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ALL THE WORLD TREASURES AN HEIRLOOM – TOMATO, THAT IS

heirloom tomato

ALL THE WORLD TREASURES AN HEIRLOOM – TOMATO, THAT IS

Everyone Can Enjoy an Heirloom

Spring weather heralds the start of weekend farmers markets offering colorful fruits and vegetables, artisanal cheeses, and home-made baked goods. Along the east coast, tomatoes play a starring role at the local farmers markets. Green, yellow, orange, brown, grape tomatoes, cherry tomatoes, large, small – the variety seems endless.

Farmers markets are a great way to shop fresh and seasonal, but if you can’t get there, you can still find an increasingly impressive selection of tomatoes at your local grocery store. Are the tomatoes in the organic corner market the same tomatoes you get from the farmer? Unlikely. For the most part local farmers cannot sustain supply to large grocery chains where consumers are demand tomatoes year round. To meet that demand, the business of the heirloom tomato has grown global.

Pimp my Tomato

Italians made tomatoes a kitchen staple, but the tomato didn’t originate in Europe. Researchers have traced its origin to the “pimp,” a pea-sized red fruit that grows naturally in Peru and Southern Ecuador. As with so many foods we love, the Mexicans domesticated the tomato and Spanish explorers brought it home, where locals created a sweeter and tastier, but also more vulnerable, tomato.

Whether due to the preferences of grocers or their shoppers, the market overwhelmingly demands that growers focus on the few breeds of tomatoes that dominate our grocery shelves today. Producers worked to change the characteristics of tomatoes through cross-pollination in order to increase yield, to produce uniform shapes and sizes with smooth skin, and to render the tomatoes hardier for transport. Tomatoes are picked while green and artificially ripened with ethylene gas, sacrificing better taste for better looks (the flavor comes from the sugars that develop as the tomato ripens naturally).

partial-dg-pimp-tomato-graphic-for-web

Photo: The pimp fruit by David Griffen, Smithsonian.com

The New (Old) Tomato

The strict definition of heirloom tomato is a variety of tomato that has been openly pollinated for more than 50 years. Today, most experts would consider heirlooms as any non-hybrid tomato. Unlike heirlooms, many hybrid vegetables and fruits, while resilient and uniform, produce seeds that cannot reproduce. Therefore, the open pollination principle for heirlooms is key. As a result, it is the seed savers and gardeners with a flair for history that helped propel heirloom tomatoes to their elite status.

In the last decade, consumers started going back to the tomato’s heirloom roots. Top restaurants, prominent chefs, cooking magazines, the farm-to-table movement, and the proliferation of farmers markets have all put heirloom tomato flavor on display. Americans have become more tomato-curious than ever.

Regional is the New Local

Generally speaking, the entire world loves a tomato. As the most consumed vegetable in the world, we devour 130 million tons of tomatoes every year, of which 88 million are sold fresh. The remaining 42 million tons are destined for processing into tomato sauce and other products. China, the European Union, India, the United States, and Turkey are the world’s top producers.

Trade in tomatoes tends to be regional. Asia, Europe, and Africa represent 45 percent, 22 percent, and 12 percent, respectively, of global production, and much of what’s grown in one region is traded there. France, for example, is the fifth largest producer of tomatoes in Europe, exporting one quarter of its production across the European continent, primarily to Germany.

North American Tomato Trade – A Tasty NAFTA Product

About half of fresh tomatoes consumed in the United States are imported. The government applies tariffs to fresh tomatoes from countries we don’t have a free trade agreement with, and the tariffs fluctuate based on the timing of the U.S. growing season. From March 1 to July 14 (when Florida’s volume is highest and California and southeastern producing states begin to ship commercial tomatoes), it’s 3.9 cents per kilogram. Between July 15 until August 31, it goes down to 2.8 cents per kilogram (availability of locally grown tomatoes is highest). September 1 to November 14, it goes up again to 3.9 cents per kilogram. For the remainder of our winter, November 15 until March 1, it goes back down to 2.8 cents per kilogram.

Nearly all of fresh tomatoes we import into the United States come from Mexico (89 percent) and Canada (10 percent) duty-free under NAFTA. NAFTA partners are also the primary destinations for exported American tomatoes, with 77 percent of our exports going to Canada and 20 percent to Mexico. (The United States manufactures 96 percent of the tomatoes it uses in processing.)

Even though they enter the United States duty-free, tomatoes from Mexico are subject to minimum prices that vary based on the season; the price floor for winter tomatoes ranges from 31 cents to 59 cents, while summer tomato prices vary between 24.6 to 46.8 cents, depending on the tomato category. This is because Mexico has gotten very efficient at producing tomatoes year-round, which concerns some segments of American growers, particularly in Florida.

Florida growers are seeking changes to U.S. antidumping and countervailing duty proceedings in the current renegotiations of NAFTA to allow them to pursue dumping cases based on pricing in one specific season versus relying on three years of data, as is currently required. This proposal has created rifts among U.S. growers – primarily Southeast growers who support it and Western growers who fear its consequences. Mexico has also expressed strong opposition. American producers of other fruits and vegetables have also publicly opposed the proposal. They worry Mexico could use the same approach against American exporters of perishable produce.

