04.30.09
Posted in Latin America, Negotiating, Obama Administration, Trade Policy at 4:20 am by Administrator
The recent Summit of the Americas in Trinidad marked a positive change in US attitudes towards Latin America. Much has been made of the interchanges with Hugo Chavez but the real story is that the Obama Administration has decided to approach Latin America as an equal rather than the big brother (bully?) to the north. I suspect that in the long run the new stance will do more to undercut the likes of Chavez than all the bully tactics of the Bush Administration.
The one country absent from the gathering of hemispheric leaders was Cuba. There have been some movements by Cuba on loosening the grip of the dictatorship since Raul Castro took over from his brother Fidel and Obama responded by allowing greater contact between families in the US and Cuba. Obama is wisely playing a shrewd negotiating game by giving small concessions. I think the small steps will lead to wide fissures that will result in a return to democracy. Whenever democracy arrives in Cuba, it take place in a relatively short time and from within (not caused by external pressure). The US embargo policy lost its effectiveness decades ago but it can still be traded away for reforms.
The last important result of the Summit of the Americas was that the Obama Administration placed itself squarely in the camp of preserving free trade. As we face the worst recession since the Great Depression, the lessons of how protectionist measures (Smoot-Hawley bill) prolonged the Depression have not been lost on the Obama Team. USTR Kirk announced that the US would not seek changes in the NAFTA agreement and would push for ratification of the draft Free Trade Agreements with Panama, Colombia and South Korea. These are all good agreements and we should urge our Representatives and Senators to approve the measures. In this global economic downturn, we need to reaffirm the need for open global markets that will promote economic recovery.
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03.31.09
Posted in Cross Cultural, Latin America, Strategies at 6:51 pm by Administrator
Hillary Clinton’s visit to Mexico last week centered around ways to deal with the violence surrounding the trade in illegal drugs. The Mexican government has been cracking down on the cartels, resulting in open conflicts with the authorities and among the drug runners. Now the violence has landed on our doorsteps. In the past, there have been drug wars on the streets of major cities (remember Miami Vice and more recently CSI Miami?) but the spill over effect along the border is something new. And the Mexican authorities did raise a valid point with Secretary Clinton that the US was the source of the high powered assault weapons.
My first international posting was in Colombia at the beginning of the “War on Drugs.” We had about 160 US prisoners in Northern Colombia (I was stationed in Barranquilla and our Consular district covered the northern coast). The attitude among many Colombians was that drug use was an American problem and if their impoverished country made money off of the stupid “gringos” then no harm was done. The problem was that the corruption that accompanied the drug trade poisoned every aspect of Colombia’s society and the country was been locked in internal strife for the past thirty years. The Mexican authorities learned from that lesson but the cost of attacking drugs will be very high.
What has this to do with business? When you are conducting business in a country that is riddled with drug corruption, you need to be very careful of vetting whom you are doing business with. The “families” of the drug cartels will have the money in the country. I would recommend strongly against using as an importer or agent anyone involved with the trade. If you can’t find any reliable agent not involved with the trade, I’d consider skipping that country. Consider what the impact would be if it appeared on the front page of the New York Times that your company was involved with drug traffickers. If you need help in vetting an agent, use your usual sources — other businesses, banks, internet searches and Embassies. I always found that the US Embassy is good about telling you who you should be careful about, even if they can’t tell you exactly why.
In addition, if you are operating in a country where there is considerable drug violence, you need to take the advice of your security advisers or Embassy very seriously. You don’t want to get caught in the middle of random violence or worse involved as a target of the cartels.
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02.28.09
Posted in Economic Analysis, Japan, Latin America at 6:52 pm by Administrator
We’re in a position in the world economy that few in America would have imagined one year ago. And yet there are lots of examples from countries around the world that went through similar crises — we just never thought it would happen to us.
I’m shifting the focus of the my postings over the next few months from Asia to Latin America. I’ll be teaching a course on “Doing Business in Latin America” at Golden Gate University and I’ll work in examples from that. There are many examples of dealing with debt crises and cleaning up bad bank loans from the crises in the 1980’s that swept through the continent.
