Coming Apart: WTO fiasco highlights urgency for the U.S. to lead the global trading system

India’s torpedoing last week the WTO’s trade facilitation agreement, struck at the last minute between the United States and India in the December 2013 WTO Ministerial in Bali, is a death blow to the world body and adds to growing disarray in the global trading system.

Two threats are emerging. The first is disintegration of the trading system. The core of the system until the mid-1990s, the WTO is utterly dysfunctional: deals require unanimity among 160 members, making any cantankerous player like India a veto. Aligning interests has been impossible, turning all action in global trade policymaking to free trade agreements (FTAs), first kicked off by the North American Free Trade Agreement (NAFTA) in 1994. By now, 400 FTAs are in place or under negotiation. FTAs have been good cholesterol for trade, but the overlapping deals and rules also complicate life for U.S. companies doing global business. One single deal among all countries would be much preferable to the “spaghetti bowl” of FTAs, but it is but a pie in the sky. So is deeper liberalization by protectionist countries like India.

The U.S.-led talks for “mega-regional” agreements with Europe and Asia-Pacific nations, the Trans-Atlantic Trade and Investment Partnership (TTIP) and Trans-Pacific Partnership (TPP), are the best solution yet to these problems. They free trade and create uniform rules among countries making up two-thirds of the world economy. Incidentally, they would create a million jobs in America. Yet both hang in balance thanks to inaction on Capitol Hill to pass the Trade Promotion Authority (TPA), the key piece of legislation for approving the mega-deals, now stuck in a bitter political fight as several Democrats and Tea Party line up in opposition. TPA is key for the Obama administration to conclude TPP and TTIP talks: Europeans and Asians are unwilling to negotiate the thorniest topics before they know TPA is in place to constrain U.S. Congress to voting up or down on these deals, rather than amending freshly negotiated texts.

The second threat in world trade is the absence of common rules of the game for the 21st century global digital economy. As 3D printing, Internet of Things, and cross-border ecommerce, and other disruptive technologies expand trade in digital goods and services, intellectual property will be fair game – why couldn’t a company around the world simply replicate 3D printable products and designs Made in the USA? Another problem is data protectionism – rules on access and transport of data across borders. Europeans are imposing limits on companies’ access to consumer data, complicating U.S. businesses’ customer service and marketing; emerging markets such as Brazil and Vietnam are forcing foreign IT companies to locate servers and build data centers as a condition for market access, measure that costs companies millions in inefficiencies. A growing number of countries claim limits on access to data on the grounds of “national security” and “public safety”, familiar code words for protectionism.

Digital protectionism risks balkanizing the global virtual economy just as tariffs siloed national markets in the 19th century when countries set out to collect revenue and promote infant industries – a self-defeating approach that took well over a century to undo, and is still alive and well in countries like India. The biggest losers of digital protectionism are American small businesses and consumers leveraging their laptops, iPads and smart phones to buy and sell goods and services around the planet. Trade policymakers however lag far behind today’s trade, which requires sophisticated rules on IP, piracy, copyrights, patents and trademarks, ecommerce, data flows, virtual currencies, and dispute settlement. The mega-regionals, especially the TTIP, are a perfect venue to start this process.

Disintegration of trade policies risk disintegrating world markets. Just as after World War II, the global trading system rests in America’s hands. Three things are needed.

The first is the approval of TPA, which unshackles U.S. negotiators to finalize TPP and TTIP. Most interesting for U.S. exporters, TPP and TTIP almost de facto merge into a superdeal: the United States and EU already have bilateral FTAs with several common partners belonging in TPP – Peru, Colombia, Chile, Australia, Singapore, Canada, and Mexico to name a few. What’s more, gatekeepers to markets with two-thirds of global spending power, TPP and TTIP will be giant magnetic docking stations to outsiders; China and Brazil, aiming to revive sagging growth, are interested. Once this happens, the TTIP-TPP superdeal will cover 80 percent of world’s output and approximate a multilateral agreement – and have cutting-edge common trade rules that could never be agreed in one Big Bang at the WTO.