Global, Regional, Local – It’s All Good

Our love for tomatoes will not recede any time soon. Improvements in technology are helping farmers increase their yields while maintaining or even reducing the acreage they are devoting to tomatoes. But even as trade routes for tomatoes are increasing and broadening, the allure and specialness of a locally-grown fresh tomato remains.

Tomatoes are the most popular plant for amateur home gardeners like myself. And with spring in full bloom, it’s only a matter of time before local tomatoes explode onto the scene in our neighborhood farmers market, exhibiting their versatility and flavor. The heirloom tomato has once again returned to prominence – just sprinkle a little salt on it, and take a satisfying bite. Trust me, you won’t regret it.

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Ayelet Haran

Ayelet Haran is a contributor to TradeVistas. She is a government affairs and policy executive in the life sciences industry. She holds a Master’s of Public Administration degree in International Economic Policy from Columbia University.

This article originally appeared on TradeVistas.org. Republished with permission.

saw log

The Pandemic to Put a Drag on the Growth of the Global Coniferous Saw Log And Veneer Log Market

IndexBox has just published a new report: ‘World – Saw Logs And Veneer Logs (Coniferous) – Market Analysis, Forecast, Size, Trends and Insights’. Here is a summary of the report’s key findings.

The Global Saw Log and Veneer Log Market Expanded Robustly Over the Last Decade

The global market for saw logs and veneer logs (coniferous) totaled $68.8B in 2019, increasing by 2.5% against the previous year. This figure reflects the total revenues of producers and importers (excluding logistics costs, taxes, and margins, which will be included in the final consumer price). The market value increased at an average annual rate of +1.3% over the period from 2007 to 2019; the trend pattern remained relatively stable, with somewhat noticeable fluctuations throughout the analyzed period. Global consumption peaked in 2019 and is expected to retain growth in the near future.

The countries with the highest volumes of consumption of saw logs and veneer logs (coniferous) in 2019 were the U.S. (261M cubic meters), Russia (168M cubic meters), and Canada (113M cubic meters), with a combined 46% share of global consumption. In value terms, the largest saw logs and veneer logs (coniferous) markets worldwide were the U.S. ($13.2B), Russia ($9.3B), and Canada ($5.7B), together comprising 41% of the global market.

Sawlogs and veneer logs are one of the basic materials around the world, as they serve as raw materials for the production of sawn wood and all kinds of wood-based panels, which are widely used in construction, and, at a lesser extent, in industry. The key factor determining the development of the saw logs and veneer logs market is the dynamics of construction in a particular country, which, in turn, depends on a set of economic and social factors: population growth, employment and income of the population, economic growth of the country, rates of urbanization, investment volumes and the availability of credit resources for the population, which altogether reflect the overall GDP growth.

Over the past years, the global construction industry has grown at a steady pace thanks to residential construction and major investment infrastructure projects, in both emerging markets and some developed markets. The main driver of growth in the global construction industry was the growing demand from developing countries, mainly China and the countries of Southeast Asia.

In these countries the economic growth rates are the highest in the world, which is accompanied by active urbanization and growth of the population’s income; all this together leads to an expansion of the volume of housing, industrial, and infrastructural construction. The pace of construction in the United States was also high, which was due to both the growth of the economy and the tendency to move from large cities to the suburbs, as well as active immigration; these factors were especially relevant to the saw log market due to the high popularity of wood construction materials in America.

The Lockdown and Uncertainty in the Construction Sector to Hamper the Market Growth

Until 2020, the global economy has been developing steadily for five years, although at a slower pace than in the previous decade. The slowdown in global economic growth was caused by increased political uncertainty in the world and trade wars between the United States and China. According to the World Bank outlook from January 2020, the global economy was expected to pick up the growth momentum and increase by from +2.5% to +2.7% per year in the medium term.

In early 2020, however, the global economy entered a period of the crisis caused by the outbreak of the COVID-19 pandemic. In order to battle the spread of the virus, most countries in the world implemented quarantine measures that put on halt production and transport activity. The result will be a drop in GDP relative to previous years and a sharp fall in the demand for oil, which led to extremely low prices and heavy oil production cuts.

The combination of those factors disrupts economic growth heavily throughout the world. According to World Bank forecasts, despite the gradual relaxing of restrictive measures and unprecedented government support in countries that faced the pandemic in early 2020, the annual decline of global GDP could amount to -5.2%, which is the deepest global recession being seen over the past eight decades.

In Asian countries, especially China, which faced the pandemic earlier than others, the epidemic situation improved earlier, with the quarantine measures largely relaxed, and the economy is gradually recovering from the forced outage. Thus, in China, by the end of 2020, an increase of 1% is expected (while a year earlier it was 6.1%), and in general in Southeast Asia in 2020, an increase of 0.5% is expected. In the medium term, it is assumed that the economy will gradually recover over several years as the restrictions are finally lifted.

The U.S., by contrast, is struggling with a drastic short-term recession, with the expected contraction of GDP of approx. -6.1% in 2020, as the hit of the pandemic was harder than expected, and unemployment soared due to the shutdown and social isolation. In the medium term, should the pandemic outbreak end in the second half of 2020, the economy is to start recovering in 2021 and then return to the market trend of the gradual growth, driven by the fundamentals existed before 2020 and boosted by support measures imposed by the government. In the European Union, the economy may plunge by 9% in 2020, in many other countries a comparable negative trend is also expected.