But before we switch gears, I’d like to take one final lesson from Japan. I talked previously about how Japan had gotten itself out of the “Lost Decade” of the 1990’s by taking the tough medicine of forcing the banks to clean up their loans and by making internal reforms in government organization and regulation. There are lingering costs however in terms of consumer spending. The New York Times wrote a great article last week about how Japan’s consumers have cut back spending as a response to stagnant real incomes. The Japanese were famous for saving up to the 1980’s but even that rate has fallen as the country rapidly ages.
The US has finished not so much a business cycle as a credit cycle. Private sector debt has risen steadily as a percent of GDP since 1952, accelerating rapidly during the Reagan years and since 1997, reaching over 350% of GDP. The market is correcting and credit will be tighter. This means less consumer spending, fewer leveraged buyouts, less M&A activity, lower inventory levels, etc. Companies will have to rely on organic growth as opposed to infusions of equity (especially from hedge funds) or debt. We face a difficult era ahead for the middle-class worker.
What is the way out? The US has traditionally grown around 2 1/2 to 3 1/2 percent in real terms. About half of this has been due to population growth while the other half has been due to increases in productivity. The emphasis is going to have to be on productivity and the key there is education, education and education.
Send me your thoughts.
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01.30.09
Posted in China, Economic Analysis at 10:51 pm by Administrator
The New York Times ran on January 16 an analysis of the dramatic drop in international trade since last summer. Virtually every major economy has suffered a drop. (See this graphic which sums it up quite nicely). There has been undoubtedly a reduction in demand as economies turn into recession. The countries that pursued export-led economic strategies have paid the heaviest price — China’s exports to the US were down 3% as US retailers cut back orders sharply for the Christmas season. Again the New York Times ran a good analysis on January 21 and the misery is felt even in low wage countries like Indonesia.
Another reason was the sharp reduction in credit. With the collapse of many major creditors and the remainder becoming extremely skittish about lending, trade has been hit particularly hard. Banks have cash on hand and even guarantees such as from the US EXIM Bank but still there is a reluctance to lend. The new O’Bama administration, in concert with the leaders of other major industrialized nations, needs to add trade finance to the list of areas where banks need to be nudged.
One of the features of the Great Depression brought on by protectionism (Smoot Hawley Act in the US) was the dramatic decline in trade volume. The lack of credit can have the same effect. The world economies cannot recover without adequate trade finance facilities.
It’s going to be a difficult New Year. Send me your thoughts on how international business can cope in the recession.
Gung Hay Fat Choy!
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12.29.08
Posted in China, Economic Analysis, Exchange Rates, Obama Administration, Trade Policy at 6:49 am by Administrator
The New York Time has been running an oustanding series entitled “The Reckoning” which explores the causes of the global economic crisis. I recommend the one published this week entitled “Chinese Savings Helped Inflate American Bubble” by Mark Landler. Landler pointed out how Chinese money (from the huge export surplus due to the fixed exchange rate policy) helped the US run a risky economic policy (sharply expansive fiscal policy fueled by large deficits at the same time as an expansive monetary policy from a low interest rate policy). The first to write about the phenomenon was a leading economist (guess who?). Landler starts off the article:
In March 2005, a low-key Princeton economist who had become a Federal Reserve governor coined a novel theory to explain the growing tendency of Americans to borrow from foreigners, particularly the Chinese, to finance their heavy spending.
The problem, he said, was not that Americans spend too much, but that foreigners save too much. The Chinese have piled up so much excess savings that they lend money to the United States at low rates, underwriting American consumption.
This colossal credit cycle could not last forever, he said. But in a global economy, the transfer of Chinese money to America was a market phenomenon that would take years, even a decade, to work itself out. For now, he said, “we probably have little choice except to be patient.”
