth, and plain-dumb bickering over the budget risk making “American leadership” an oxymoron. For an administration that campaigned on renegotiating NAFTA and pausing the George W. Bush administration’s vibrant trade agenda, the TPP and TTIP represent a stunning about-face — and the best chance for America to regain its global leadership role.
It’s time lawmakers stop framing trade agreements as Trojan Horses that ship American jobs abroad, and start advocating for trade deals as instruments to secure an open and rules-based global trading system — and to unshackle and empower U.S. companies, small businesses, and garage entrepreneurs to drive America’s economic recovery.
From Ideas Lab, 9 January 2014
Small will be big in the global digital economy – and policymakers must catch up
The WTO’s trade facilitation deal reached in Bali in early December adds to the past three decades’ dramatic expansion in world trade owing to tariff liberalization, regional integration, lower transport costs, and spread of global supply chains. Now five technology game-changers will erase many of the pending impediments to globalization – yet also give rise to new business and policy challenges:
1. Consumer-powered commerce. Dictated directly by individual consumers leveraging their laptops, tablets, and phones, world trade will increasingly flow online and be of B2C and C2C kind, rather than only B2B that still makes up 90 percent of total trade. Cross-border e-commerce explodes between now and 2025, as five billion to-be Internet users log-on across the developing world and businesses around the world build e-commerce capabilities. Small businesses and individuals selling online win: already, 97 percent of American micro and small businesses that sell on eBay also export – that is 20 times more than the five percent of small businesses that export offline. Once the planet gets online, anyone anywhere can sell anything to anyone anywhere in the world: garage sales will be global.
2. Virtual supply chain. Thought global supply chains are already streamlined? Emerging technologies like nanotech, 3D printing, and robotics will power hyper-localized production and obliterate the “factory world” of outsourced production and global sourcing and shipping of components. Corporate giants from GE to Ford are already using 3D printers to develop and print parts and components right where they are assembled into planes and cars, soon enough by human-like robots. By 2020, individual consumers will also be printing goods like Kindle books right off the web. 3D printing will also generate a local micro-manufacturing revolution, with makers and small businesses producing individualized products to local clients. Designers of parts and products can sell to consumers armed with printers on the other side of the world – without the hassles of shipping and handling. Soon enough, entire vehicles can be 3D printed. As trade moves to the cloud, weight no more matters and distance, key impediment to trade, dies.
3. Global data integration. The buzzword of 2013, “big data” will also fuel world trade. Smart users are already streamlining shipping and trucking. But particularly interesting are the indirect impacts. Marketers will be able to consolidate customer data currently dispersed across platforms and anticipate customer whims; companies that connect this point of sale and customer feedback data with operational, financial, and global supply chain data can mitigate the bullwhip effect, where changes in customer behaviors magnify across the supply chain all the way to raw material purchases. International purchases, production, shipments, and inventories are optimized. Consumers will gain, both in experience and cost.
4. Hyper-connectivity. Global icons from the Internet to Hollywood, McDonald’s, Apple, and Starbucks have not erased the cultural “distance” that still obstructs trade: habits, tastes, languages differences, and trust-building face-to-face meetings tend to be rarer with international than domestic clients. But what if lunch with any client anywhere in the world were the equivalent of today’s metro ride away? Hypersonic airplanes promise to shuttle passengers from New York to Beijing in less than 2 hours; Elon Musk’s Hyperloop could take riders from San Francisco to Mexico City in 90 minutes. In a world where cross-border business can be conducted by Skype, video, personal holograms, and hypersonic travel, cultural distance will evaporate – yet handshake and in-person lunches can remain a core to doing business in the global digital economy. The rise of massive online open courses (MOOCs) can expand common ground: your next customer in Johannesburg may well have taken the very same class online you took at Stanford.
5. Global currency. Trade economists have for decades fancied a world with a single currency that would remove transaction costs from cross-border transactions, only to run up against countries’ jealousy over monetary and exchange rate policies. This will change as the virtual currency takes hold. For now “embodied” in Bitcoin, virtual money can coexist with national currencies and be used by banks and future peer-to-peer conversion platforms as a middleman that lubricates cross-border transactions. It also enables digital payments in developing world, still without PayPal and first-world credit systems. As security and consumer protections are being worked out, tomorrow’s trade can run on one world money. Currency disputes won’t necessarily end, but delays and transactions costs can.
These trends have three implications. First and most obvious, businesses that fail to leverage these game-changers will lose. Second, today anyone can gain from trade, and not only as a consumer, but also as an exporter, producer, and designer. And smallness is no more a liability in the global economy: what entrepreneurs and small businesses lack in scale they make up in agility, speed, and creativity – success drivers in the 21st century global marketplace of changing consumer fads, niche markets, and out-of the-woods competitors. No longer do firms need scale to trade; they need trade to scale.