An additional serious risk for the medium-term recovery is the growth of geopolitical tensions in the world, especially between the United States and China, which are being drawn into a political confrontation on a wide range of issues. If sanctions and restrictions are tightened, it will hit global trade and worsen economic growth both in the United States and China and in many other countries involved in supply chains.

The construction sector has proven extremely vulnerable to the pandemic as due to quarantine measures, construction projects were paused, and the drop in incomes of the population makes mortgage loans less affordable. Thus, the above economic prerequisites will have the most negative impact on the production of building materials, and, therefore, on the consumption of saw logs and veneer logs.

Taking into account the above, it is expected that in 2020 global consumption of saw logs and veneer logs will drop by approx. 5%. In the medium term, as the global economy recovers from the effects of the pandemic, the market is expected to grow gradually. Overall, market performance is forecast to expand with an anticipated CAGR of +0.3% for the period from 2019 to 2030, which is projected to bring the market volume to 1.2B cubic meters by the end of 2030.

Production

For the seventh consecutive year, the global market recorded growth in the production of saw logs and veneer logs (coniferous), which increased by 1.8% to 1.2B cubic meters in 2019. The total output volume increased at an average annual rate of +1.5% from 2007 to 2019; the trend pattern remained consistent, with only minor fluctuations being recorded throughout the analyzed period. The most prominent rate of growth was recorded in 2010 when the production volume increased by 6.4% year-to-year. Global production peaked in 2019 and is expected to retain growth in years to come.

In value terms, the production of saw logs and veneer logs (coniferous) expanded modestly to $69.8B in 2019 estimated at export prices. The total output value increased at an average annual rate of +1.6% from 2007 to 2019; the trend pattern remained relatively stable, with only minor fluctuations being recorded in certain years. The growth pace was the most rapid in 2017 when the production volume increased by 9.4% y-o-y. Over the period under review, global production attained the peak level in 2019 and is likely to see gradual growth in the immediate term.

Production By Country

The countries with the highest volumes of production of saw logs and veneer logs (coniferous) in 2019 were the U.S. (278M cubic meters), Russia (181M cubic meters), and Canada (120M cubic meters), with a combined 49% share of global production. These countries were followed by Sweden, Finland, Brazil, New Zealand, Germany, Poland, Chile, China, and Japan, which together accounted for a further 30%.

From 2007 to 2019, the biggest increases were in New Zealand, while the production of saw logs and veneer logs (coniferous) for the other global leaders experienced more modest paces of growth.

Imports

In 2019, global imports of saw logs and veneer logs (coniferous) totaled 155M cubic meters, growing by 3.4% against 2018 figures. Overall, imports saw a relatively flat trend pattern. The pace of growth appeared the most rapid in 2010 when imports increased by 24% against the previous year. Global imports peaked at 165M cubic meters in 2014; however, from 2015 to 2019, imports remained at a lower figure. In value terms, imports of saw logs and veneer logs (coniferous) contracted to $8.1B (IndexBox estimates) in 2019.

China Remains the Largest Market for Imported Coniferous Saw Logs and Veneer Logs

China was the key importer of saw logs and veneer logs (coniferous) in the world, with the volume of imports accounting for 69M cubic meters, which was approx. 45% of total imports in 2019. Austria (17M cubic meters) occupied an 11% share (based on tonnes) of total imports, which put it in second place, followed by Sweden (7.3%), Japan (7%), Germany (6.8%) and South Korea (4.8%). Belgium (3.7M cubic meters) followed a long way behind the leaders.

Imports in China increased at an average annual rate of +4.2% from 2007 to 2019. At the same time, Belgium (+7.5%), Germany (+5.3%), Sweden (+4.4%) and Austria (+2.5%) displayed positive paces of growth. Moreover, Belgium emerged as the fastest-growing importer imported in the world, with a CAGR of +7.5% from 2007-2019. By contrast, South Korea (-3.4%) and Japan (-5.4%) illustrated a downward trend over the same period.

In value terms, China ($4.1B) constitutes the largest market for imported saw logs and veneer logs (coniferous) worldwide, comprising 50% of global imports. The second position in the ranking was occupied by Japan ($663M), with a 8.2% share of global imports. It was followed by Austria, with a 7.2% share.

From 2007 to 2019, the average annual growth rate of value in China amounted to +5.5%. In the other countries, the average annual rates were as follows: Japan (-4.0% per year) and Austria (-1.0% per year).

The average import price for saw logs and veneer logs (coniferous) stood at $53 per cubic meter in 2019, shrinking by -3.3% against the previous year. Over the period under review, the import price recorded a relatively flat trend pattern. The pace of growth was the most pronounced in 2008 an increase of 17% y-o-y. As a result, import price attained the peak level of $63 per cubic meter. From 2009 to 2019, the growth in terms of the average import prices remained at a somewhat lower figure.

There were significant differences in the average prices amongst the major importing countries. In 2019, the country with the highest price was Japan ($61 per cubic meter), while Belgium ($34 per cubic meter) was amongst the lowest.

From 2007 to 2019, the most notable rate of growth in terms of prices was attained by Japan, while the other global leaders experienced mixed trends in the import price figures.