Today, the dependence of the United States on Chinese money looks less benign. And the economist who proposed the theory, Ben S. Bernanke, is dealing with the consequences, having been promoted to chairman of the Fed in 2006, as these cross-border money flows were reaching stratospheric levels.
As I blogged previously, the US consumption binge was fueled with Chinese money. The trade policy of a fixed exchange rate allowed China to price its goods aggressively in the US markets. China however had to sterilize the inflationary effects of the export surplus by buying up the excess dollars. It then invested those dollars in Treasury securities, even though the Fed was keeping US rates low. (Other Asia export-oriented countries did similarly with their surpluses, although at a much smaller scale.)
The US made its share of economic mistakes as well. The Bush Administration started two wars without raising taxes, relaxed financial regulation and supervision and took advantage of the Alan Greenspan’s low interest rate policy. In the ensuing party, the banks gave away mortgages to just about anyone, causing a huge housing bubble. Unfortunately, US policy makers focused largely on the domestic US market, and thus they missed the “blinking red light.” The US inflation indicators excluded the wealth effects of higher stock indices and higher housing prices. Without those two components, inflation looked under control, especially in the consumer goods portion of the CPI where Chinese imports kept down prices. The little that US policy makers looked at international issues was with regard to the euro/dollar or yen/dollar relationship.
One lesson that has to be learned is the US is inextricably entwined in the world economy and that it no longer sets the agenda. It can play a leadership role if it chooses to participate in the game. The incoming Obama administration has the intellectual horsepower to make that mental shift. My New Year’s wish is that the Obama administration will formulate its economic policies with a global vision.
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11.30.08
Posted in Economic Analysis, Government Resources, Strategies at 8:10 pm by Administrator
I ran a roundtable discussion on international markets at the Fifth North Bay Growth in Innovation Forum in Santa Rosa on November 13. (I organized these in conjunction with the City of Santa Rosa — Nancy Mancester — and some great Chamber member volunteers, this time led by Mike Adler) As usual there were lots of companies with great ideas — computer architecture to combat viruses and spyware, web 2.0 social networking, green building, etc. One of the entrepreneurs told me that he wasn’t participating in my roundtable discussion because he had to concentrate on domestic markets. I said that this was exactly the best time to renew your international efforts.
Why?
– Markets that were previously very competitive may have shrunk, but this is the time where customers will be rethinking costs and traditional relationships. If you concentrate domestically, you will be fighting on a limited market.
– Competitors may now be willing to look for partnerships with the weaker ecoomy. This opens the potential to create new product lines and markets. Again, you have the entire globe, instead of a shrinking domestic market.
– Suppliers around the world are hungry for new customers — you can cut deals now that were unattainable even two months ago.
One theme that emerged from the Fifth Growth & Innovation Forum was that there are incredible resources available. Nowhere is that more true than with international markets. Yes, there is greater risk but there is greater support. So get out there!
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10.24.08
Posted in Expat Issues, HR, Strategies at 4:18 am by Administrator
Recently, a former student of mine wrote from his first overseas position with an international company. He told me that though he appreciated my class, he felt that there was one area that I didn’t address — how tough it was to be the expatriate. He was excited by the position but felt lonely and isolated. Here’s how I answered him:
“I agree that taking the overseas assignments will help your advancement, particularly in a global company. The assignments will also broaden your perspective and give you a lot of valuable skills.
“You’re right I didn’t talk about the difficulties of the expat. I tried to figure out how to convey the complex emotional issues involved for people without the direct experience. I will give you the insights that I got at the State Department in my first training course.
“Everyone goes through a series of ups and downs when moving to a new country — it’s called culture shock. The first months are great — everything is new and in some ways magical. You see life through a different set of lenses. Then the culture shock part sets in — usually somewhere in the three to five month span after arriving in the new location. You start being aware of all of the cultural cues that you are either missing or don’t understand. Ordinary tasks, like figuring out where to find a doctor or a barber get on your nerves. Traffic and local driving customs seem mad to you. Somewhere about six to eight months you achieve the long-run equilibrium. If you’re in a location that suits you, your mood will be positive. If you are in a place that is not suited to you, your mood will be less than your “normal” state. I had culture shock to some degree in all six of my overseas postings — so take it as normal. Life can feel very isolated and lonely at the beginning. The key is to go out and make the new friends — and get everything you can out of your posting.