The third implication is for policy. Today’s trade policies lag far, far behind tomorrow’s trade. Wide international differences remain on key topics in the digital economy – IP, copyrights, trademarks, data protections to name a few. But most worrisome are governments’ knee-jerk reactions to control the digital economy. While some regulations may be needed to tame predation, policymakers around the world must keep their eye on the ball: the very consumers they claim to protect are ever likely to be multinational vendors thriving on an unfettered global digital economy.
From Ideas Lab, 27 December 2013:
The discord in Bali only highlighted the role of regional trade agreements as the center of gravity in world trade.
There are two ways to look at the WTO’s agreement in Bali on trade facilitation, struck at the last minute after U.S. and India agreed on language on Indian food subsidies. One is that the deal is a jolt for the multilateral trading system after a dozen years of fruitless Doha Round negotiations. The other is that the deal is a mitigated disaster aimed to buy the WTO time to fashion a value proposition in a world where it is crowded out by regional trade deals.Both views have merit. Yet either way, the U.S. will have an edge as five geo-commercial game changers unfold:
1. Unstoppable mega-regionals. The discord in Bali only highlighted the role of regional trade agreements, especially the U.S.-led Trans-Pacific Partnership (TPP) and Trans-Atlantic Trade and Investment Partnership (TTIP), as the center of gravity in world trade. Most of the more than 300 Regional Trade Agreements crisscrossing the world are far more liberalizing and comprehensive than WTO agreements, and now pioneering in such topics as e-commerce, copyrights, and state-owned enterprises. Negotiated among coalitions of the willing, mega-regionals contrast with the WTO of 160 players with widely different aspirations and a “single undertaking” rule that enables any one disgruntled member like India to veto an entire deal. Mega-regionals will face challenges – most immediately, the battle for the trade promotion authority (TPA) on Capitol Hill needed for passing these deals. But they will get done: Leading industry lobbies have placed their energies on mega-regionals, and governments too send star negotiators to mega-regional talks rather than WTO tables. Expect the TPP to be passed within a year and TTIP within three years – and for Washington, Brussels, and Tokyo to set the tone and tempo in global trade policymaking.
2. China. Often considered antagonistic to the TPP, China, the world’s largest trader, is seriously interested in joining the deal. Various domestic lobbies see the deal as a means to counteract economic slowdown and drive domestic reforms, especially to state-owned enterprises. Asia’s new mega-regional deal championed by Beijing, the Regional Comprehensive Economic Partnership (RCEP) containing China, Japan, South Korea, Association of Southeast Asian Nations (ASEAN), Australia, India, and New Zealand, is less of a counterweight to TPP than a stepping-stone for China and ASEAN nations to ultimately join TPP. China is also seeking entry to the plurilateral Trade in Services Agreement (TISA) spearheaded by the United States and EU. Beijing and Washington will clash more than once over TPP and TISA accession criteria – but the bigger point is Beijing’s strategic shift to embracing U.S.-led deals, which is prompting rethink across emerging market capitals on the merits of multilateralism vs. regionalism.
3. Brazil. The host to the 2014 World Cup has completely missed the bus on regional integration with the exception of its own dysfunctional bloc, Mercosur. Brazil’s latest attempts at big-time integration, the 34-nation Free Trade Area of the Americas (FTAA) and the EU-Mercosur talks, collapsed a decade ago, not least due to Brazil’s unhappiness with U.S. and European agricultural protectionism, and U.S. and European frustrations with Brazil’s barriers in manufactures and services.Now the country’s industrial lobby, worried about being left out of global supply chains and mired in endless red tape, has broken with the government to call for a relaunch of the EU talks, even if that means breaking with Mercosur partners. Next on the list: TTIP, and, perhaps the new 210 million consumer bloc, the Pacific Alliance composed of Colombia, Peru, Chile, and Mexico, followed by TPP.
4. Latin power. Long students of European and Asian integration, the Pacific Alliance is quietly showing the world an example of pragmatic, business-driven integration aimed at simplifying the “spaghetti bowl” of overlapping trade deals. Until recently with separate bilateral Free Trade Agreements with one another, the four members have agreed on common rules of origin, a hairy part of trade negotiations, and freed tariffs on 92 percent of goods and services. They have also abolished tourist visas and, remarkably, consolidated embassies and commercial offices, with Peruvians championing Chilean goods and Chileans promoting Mexican products.Integration of infrastructure, customs, capital markets, and energy will follow. This is not only a premier example of deeper integration: The Alliance is well-placed to become the core for a take two of the FTAA, just like the P4 bloc formed by Chile, Singapore, Brunei, and New Zealand was the genesis of the TPP. What helps that all Alliance members already have FTAs with the United States and Canada.