Source: IndexBox AI Platform

u.n. sanctions

U.S. Seeks Snapback of U.N. Sanctions on Iran Despite Departure from Nuclear Deal

The United States is formally demanding that the United Nations (U.N.) reimpose sanctions on Iran for its failure to meet commitments to limit its nuclear program set forth under the Joint Comprehensive Plan of Action (JCPOA). U.N. sanctions on Iran were lifted in 2015 as part of the terms of the JCPOA, which included the United States, European Union, France, Germany, the United Kingdom, Russia, and China as signatories. The U.S. formally withdrew from the JCPOA in 2018 and reinstated sanctions on Iran.

According to President Trump, the U.S. intends to restore “virtually all of the previously suspended U.N. sanctions on Iran. It’s a snapback.” Secretary of State Mike Pompeo is scheduled to go before the United Nations this week to officially notify the Security Council that the U.S. intends to restore U.N. sanctions on Iran. According to the Department of State’s press release, a range of U.N. sanctions will be restored within thirty (30) days, including the requirement to end all nuclear enrichment activities and the extension of the arms embargo on Iran, which is currently set to lapse in October.

The decision to request a snapback of U.N. sanctions on Iran follows the failure of an effort to extend a five-year U.N. arms embargo on Iran. The legality of the requested snapback by the U.S. has been questioned by other members of the JCPOA and the U.N. Security Council because the U.S. is no longer a party to the agreement. The Administration, however, maintains that as a permanent member of the Security Council, it has the authority under U.N. Security Council Resolution 2231 to push for a snapback of sanctions.

As a “participant state” in the JCPOA under the resolution, the U.S. claims it can assert “significant non-performance of commitments” by Iran to force a snapback within 30 days. It is not clear how the U.S. without support from Europe would enforce the U.N. sanctions. Without support from the rest of the Security Council, the U.S. will need to enforce sanctions unilaterally.

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Cortney O’Toole Morgan is a Washington D.C.-based partner with the law firm Husch Blackwell LLP. She leads the firm’s International Trade & Supply Chain group.

Camron Greer is an Assistant Trade Analyst in Husch Blackwell LLP’s Washington D.C. office.

Cultural intelligence

Leading in a Volatile World: How Cultural Intelligence and Political Risk Abilities will Define Winners in the New Global Trade Environment

The world economic environment has been roiled by the impact of a lengthy trade war, the far-reaching impacts of the COVID-19 pandemic, and social protests which have ramped up consumer scrutiny of company practices. This new and volatile arena presents stiff challenges requiring different skills from business leaders.  While some companies will fold under the strain of the lockdowns and global stagnation, others will survive but face a brave new world where many of the trade norms and logistics habits of previous years will have disappeared. Navigating this terrain successfully will, of course, require agility and innovation but also a profound understanding of global trends, diverse cultures, and the rapidly changing political and regulatory structures of international markets.

The growing importance of cultural intelligence in business leadership will sharpen in this multi-faceted trade environment, and political risk analysis will take a critical role in shaping company strategies. Leaders with strong cultural intelligence and an understanding of political risk in this unsettled business environment will have a significant edge in finding new customers, identifying strong partners for mergers and acquisitions, and in comprehending and partnering with the new political forces that will spring up in the wake of this global disruption.

The trade conflict between the U.S. and China forced many companies to decouple their production from established facilities in Asia and reevaluate business opportunities and partnerships in the global market. The tariffs alone caused some businesses, living as they were on slim margins, to fold. Others scrambled to develop, on short notice, new production facilities, and hurried global partnerships. Savvy companies recognized the crucial importance of properly vetting the political risk of potential new locations to ensure that they would welcome new investors for the long-term. They also had to make a sober assessment of which countries might be in the crosshairs of trade conflict in these uncertain times.

On top of the political risk concerns, leaders had to ensure that the working cultures of these new sites and new partners would align with their company values and communication preferences. How would they match up culturally?

Following on the heels of this abrupt and wrenching change to the global economy came the pandemic shutdown. The challenges that were brought on by the trade conflict pales in comparison to the economic impact we’ve seen over the last few months as businesses are cut off from their producers, employees and customers in ways never previously seen in the modern global economy. For the companies that survive this shutdown, the concern is urgent – how can they best position themselves to not only survive but thrive in the new international business environment? Only leaders with a firm understanding of the tenets of cultural intelligence and the tools of political risk analysis will be able to grasp and exploit the opportunities that are developing in the ‘new’ global market.

“Common Sense” is not a Common Currency

When working globally in this volatile environment, it is not possible to prepare for any and all potential outcomes, especially when there are such unpredictable variables in people. What may be “common sense” to one person may not be common to another. Each person is influenced by culture, personal experiences, and cognitive interpretation which impacts values, attitudes, and behaviors. So how do global business leaders prepare for the unexpected when there is no playbook for every situation and every person? They develop their cultural intelligence skills.

Cultural intelligence is an interpersonal skill that has emerged in the last two decades from the same body of research as emotional intelligence. It is the capability to function and relate effectively with others in culturally diverse contexts. Cultural intelligence is a crucial tool to help leaders adapt and work effectively with people who have different cultural orientations, values, and expectations.

How do political risk and cultural intelligence go together?

When leaders get involved in a foreign culture, there are many cues that can be easily missed or misunderstood. Most leaders will be familiar with objective culture cues, such as a country’s economic performance, political system, and social institutions. They may become familiar with social customs, history, arts, language, food, and kinship relationships. Market analysis reports and “Doing Business in…” books look at this objective data, comparing national measurements and the visible artifacts between two or more cultures. However, the subjective culture cues are harder to interpret and certainly challenging to measure. These cues are hidden psychological inputs such as values, beliefs, norms, and assumptions. For example, a leader may be well-read on the legal, political, and social frameworks of foreign culture but understanding how conflict is expressed (or not expressed) and resolved in a particular culture is the crucial domain of cultural intelligence.