Second, also needed is a shift negotiation of plurilateral agreements – broad-based agreements among sub-sets of WTO members now negotiated in trade in services and in environmental goods and services, and proposed for investment and data security, and now also for trade facilitation sans India. The coalitions of the willing driving plurilaterals include the United States, EU, Japan, and many Latin American and Asian emerging markets disillusioned by India and its accomplices, Cuba, Bolivia, and Venezuela. A pivot in trade politics, China is looking to join the services plurilateral. Plurilaterals not only help American companies to export more; they enable Washington and its friends and allies to call the shots in global trade rulemaking – and isolate India, proving its policies self-defeating.

The third deal that is needed is Washington Consensus II, for the global digital economy. In the 1990s, the Washington Consensus set off a wave of deep trade and investment liberalization across the developing and post-communist world, paving the way for a tidal wave of globalization. The digital economy has no equivalent. A broad group of stakeholders and thought-leaders – governments, international organizations, companies, and think-tanks – need to come together to articulate guidelines for nations’ behavior in the global digital economy. Given its infamous connotations, the digital deal could be called “Seoul Consensus”, highlighting Korea’s leap to a leader in digitization from a rural economy just a couple of decades ago.

U.S. leadership is urgently needed to integrate the rapidly changing global trading system. It is time for Congress to step up to the plate.

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RTA Exchange Platform Presented at WTO

This week I had a chance to present at the World Trade Organization (WTO) the draft online platform of RTA Exchange, a new global forum for dialogue on regional trade agreements I conceptualized in 2012-13 as theme leader of the RTA Group of the E15 Initiative sponsored by the Internatinal Center for Trade and Sustainable Development (ICTSD), Inter-American Development Bank, and World Economic Forum. RTA Exchange has since been shaped by the members of the group and become sponsored by the Inter-American Development Bank, Asian Development Bank, and ICTSD. My firm Nextrade Group is building it to a Beta version by mid-2014. We announced the RTA Exchange during the WTO ministerial in Bali in December 2013, and will formally launch it in late September 2014.

Here is more about the event including a video: http://www.ictsd.org/themes/global-economic-governance/events/roundtable-on-mega-regionals-and-the-wto.

Picture Suominen RTA Exchange

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Use Crowdfunding to Fuel Your Global Business

I recently wrote a piece for SmallBiz Daily: http://www.smallbizdaily.com/17305/use-crowdfunding-fuel-global-business/

As the global economy rebounds, exporting is a great way to grow your small business. Consumer wallet space and infrastructure spending is booming in the emerging markets, frontier economies of Africa, Latin America and Asia are on a growth spurt, and advanced markets in Europe and Japan, collectively a 630 million consumer market, are recovering.

There are growing opportunities across sectors – industrial machinery, ICT equipment and transport equipment; consumer goods, electronics, fashion, and entertainment; clean tech products and services; water technology manufacturers, suppliers, engineers and consultants; internet of things, data visualization, wireless communications, cloud infrastructure, and so on. U.S. companies can also tap into “Womenomics”, the rise of the emerging market women who control households’ big spending decisions and have their own spending power and appetite for computers and electronics.

According to surveys, three-quarters of current small business exporters and almost one-quarter of non-exporters look to expand their global sales. America’s own recovery and macroeconomic fundamentals, such as lowering energy costs and competitively priced labor, fuel companies’ optimism and investments.

But going global is an investment – to cover upfront costs, such as creating distributor networks and meeting foreign product standards; finance the costs of export transactions, such as shipping, logistics, and trade compliance costs; and, perhaps most important and toughest, secure growth capital to expand production capacity to serve the global customer base and fulfill what can be large international orders.

Of course, few small businesses feel that capital is amply available.

This is where crowdfunding can help. Equity crowdfunding, where companies can several millions in debt and equity financing online, is a rapidly growing industry. This is traditionally fundraising applied online: Companies can use equity crowdfudning platform to connect with accredited investors and funds, who upon investing become owners or shareholders of the company or receive interest payments on a loan to the company.

Equity crowdfunding stands out from the traditional, rewards-based crowdfunding hosted by such platforms as Kickstarter and Indiegogo. In rewards-based crowdfunding, the “investor” does not expect a financial return, but is more like a contributor, receiving a coffee cup or a T-shirt or goodwill for her donation. Rewards-based crowdfunding campaigns are often on the smaller side, below $50,000, and used by startups and creative, philanthropic and social endeavors.