“By the way, there is also reverse culture shock. When you come back to the US, you see it with different lenses. A lot of the customs we have seem odd — even barbaric. Our solution to health care seems inhumane for those suffering economic losses from major illnesses. I remember the time that I took a German trade delegation to San Francisco in 2000 while I was still Consul General in Hamburg. We came off the freeway from the airport onto Sixth Street, right into the Tenderloin with homeless and drug dealers wandering the streets. They were shocked and I was embarrassed as an American. Most who live here in San Francisco just drive right by ignoring the human plight.
“A word of advice as a returning expat: The Expat comes back to headquarters with ambivalence having seen different solutions work just as well in other parts of the world and citicism of practices here in the US. This is sometimes taken by headquarters as less than enthusiastic support for the mission of the company. Some corporations deal with this by keeping their expats overseas; others banish the former expat to marginal parts of the company; the wise companies learn how to integrate these people into their hierarchy. So when you come back to the US, ask your other expats how the company rewards them. That will be a major career decision point for you.
“The Foreign Service Officer who ran that first training course gave me some advice, that I made my objectiveeveryplace I was stationed: “Make each post a better place for your having been there. Strive to leave each post a better person physically, morally and spiritually.”
I’d be interested in any of your experiences in overseas living. Please post your comments.
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10.01.08
Posted in Finance, Strategies at 4:02 am by Administrator
With the current credit crisis, one question that continues to arise is ”Is my money safe?” That certainly is a major consideration for personal banking and it is to a degree also important for international business.
If you look at the banking landscape, there are lots of banks offering services — and that works to the advantage of the international business person. Your local bank where you do your banking and credit may be fine to finance the domestic side of your business but you need a bank with global reach for international work. And more importantly, you need a bank that has experience in your principal export or supplier markets. A bank that has a good European network but few relationships in Asia won’t help you with letters of credit to pay your Chinese suppliers.
My strategy would be to have a number of banking relationships. You need a key bank in your domestic market to provide lines of credit and for working capital needs. You’ll need another bank or banks to handle your international transactions — currency transactions, letters of credit, and a resource for the local market. In many ways, the function as a resource about the local market is the most important. The bank can provide market intelligence as well as serve as a referral resource.
Lastly, if you are not satisfied with your bank, look around. The competition in the marketplace will serve you well.
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09.29.08
Posted in China, Economic Analysis, Exchange Rates, Finance, Strategies at 2:47 am by Administrator
A number of months ago, I blogged about the interconnectedness of modern financial markets. The events of the last month have clearly demonstrated this.
We have to look back about a decade for the origins of the crisis which had its origins in the US policy to promote home ownership. In 1997, the US changed its rules on capital gains to allow individuals to avoid (on two properties no less) capital gains tax on less than $500,000. (Remember that the US allows a personal tax deduction on interest only for those associated with a home mortgage.) After that, banks and other lenders began liberalizing the documentation required to get home loans and lots of people qualified for loans that previously couldn’t. People do react to the economic incentives around them and the prices of houses in real terms began to soar — who couldn’t afford to be part of the great bonanza provided by Uncle Sam.
A second enabling factor was the huge fiscal deficit by the United States. George W. Bush decided to fight two global wars without a tax increase. The result was over a trillion dollars injected into the economy.
Next, the expansive fiscal policy was complemented by an accommodating monetary policy. From early 2001 when the tech downturn took place and accelerating after the 9/11 attacks, the Fed cut and maintained interest rates at very low levels. From their point of view, the Fed looked at domestic inflation and saw little impact, but did see a continuing weak economy. It continued its accommodating monetary policy into 2005-7.