Leaders with an individualistic and confrontational communication style may struggle when working with a counterpart who prioritizes relationships and harmony. If leaders are not aware of the subjective cultural cues, deciphering “silence” in those contexts may leave a wide interpretive space between compliance and defiance. If any leader assumes his or her own cultural perspective and behaviors are superior ways to “get things done”, that leader will almost certainly fail to build trust and succeed in a foreign environment.

Even great cultural intelligence does not deliver business success if politics threaten market stability. Thus, cultural intelligence needs to go hand-in-hand with an understanding of the relevant global and local politics and risks. A definition of political risk for global leaders is whether business interests and market stability are threatened by unexpected or chaotic government action. Those terms – unexpected or chaotic – highlight the difference between government action detrimental to business interests that is normal, and which can be forecast (regulations, new taxes, changes in currency exchange rates) from government action that is unexpected. This issue of ‘expected’ and ‘unexpected’ is a clear nexus between the arts of cultural intelligence and political risk: a profound understanding of a culture can help navigate political risk and reactions to outside pressure.

Everything is ‘unexpected’ if leaders do not understand the culture, but savvy and adept practitioners are much more capable of responding appropriately, in culturally intelligent ways, in the face of government actions and reactions.

How can global leaders sharpen their cultural intelligence?

Cultural intelligence and political risk analysis can be learned and share certain key characteristics. An ability to speak a foreign language not only improves your cultural knowledge, it also gives you a key tool to understanding the risk factors in a foreign market as you can delve into primary sources of political and business reporting.

While cultural competency is one component of Cultural intelligence, it is a skill that goes well beyond just facts and knowledge. It is made up of four capabilities, each of which can be developed and sharpened:

Motivational

What is it: This relates to the leader’s desire and ability to direct attention and energy toward learning about and functioning in intercultural situations.

One tip to improve it: Leaders who connect deeply with their motivation, it helps them persist and be open to work with people who think and behave differently from them. Some leaders enjoy travel. Others enjoy watching how other people solve daily problems. For others still, it may be the prestige of a successful merger & acquisition.

Cognition

What is it: This refers to a leader’s knowledge of the norms, practices, and conventions in different cultures. This is commonly addressed in trainings and in books on objective and subjective culture.

One tip to improve it: Learn the language, read about the culture, read the local news, and understand the socio-economic and political history of a culture. Be aware these are meant to build archetypes for understanding the mindset of a culture and not stereotypes to judge or question other cultural norms.

Metacognition

What is it: This refers to the leader’s cultural consciousness and awareness during intercultural encounters.

One tip to improve it: The culturally intelligent leader plans prior to an engagement. They ask questions about the culture, who they are going to meet, and about different possible cultural scenarios. During an engagement, they evaluate and assess what is familiar and what is not familiar and adjust accordingly. After an engagement, an effective leader will write down their thoughts and debrief from their cross-cultural experience. One of the most important assets to a culturally intelligent leader is having a trusted cultural attaché who is independent and can give a leader unbiased feedback, interpret, and connect some of the cultural dots.

Behavior

What is it: This refers to the leader’s ability to exhibit appropriate verbal and nonverbal actions appropriate for the intercultural interaction. A culturally intelligent leader must know when and be willing to adapt to most situations. They also must know and be able to communicate why they are unwilling to adapt in a given situation.

One tip to improve it: A leader must be aware of their own beliefs and behaviors. If a leader comes from an individualistic, competitive culture and is working in a culture that is more community-oriented and cooperative, they need to adjust how they give praise. Calling out an individual for an accomplishment may not be received well by the individual or the group.

While these may seem like “common sense”, when a leader is out of their cultural element, a leader with low cultural intelligence may become overwhelmed, disoriented, angry, or frustrated. Some leaders may retreat and appear withdrawn, while others may magnify their behaviors and come across as ignorant and insensitive. I’m sure we’ve all seen and maybe been that “Ugly American” at some point. Cultural intelligence helps leaders be more confident and effective in foreign and sometimes uncomfortable situations.

Moving forward in the coming decade

The 2020 Bloomberg Innovation Index selected the top 20 most innovative countries. The U.S. is #9. It is tempting to think that your own experience and common sense has shown you “the right way” to get things done. While that may be true in a familiar environment, it may not be the most effective way to get things done in other contexts (other families, companies, communities, or social systems). Great innovations come from harnessing divergent thinking. While the US emphasizes agile methods and shared leadership, other top innovative countries like Germany emphasize cooperative planning; South Korea culturally emphasizes hierarchical, top-down decision making. Both have outranked the US in innovation for the last five years of this index. None of those cultural approaches are necessarily superior. They are simply different ways innovation occurs in other cultural contexts.

As we look out over the next fifty years, with nearly 77% of the world’s population living in Africa and Asia, these economies will continue to benefit from young workforces, improvements in infrastructure and education, and a growing middle class. If you want to work in these regions, regardless of culture, people generally prefer to do business with people they can trust. Building trust requires both parties to adapt and find agreement on values, respect, and mutual outcomes. Understanding why how to adapt in each situation are hallmarks of a culturally intelligent person.