Equity crowdfunding opens the potential for companies to raise serious money, in the millions. Crowdfunding is especially great for small business owners are already stretched in working to bring clients in the door. The platforms open visibility and access to many more investors than you would ever get to on your own. Several crowdfunding platforms have emerged, targeting specific stages and sectors such as startups or consumer brands (see a list of crowdfunding sites).

But crowdfunding isn’t a silver bullet. The platforms expand your reach, but you still need the basics investors appreciate – a great team, great product, smart plan, ideally already in business and making money, and excellent investor materials like a Powerpoint deck and clear statement of the purpose of the use of investor money. It is also important not to put all your eggs in one basket, but to consider crowdfunding as just one of many ways to raise capital.

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eTrade Readiness Index by EIU – My interview on catalyzing cross-border ecommerce

I was recently interviewed about the reforms needed for fueling cross-border eCommerce for the new “The G20 e-Trade Readiness Index“, and Economist Intelligence Unit report, commissioned by eBay Inc.

The report is based on a quantitative index ranking of countries on the degree to which they encourage—through policy, regulation and infrastructure—cross-border trade using the Internet. The index comprises more than 40 indicators across five thematic categories: investment climate, Internet environment, international trading environment, regulatory and legal framework, and the environment for e-payments. The categories within the index are weighted according to our assumptions of their relative importance in facilitating cross-border trade using the Internet, especially for small and
medium-sized enterprises (SMEs).

Read more here

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How Big Data Streamlines Globalization

At 3:30am one May morning in 2011 in California, Tony Prophet, senior vice president for operations at Hewlett-Packard, was awakened and told that an earthquake and tsunami had struck Japan, a vital supplier of parts and equipment for major industries like computers, electronics and automobiles. Soon after, Prophet had set up a virtual situation room, so managers in Japan, Taiwan and the United States could rescue HP’s global supply chain, which at $65 billion per year feeds its huge manufacturing engine churning out two personal computers a second, two printers a second and one data-center computer every 15 seconds. HP managed, but not everyone fared as well: General Motors truck plant in Louisiana temporarily shut for lack of Japanese-made parts, and Toyota and Sony suspended production on several plants. Korean shipbuilders, European cell phone companies, and U.S. solar panel makers too were hit.

Such Acts of God resulting in glitches and losses are often unpredictable. But even the predictable patterns in the global economy have long gone unpredicted. Companies, especially small ones, lack insight into consumer whims in China, price levels in Brazil, quality of suppliers in Malaysia, or demand trends in Europe They have driven in the fog, a risky endeavor. But now a crystal ball is within reach: Big Data.

By 2020, there will be 44 times more data in the world than there was in 2009. Big data is not only numbers on Excel files – it is continuous stream of information that can be leveraged to predict the future. And it can be used to make efficiently: in the Internet of Everything, Big Data flows from one smart machine to another.

Big Data can help fix supply chains before they break. Manufacturers that collect and connect street-level data on buying habits and social media chatter with their internal data on operations, manufacturing, financial, and logistics can mitigate the infamous “bullwhip effect”, in which changes in customer behaviors magnify across the global supply chain all the way to raw material purchases. Bullwhip effect has long left companies with obsolete inventories when demand unexpectedly falls, and lost sales when demand suddenly spikes. In a recent study of 4,689 public U.S. companies in 1974-2008, two-thirds had felt bullwhip effects, typically due to over optimistic sales forecasts. Each quarter, upstream orders exceeded downstream demand by $20 million. When the Eurozone crisis expanded, Chinese exporters to Europe got stuck with excess inventories, going out of business and sending workers back to their villages.