5. Developed vs. developing countries. The developed vs. developing country divisions that have held back WTO talks are eroded in Bali, as China, Brazil, and practically all large emerging nations and developing countries sided with the advanced nations, breaking with India and its accomplices Venezuela, Bolivia, Ecuador, and Cuba. Many emerging markets such as the host nation Indonesia are genuinely concerned about food security, but also see the point in such win-win deals as trade facilitation. That old coalitions give in could open spaces for broader-based plurilateral agreements among sub-sets of WTO members, both developed and developing, in such areas as investment, data security, and trade in environmental goods and services.New Scenarios for Global Trading System
These geo-commercial realignments create three scenarios for the global trading system.
One is a renaissance of multilateralism: Regional deals force outsider India and developing countries’ hands to agree on a set of multilateral deals at the WTO. This is unlikely. WTO’s Director General Roberto Azevedo is a stellar diplomat, but even narrower deals can take years to reach. In a room of 160, someone will always have a problem with something.
In the second scenario, the WTO emerges as a venue for negotiating plurilaterals and handmaiden for “multilateralizing” tested and tried regional rules. This would revive the WTO’s relevance and save its renowned dispute settlement mechanism, which lacks jurisdiction over the newest regional rules. But anything short of multilateralism is hugely political at the WTO: Someone will always feel left out.
In the third scenario, the WTO is sidelined by TPP and TTIP, which power on and ultimately merge. This super-deal is possible: The U.S. and EU already have bilateral FTAs with several common TPP partners – Korea, Peru, Australia, Singapore, Canada, and Mexico to name a few. With China and Brazil on board, the super-deal would cover 80 percent of world’s output and approximate a multilateral agreement – and have cutting-edge rules that could never be agreed in one Big Bang at the WTO.As the liberalizing coalition expands and powers on, India and its partners may yet to become isolated in the global trading system. The United States, meanwhile, will get to call the shots. – See more at: http://www.ideaslaboratory.com/2013/12/27/five-coming-geo-commercial-game-changers/#sthash.qmM2WKvF.dpuf
I am glad to share the announcement of a new global initiative that I conceptualized in the context of the ICTSD-World Economic Forum E15 initaitive. The press release follows, and paper is attached. Comments welcome!
For immediate release, 4 December 2013
BALI, INDONESIA – A consortium of three institutions – the International Center for Trade and Sustainable Development (ICTSD), the Inter-American Development Bank (IDB), and the Asian Development Bank Institute (ADBI) – today announced the launch of the “RTA Exchange” a knowledge and dialogue platform aimed at promoting international dialogue, deeper analysis and information-sharing on regional and preferential trade agreements (RTAs). The announcement was made at the bi-annual Trade and Development Symposium, this year held in Bali concurrently with the 2013 WTO Ministerial. The idea is the result of deliberations of experts in the context of the ICTSD – World Economic Forum “E15 Initiative”, a major undertaking that works towards strengthening the multilateral trade system.
RTAs have proliferated around the world in the past two decades alongside and independent of the multilateral trading system. By now more than 300 RTAs are in place, and several further ones are being negotiated, including the so-called “mega-regional” agreements, the Trans-Pacific Partnership agreement (TPP) and the Transatlantic Trade and Investment Partnership agreement (TTIP).
Though RTAs are emerging as the center of gravity in global commerce, there is no one instance that would systematically bring together all relevant information on RTAs around the world, let alone encourage dialogue and sharing of experiences among the various stakeholders interested in RTAs, such as policymakers, think-tanks and private sector leaders. The purpose of the RTA Exchange is to bridge this gap and contribute to the construction of a robust, efficient and more updated international trade regime.
The RTA Exchange will be a first-in-class global clearing house of information on RTAs. It is a web-based platform aimed at curating the world’s information and expertise on RTAs, a mechanism to undertake research and analysis on RTAs, and a venue for policy dialogue and sharing of experiences among trade negotiators, private sector leaders, and other stakeholders. It will also help build countries’ capacity to benefit and develop RTAs that deliver higher quality development, and a broader participation of firms from all over the world in global markets.
The RTA Exchange is highly policy-relevant: it enhances RTAs’ transparency, facilitates the transfer of lessons-learned and best practices across RTAs, lays the groundwork to foster coherence between RTAs and multilateralising RTAs’ best practices, and helps generate fresh thinking on ways to complement RTAs for trade and development.
“We are friends of an effective rules-based, inclusive WTO and aim to support its evolution through this ground-breaking initiative,” said Ricardo Meléndez-Ortiz, CEO of ICTSD. “The RTA Exchange will help enhance the capacities of small and mid-size enterprises to take advantage of the various RTAs in doing cross-border business,” said Antoni Estevadeordal, the Manager of the IDB’s Integration and Trade Department. Ganeshan Wignaraja, Research Director at the ADBI commented, “this tool will be very useful for economies in Asia and other world regions that are seriously engaged in RTAs and negotiating mega-regionals, and it will further cross-regional learning and sharing of good practices on RTAs.”
The RTA Exchange intends to convene its first policy dialogue in Geneva in 2014.