Peter Diamandis recently noted that if companies ‘are not disruptively innovating now, you are done. The old ways of working are done. We are going to see 20% of companies go out of business’ as a result of the pandemic lockdown. However, innovating successfully also requires that you use the tools of cultural intelligence and political risk analysis to establish your business in the right locations. Disruptive innovation will not pay dividends if you suddenly lose your valuable intellectual property in a country that does not value and support the rule of law.

Your global teams will not be successful or engaged in producing new solutions and innovative products if you cannot break down the communication and collaboration barriers using cultural intelligence. The U.S. represents only 5% of the world’s population. Despite being a wealthy, critical market for any conceivable service or product, it is just a sliver of the available total global market. Companies, stressed by an economic collapse which is unlike anything seen in a generation, must boldly jump into the global market with both feet to thrive. To succeed in this new world, modern leaders need to bring an analytical tool kit which is well-stocked with political risk insights and cultural intelligence methodologies. If business leaders don’t apply these key perspectives in their global strategies, the volatile market forces that continue to churn around us will disrupt even the best of business plans.

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Scott Rencher, a former Regional Director and Country Manager at Euromonitor International, is a CQ Certified, Cultural Intelligence evangelist and business strategist.

Kirk Samson, worked as a U.S. diplomat and international law advisor and is the head of Samson Atlantic LLC; a Chicago-based consulting company providing global political risk analysis. 

list 1

USTR to Consider Extending List 1 Exclusions Past October 2nd Expiration Date

On August 3, 2020, the Office of the U.S. Trade Representative (USTR) issued a notice requesting comments on whether to extend specific exclusions on Chinese imports from the Section 301 List 1 that are set to expire on October 2, 2020. Companies whose List 1 Exclusions products were granted exclusions in notices published on October 2, 2019December 17, 2019, and February 11, 2020 are eligible to submit comments.

The due date for companies to submit their comments is August 30, 2020. USTR has stated that it will focus its evaluation on whether, despite the first imposition of these additional duties, the particular product remains available only from China. Additionally, USTR encourages companies to specifically address the following in their submission:

-Whether the particular product and/or a comparable product is available from sources in the United States and/or in third countries.

-Any changes in the global supply chain since July 2018 with respect to the particular product or any other relevant industry developments.

-The efforts, if any, the importers or U.S. purchasers have undertaken since July 2018 to source the product from the United States or third countries.

-Whether the imposition of additional duties on the products will result in severe economic harm to the commenter.

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Turner Kim is an Assistant Trade Analyst in Husch Blackwell LLP’s Washington D.C. office.

silk road

CHINA IS GIVING ANCIENT SILK ROAD TRADE ROUTES A DIGITAL MAKEOVER

The New Silk Road is Paved by Bits and Bytes

In 2015, China launched its Digital Silk Road (DSR) initiative. The DSR is the digital backbone for China’s modern reconstruction of the ancient silk trade routes. Against the backdrop of heightened U.S.-China tensions and the COVID-19 pandemic, the DSR is how China is creating new trade ecosystems and deepening its trade relations across the developing world.

The pandemic has propelled us all faster toward a digital world as we adapt to distance learning, working from home, telehealth, and online shopping, putting technology at the center of economic life.

The pandemic has also shone a spotlight on reliance on China for imports of critical products like personal protective equipment and pharmaceuticals.

These dynamics are fueling China to accelerate its global tech drive – embodied by the DSR – as well the backlash against it, primarily led by the United States. We are entering a “tech cold war” with China’s Digital Silk Road at the epicenter.

The DSR is neither well defined nor understood, but it will re-shape the global economy. Here’s what you need to know.

DSR quote

What the Digital Silk Road and McDonald’s Have in Common

Paul Triolo, a leading U.S.-based China tech analyst, compares the structure of the DSR to the groundbreaking business model of McDonald’s: In a word — it’s about franchising. China’s publicly traded tech giants establish technological outposts or “franchises” that receive political, financial, and branding benefits under the DSR marketing umbrella from the state, which China’s competitors claim tilts the playing field against other international players.

The Digital Heart of China’s Belt and Road

China’s Belt & Road Initiative (BRI) was announced by President Xi Jinping in 2013. It’s an ambitious plan to rebuild the land (belt) and maritime (road) trade routes of the ancient silk trade routes, extending throughout the developing world from central Asia to the Middle East, and to Latin America and the Caribbean. To date, 137 countries have signed onto the program. All in, BRI is estimated to be a trillion-dollar infrastructure build, but the BRI is already showing signs of shifting global trade flows.

As the signature foreign policy of President Xi, activities to advance the BRI are a top priority across Chinese government and business sector. The Digital Silk Road is a key part of the BRI vision. So far, 30 countries have MOUs with China for DSR projects – spanning from Laos up to Kazakhstan, across to Egypt, Saudi Arabia, and the UAE and stretching to Peru and the Dominican Republic.

The DSR encompasses a vast array of tech projects: building the physical infrastructure for 5G networks, laying fiber optic cable, and constructing and equipping data centers. By design, it also includes promoting China’s standards for telecom, satellite navigation, artificial intelligence, quantum computing, and electronic payment systems throughout the countries where DSR projects are underway.