In the era of Friedman’s Flat World (yes, I am writing a book on globalization and think we need an updated one as even Facebook and Twitter never made it in his), companies always struggled to finding reliable, high-quality and low-cost suppliers from East Asia and Easter Europe. Now, platforms separate wheat from chaff.  For example, ImportGenius uses 100 million ocean freight records, previously sitting idle in government databanks, to help U.S. manufacturers and retail chains to see which suppliers are used by such stalwarts as JC Penney and Boeing. New York firm Panjiva holds detailed records on 10 million suppliers in 190 countries to help clients understand what their competitors are buying and which suppliers they’re using. In short, companies can now see not only their own supply chain, but everyone else’s, and make better choices.

Another Flat World challenge for companies was getting pricing right in foreign markets. Now, Big Data gives a bird’s eye view for companies to see competitors’ prices in their target markets in real-time – and adjust prices in real-time to drive demand. For example, a price-monitoring platform Dynamite Data crawls more than 1,300 merchants and 11 million buy pages around the world, generating real-time price data on countless of verticals such as cars in China and widescreen HD monitors in the United States. San Francisco startup Premise uses an army of part-time laborers to take daily pictures of the prices of thousands of food and other consumer products that are not online, but in open air markets and supermarkets in developing world, such as in India. Translated online, these data not only help companies price their products to the bottom of the pyramid; they alarm in real-time governments, still stuck on using backward-looking monthly consumer price indices, about impending inflationary hikes and food crises.

Big Data makes it easier also to find new markets. Most companies, even corporations, still focus on countries as the key units in their business and marketing decisions, even though there are huge variations within countries – compare the glitzy cities in Eastern China with ones in the Western provinces. According to McKinsey, by 2025, 600 cities will drive 65 percent of global economic growth. But now the lens can be even sharper, zooming into “micromarkets”, or regional pockets of growth that don’t correspond to cities or Zipcodes, but rather to areas like Easternmost part of Mexico-U.S. border or Northwest of South Africa. Big Data will rename future markets – and they won’t be called China, Brazil or France.

Big Data empowers small business: whereas before small businesses would need to invest in costly hardware and software, now they can use cloud computing, open-source software, and software as a service to access and leverage large-scale data. Small businesses that sell online can also impute data in Google Analytics API to establish relationships between their website traffic and real-world, on-the-ground sales and shipments.

For the first time, all parts of doing global business are visible and transparent to companies of any size: any company can access data on suppliers and their credibility and prices; competitors and their process; customers and their preferences; and potential new markets and product needs. This lowers the oldest and most elusive obstacles to globalization – companies’ “information costs” to figure out foreign demand patterns and prices, and “search costs” to find customers and partners.

Of course, even the greatest data does not sing on its own: its usefulness for business insight hinges on how it is analyzed. Already companies war over the rare world-class statisticians who know what Big Data can do, can identify relevant data and wade through the complexity, and, critically, understand the business in order to ask the right questions and answer questions in the right way. In the battle of infonomics, the gap will widen not between data haves and have nots, but between analyst haves and have nots.

Granted, for specific projects with clear questions, analytical horsepower can be rented: a 50-employee online car dealer Carvana used crowdsourcing firm Kaggle to offer $1,000-$5,000 prizes to attract a hundred data modelers to establish the likelihood that particular cars found at auctions would turn out to be lemons.

A thornier challenge is governments’ growing interest in curbing companies’ access to data and its transfer across borders. Cross-border data flows are a big deal: they are key for companies that manufacture and export to access digital support services – such as logistics, retail distribution, finance or professional services – and digital goods at competitive prices, and these services depend on secure and efficient access to data. The transatlantic data flow arena is already highly contested: Europeans, incensed by the Snowden scandal, have tightened consumer data privacy rules, which complicates U.S. companies’ customer service in Europe – right when companies are hoarding information on prospective customers as a key source of competitive advantage. As advocates of free data flows go head-to-head with proponents of data localization, law suits and angry government action follow.

Another fundamental problem for transporting data is that some emerging markets like Brazil, China, Indonesia, Nigeria, Malaysia, and Vietnam have or are planning laws to force companies place servers as a condition for market access. Usually used as a job-creation program for locals to man server hubs, this too complicates doing business: for example, for companies to establish an extra server center in Brazil just to meet the law could cost as much as $40 million. According to a recent analysis by European think-tank ECIPE, this is self-defeating: server localization laws could cost 0.2-1.7 percent of national GDPs. Equally bad, many companies have servers in one country, customers in another, and operate out of a third one.