Both the White House and Fed saw the positive impact of their policies in a steady US expansion. What they missed were the negative results. First, despite the grossly expansionary fiscal and monetary policies, there was little US inflation as measured by the CPI or WPI. Why — first of all housing prices were not included in the CPI — only rental prices as a proxy. Secondly, Washington didn’t look at the role of international markets. – specifically tradable versus non-tradable goods and services.
While US prices have not move dramatically over the past years, the subsets have. Internationally traded goods — like food, clothing and consumer goods — have shown little growth and in the case of electronics, prices have fallen. Why? Because as international trade barriers have fallen, cheaper international goods have flooded the US marketplace. The consumer has profited from lower prices. There have been negative effects for those workers in those industries who saw their jobs move overseas. Non-traded goods, like health care and education, soared since consumers had extra money in their pockets (often after having taken out second mortgages on their homes that suddenly were worth much more). And the non-traded good with the largest price increase — houses — were excluded from the index. In short, we exported part of the inflation (and at the same time lots of US jobs) and we were baffled at why education and health care continued to rise far faster than the CPI.
As Americans purchased more goods and services from overseas, the trade and current account deficits soared. Suddenly there were lots of US dollars flooding world currency markets. Here comes in the last element — normally, the rates of exchange would have corrected themselves by making dollars cheaper, pushing exports and decreasing imports. However during most of this time, China wanted to keep its exchange rate fixed to ensure continued export competitiveness. The Chinese were able to support the RMBI only by buying up the excess dollars, with which they bought US Treasury notes.
US home prices started turning down in late 2006 and accelerated this past year. As a result, many found their home prices less than the mortgage, causing defaults. That cascaded from the mortgage holders to the guarantors of the mortgages (Fannie Mae and Freddie Mac) to the investment banks (Bear Stearns, Lehman Brothers) to the insurers of the derivatives (AIG). At the same time, the Chinese government lost the capacity to control the influx of cash and resultant inflation. It has let the RMBI appreciate at a 15% per year rate and took severe measures to restrict the leverage of the Chinese banks. When the financial crisis hit in the US, the Chinese were also worried about buying US securities, accelerating the global credit crunch.
What’s the moral in this? Bad economic policy catches up with you. In this interconnected world, the results may be less easy to see, but the markets eventually punish excesses. So for all those who say Wall Street greed led to the collapse, you missed the essential elements. The bubble couldn’t have built up except for huge fiscal deficits, tax policy pumping up one sector, accommodating monetary policy and attempts internationally to fix exchange rates. Wall Street firms are supposed to be greedy — it’s the job of the politicians and ordinary citizens to make sure that this doesn’t happen.
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08.28.08
Posted in China, Economic Analysis, Government Resources at 9:23 pm by Administrator
This year’s Olympics were a triumph for China and awakened considerable interest in this rising power. Here are a couple of great resources for you to check out on doing business in China.
Song White, who has incredible experience in doing business in China, has developed Beijing Show and Go which provides a translation aid for in Mandarin and English especially for Beijing. While you’re there, check out her regular site, White Song Books, which also has telephone cards for China. It’s certainly much cheaper than paying for the international rate for phone call from your mobile phone when you’re just calling around the corner.
“The Little Red Book of Doing Business in China” is a great book which takes sayings from Chairman Mao to understand the how and why of doing business in contemporary China. The author, Sheila Melvin, spent seven years working in China, including for the Shanghai chapter of the US-China Chamber of Commerce. This is far and away the best guide for understanding the business culture of China that I’ve come across.
Another great book to help you understand the culture and thought processes of China is “China Road, A Journey into the Future of a Rising Power” by Rob Gifford. Rob, for many years the NPR correspondent in Beijing, writes about a trip he took from Shanghai to the Kazakhstan border on one of China’s national roads. Much like the US Route 66, parts of the road have been replaced by superhighway, but like Route 66, the trip to the cities and small towns reveals the soul of the country. One of the features of the books is that it takes face on the strengths and the problems of contemporary China, including pollution, ethnic minorities and human rights. This is a great read that I recommend highly.
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