DSR projects combine the hard and soft infrastructure that enable the trade efficiencies promised by this next generation of technology. Under the so-called “franchise” model, public and private Chinese tech companies leverage state funding, political support, and the China brand to compete effectively for major projects around the world. The growing network of BRI trade hubs are connected through smart ports and digital free trade zones.

Title to DSR map
Merics_Digital-Silkroad-Tracker_RGB_final_web_0

Tech-Fueled Competition

Many developing countries are attracted to China’s investments that enable technological leapfrogging and the deployment of next-generation technologies in manufacturing and service-delivery. But China’s aggressive strategy has led to mounting concerns about the security implications of China’s potential dominance in the technology that drives the global economy, but that could also be used in more concerning ways.

Chinese tech products, particularly in telecommunications, are alleged to enable cyber espionage, providing the Chinese Communist Party access to sensitive data. China’s push to conform international standards to Chinese tech products could effectively shut out competition in third markets. The Trump administration initiated an investigation into unfair trade practices such as state funding to companies like Huawei that enable them to undercut Western competitors on price. The international community is also raising concerns about China’s use of facial surveillance products to target and suppress political, religious, or ethnic minorities, amounting to fears that a techno-authoritarianism governance model could also be exported.

Some of these concerns may be overstated, but the lines between private competition and state security are blurred when it comes to emerging technologies in China. Chinese companies are capable of producing high-quality 5G telecom products. China’s satellite navigation system, known as Beidou, went fully operational in June, and stands as a competitor to the U.S. GPS system and Europe’s Galileo system. China dominates the financial technology space, largely leapfrogging credit cards and offering solutions to global financial inclusion. China is also launching a digital currency that will be piloted domestically and along the BRI. Most controversially, China is the global leader in surveillance and facial recognition technology, offering these products at a much lower cost without the significant export controls used by other countries.

30 countries MOU revised

How a Tech War Could Affect Trade

The DSR is part of a larger tech race which could divide the world into at least two systems: one operating with Chinese products and standards, the other with Western products and standards. Separate systems could face interoperability issues and challenges with cross border data flows or become subject to geopolitical fractures that force countries to choose political sides when they choose tech systems. Or, countries may have to build infrastructure to accommodate both systems, at great expense, which could undermine many of the trade efficiencies that would otherwise be achieved by these technologies.

The opening battles of the tech race are already producing trade disruptions. After years of pressure by the United States, the UK announced last week that Huawei products are barred from their telecom networks, citing national security concerns. British telecom companies are prohibited from buying Huawei products after this year and will have seven years to remove all Huawei products from current networks. The United States placed Huawei on its Entity List, limiting U.S. exports to Huawei that will severely restrict the company’s access to the semiconductors needed to make their products. That lack of access will also factor in countries’ decisions about the viability of Huawei systems in the long run. And last week, U.S. Secretary of State Mike Pompeo announced that employees of Huawei and other Chinese tech firms will not be eligible for U.S. visas, citing complicity in human rights violations.

Despite the international response, China’s biggest challenge may arise from its internal policies restricting cross border data flows, as well as from conflicts between its domestic practices and other country’s requirements to secure data and protect privacy.

Where the Fault Lines May Emerge

Even as it works to overcome these hurdles, China’s tech drive into developing countries will continue. Many developing countries are reeling from the pandemic and falling behind on building digital infrastructure.

The Chinese government offers an attractive lifeline to developing countries, packaging hard infrastructure and software at good prices and high quality. It can build a new port and digitize traditional port operations while investing in the development of smart cities around those smart ports. China’s offer may prove to be more consequential in practical and political terms than ever before. Without strong alternatives, the tech competition could create fault lines in developing countries, further fracturing global trade.

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Leigh Wedell

Leigh Wedell is a Founder and COO of Basilinna and Senior Fellow at the Paulson Institute. A veteran facilitator of U.S.-China business relations, she has advised leading multinational firms across all major business sectors on China market entry and expansion, crisis management, and corporate social responsibility programs. She began her career working on political development projects traveling to more than half of China’s provinces.

This article originally appeared on TradeVistas.org. Republished with permission.

hong kong

President Trump’s Executive Order Ends Hong Kong Country of Origin

On July 14, 2020, President Trump signed into law an Executive Order that ends Hong Kong’s differential treatment compared to the People’s Republic of China (“PRC” or “China”). The President’s action follows the Chinese government’s decision in late May to impose new national security legislation on Hong Kong that outlaws any act of “secession,” “terrorism,” or “collusion” with a foreign power.

The United States government objects to this legislation and believes that it has compromised Hong Kong’s autonomous status, which justified  Hong Kong’s differential treatment from China for a number of purposes. As President Trump stated following the signing of the Executive Order, “Hong Kong will now be treated the same as mainland China…no special privileges, no special economic treatments and no export of sensitive technologies.”

As a result of the Executive Order, any imported Hong Kong origin goods will now be considered Chinese origin and will be subject to the Section 301 tariffs on certain Chinese imports, or any antidumping or countervailing duty orders applicable to China.

The Executive Order also eliminates any passport preferences for persons from Hong Kong as opposed to those from the PRC and revokes any Export Administration Regulation (“EAR”) license exceptions for exports, re-exports, and in-country transfers pertaining to Hong Kong. The order also authorizes steps to end other forms of U.S.-Hong Kong cooperation unrelated to international trade, such as the Fulbright exchange program.

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Robert Stang is a Washington, D.C.-based partner with the law firm Husch Blackwell LLP. He leads the firm’s Customs group.