Yet there is no clarity in international law on data protectionism, or on which country can control or stop the data traveling between these three points. Policymakers need to urgently focus on this issue – it is inherently international, and at its worst, it can balkanize the global digital economy before it starts.

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Why Is ExIm Bank Having Such Hard Time with Reauthorization?

The U.S. Export-Import Bank (ExIm Bank) is in the throes of its toughest experience yet.

Congress is heatedly debating whether to reauthorize the ExIm Bank’s charter, and if it doesn’t act by September 30th, the agency will no longer be able to extend new loan guarantees to U.S. exporters. The Bank and its supporters have said that a failure to reauthorize the 80-year-old institution will hurt exports and cause companies to cut jobs.

The many critics argue the bank picks winners and losers, is used by large corporations that could have access to affordable bank lending – in Washington, ExIm has long been talked about as “Boeing’s Bank”. Tea Party is of course overall fed up with federal programs and spearheads also ExIm opposition.

These battles are not new: the agency is notoriously politicized in Washington and repeatedly struggles to secure Congressional re-authorization. Yet never before has the fight been so bloody.

I think ExIm Bank should be allowed to keep going, for four reasons.

  • First, all other major economies have export credit agencies much like ExIm aimed at helping their companies get an edge in world trade. By now, ExIm’s annual support to U.S. firms pales before that of China, for example. Without the ExIm Bank, many U.S. companies are immediately placed at a disadvantage in international markets.
  • Second, ExIm has not lost any taxpayer monies: it is not exactly a federal agency that is draining the budget and expanding the deficit.
  • Third, ExIm helps U.S. SMEs export. In our view it does a worthy job in this area, but it also has a great deal to improve, to enhance customer service to accommodate today’s realities of doing global business – something we at TradeUp work every day to bridge.
  • Fourth, ExIm Bank’s financing to large companies helps small ones: as a large company like Boeing sells a plane overseas, many U.S. small businesses benefit as suppliers of parts and services to Boeing.

Let’s drill down one aspect of ExIm’s work, with SMEs in the U.S. in the past decade, and what some of the challenges are. Go here to my blog post at TradeUp.

 

 

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Why are companies that sell on e-commerce platforms so globalized?

My new blog at TradeUp blog: http://www.tradeupfund.com/blog/why-are-e-commerce-sellers-so-globalized

As one explores international trade data, a stunning fact emerges: only 1 percent of America’s 30 million companies export. The remaining 99 percent sell only in the U.S domestic market. The explanation simple: especially small and mid-size U.S. companies have been lulled by the vast domestic market: why go through the pain of reaching foreign customers if your Ohio company already sits in a market with a quarter of the world’s spending power and can “export” to New York, Illinois, and Texas? 

Yet the United States is not an exception: only a minority of companies in any one country export – only 6 percent of Mexican companies, 10 percent of French companies, and 25 percent of Swedish companies. This is because exporting is expensive. Researching markets, finding foreign customers and partners, localizing products and services to meet foreign tastes and standards, marketing and sales, international distribution and shipping, and managing regulatory paperwork all entail costs and test a small business CEO’s mental bandwidth. Exporting has traditionally been only for exceptional businesses able to shoulder its costs and stomach the risks.

Ecommerce is turning these facts on their head. In the United States and elsewhere, 97 percent of companies selling online on eBay and other platforms export. These “e-exporters” regularly reach an average of 19 foreign markets, a stark contrast to offline exporters that typically export to just 1-2 countries, usually Mexico and/or Canada. And unlike offline exporters that typically do not last in the export game, online exporters have staying power: of even the very smallest companies, 54 percent remain active exporters after five years. Of the larger ones, 71 percent do. These patterns are very similar around the world. In Chile, Latin America’s star trader, 100 percent of companies that sell on eBay also export, on average to 28 different markets. 

 
The reason for the stunning difference between online and offline exporters is that the Internet kills distance in international trade. Trade economists have long used as their workhorse the gravity model, where trade between countries is a function of their GDPs and distance: large countries that are close to each other trade much more than small countries that are distant. France and Germany have mammoth $210 billion in trade; Sweden and Peru have less than $500,000. Distance is a big drag on trade: every 1 percent increase in distance implies a 0.7 percent less trade. German trade with Brazil, which is almost the same economic size as France but 6,000 miles farther, is only 13 percent of Germany’s trade with France.

Yet when economists analyze online trade, the distance effect vanishes: it has no meaningful explanatory power. This does not mean that shipping costs do not rise with distance; they do. What it shows is how dramatically online platforms expand the buyer’s visibility of sellers far away: the seller’s products are clearly visible and easy to explore across oceans. Online platforms’ star ratings systems, customer reviews, and payment tools such as Paypal gives the buyer a sense of trust, the lubricant of trade that in the offline economy takes several transactions between buyer and seller to build. Now the buyer can ride on the views of his peers about the seller, rather than on more indirect information such as the seller’s country image. Imagine a Korean wine importer looking for Argentine wines: now she will be able to screen and compare wineries online and order cases without ever paying a visit to the other side of the Pacific, and base her purchasing decision on information about the exporter’s reputation, rather than on the messy country profile. 

These patterns also mean that trade in the digital economy is pulled more than pushed: sellers are found, and made into exporters, by foreign buyers, rather than sellers going out and finding buyers, as is the case in offline trade. Empirically, online exporters are often “passive exporters” – companies that post their goods online and are serendipitously discovered by foreign online shoppers. Though wallflowers, these companies are much more globalized than their offline exporter peers, yet incur none of the same costs of pushing products on customers – networking, attending trade missions, renting booths at foreign trade shows, and traveling overseas to wine and dine foreign prospects. Of course, many are waging on the battlegrounds of mobile marketing, geotargeting, and social media advertisement. 

Customer service too is dramatically more efficient for online companies: when customers have access to their own personal accounts online, they do not need to be calling companies at all. And no banks are needed to secure payments when everyone can pay on PayPal or Bitcoin. 

Ecommerce platforms are the modern day version of migrant networks, such as the Chinese Diaspora, that economists have long known boost international trade by providing buyers product information, accelerating buyers’ search of suppliers, and enforcing contracts. 

Cross-border ecommerce is on track to grow at 10-15 percent rates annually, double the rates of overall world trade, to make up some 10 percent of global trade by 2017. China is the big prize: according to the Boston Consulting Group, in 2015, China will have 700 million netizens, almost twice as many Internet users as the United States and Japan combined. The next prize are the other 4 billion to-be Internet users that are going to log on by 2025. Anything can be sold to anyone anywhere: garage sales will be global. 

Everyone gains. What is unfolding is the highest expression of the New Trade Theory that earned Paul Krugman a Nobel Prize in economics in 2008: gains from trade expand as countries sell an ever-greater variety of goods at a lower cost. This insight will be ring even truer in the ecommerce economy as cross-border ecommerce will satisfy preferences that consumers did not necessarily even know they had. 

Ecommerce also accelerates international development. For example, India’s recent opening to investment by foreign ecommerce companies including Amazon, Walmart, and eBay is bound to boost domestic consumption, empower small merchants across the country, and eliminate costly middlemen in the supply chains. 

Getting online now is a great globalization strategy for any aspiring or current exporters. We here at TradeUp are highly supportive of companies that set up their own e-stores and place products on ecommerce platforms from Amazon to Alibaba. Here are good guides for preparing your business for ecommerce by UPS and by the government: http://www.forbes.com/sites/ups/2013/07/16/how-to-build-an-export-friendly-e-commerce-site/ and http://export.gov/missouri/static/E-Commerce%20Guide_Latest_eg_us_mo_032053.pdf. 

We also believe that policymakers need to raise their game and remove obstacles to e-exporters, especially prevalent the developing world, such as curbs on Internet freedoms, high fees and tariffs on cross-border online sales, and complex customs regulations that complicate shipments of small parcels, the hallmark of the online economy. The wide digital divides between the larger emerging markets and many less advanced parts of Africa, South Asia, Latin America, and Eastern Europe too await bridging. But the online opportunity is real and can be exploited right now, while governments mull over rules.

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