Jeffrey Neeley is a Washington-based partner with the law firm Husch Blackwell LLP. He leads the firm’s International Trade Remedies team.

Turner Kim is an Assistant Trade Analyst in Husch Blackwell LLP’s Washington D.C. office.

Camron Greer is an Assistant Trade Analyst in Husch Blackwell LLP’s Washington D.C. office.

goat meat

The Asian-Pacific Goat Meat Market to Retain Robust Growth

IndexBox has just published a new report: ‘Asia-Pacific – Goat Meat – Market Analysis, Forecast, Size, Trends and Insights’. Here is a summary of the report’s key findings.

The Asia-Pacific goat meat market expanded rapidly to $30.1B in 2019, growing by 9.9% against the previous year. This figure reflects the total revenues of producers and importers (excluding logistics costs, retail marketing costs, and retailers’ margins, which will be included in the final consumer price). The total market indicated a prominent expansion from 2007 to 2019: its value increased at an average annual rate of +1.8% over the last twelve-year period. The trend pattern, however, indicated some noticeable fluctuations being recorded throughout the analyzed period. Based on 2019 figures, consumption increased by +56.7% against 2014 indices. The level of consumption peaked in 2019 and is expected to retain growth in years to come.

Consumption by Country

The country with the largest volume of goat meat consumption was China (2.4M tonnes), comprising approx. 61% of total volume. Moreover, goat meat consumption in China exceeded the figures recorded by the second-largest consumer, India (502K tonnes), fivefold. The third position in this ranking was occupied by Pakistan (352K tonnes), with a 9.1% share.

In China, goat meat consumption increased at an average annual rate of +1.9% over the period from 2007-2019. In the other countries, the average annual rates were as follows: India (-0.5% per year) and Pakistan (+2.8% per year).

In value terms, China ($22.7B) led the market, alone. The second position in the ranking was occupied by India ($2.4B). It was followed by Pakistan.

The countries with the highest levels of goat meat per capita consumption in 2019 were Nepal (2.47 kg per person), Myanmar (1.89 kg per person) and Pakistan (1.72 kg per person).

Market Forecast 2019-2030

Driven by increasing demand for goat meat in Asia-Pacific, the market is expected to continue an upward consumption trend over the next decade. Market performance is forecast to retain its current trend pattern, expanding with an anticipated CAGR of +1.5% for the period from 2019 to 2030, which is projected to bring the market volume to 4.6M tonnes by the end of 2030.

Production in Asia-Pacific

In 2019, goat meat production in Asia-Pacific rose to 3.9M tonnes, with an increase of 2% on 2018 figures. The total output volume increased at an average annual rate of +1.8% from 2007 to 2019; the trend pattern remained consistent, with somewhat noticeable fluctuations being observed in certain years. The growth pace was the most rapid in 2016 with an increase of 3.4% y-o-y. Over the period under review, production reached the peak volume in 2019 and is likely to see gradual growth in the immediate term. The general positive trend in terms output was largely conditioned by a mild expansion of the number of producing animals and a relatively flat trend pattern in yield figures.

In value terms, goat meat production soared to $36.8B in 2019 estimated in export prices. Overall, production posted a remarkable increase. Over the period under review, production hit record highs in 2019 and is expected to retain growth in the immediate term.

Production by Country

China (2.4M tonnes) remains the largest goat meat producing country in Asia-Pacific, accounting for 61% of total volume. Moreover, goat meat production in China exceeded the figures recorded by the second-largest producer, India (502K tonnes), fivefold. The third position in this ranking was occupied by Pakistan (353K tonnes), with a 9.1% share.

In China, goat meat production increased at an average annual rate of +1.9% over the period from 2007-2019. In the other countries, the average annual rates were as follows: India (-0.5% per year) and Pakistan (+2.7% per year).

Producing Animals in Asia-Pacific

In 2019, the number of animals slaughtered for goat meat production in Asia-Pacific expanded to 291M heads, picking up by 1.6% compared with the previous year. This number increased at an average annual rate of +1.5% over the period from 2007 to 2019; the trend pattern remained relatively stable, with somewhat noticeable fluctuations in certain years. The growth pace was the most rapid in 2009 when the number of producing animals increased by 5.3% year-to-year. Over the period under review, this number hit record highs at 291M heads in 2016; however, from 2017 to 2019, producing animals failed to regain the momentum.

Yield in Asia-Pacific

The average goat meat yield amounted to 13 kg per head in 2019, leveling off at the year before. Over the period under review, the yield saw a relatively flat trend pattern. The most prominent rate of growth was recorded in 2017 with an increase of 5.1% y-o-y. Over the period under review, the goat meat yield hit record highs in 2019 and is likely to see steady growth in years to come.

Imports in Asia-Pacific

In 2019, the amount of goat meat imported in Asia-Pacific contracted to 8.8K tonnes, waning by -9.2% on 2018. The total import volume increased at an average annual rate of +1.2% from 2007 to 2019; however, the trend pattern indicated some noticeable fluctuations being recorded throughout the analyzed period. The pace of growth was the most pronounced in 2014 when imports increased by 25% against the previous year. As a result, imports reached the peak of 12K tonnes. From 2015 to 2019, the growth imports remained at a somewhat lower figure.

In value terms, goat meat imports declined to $43M (IndexBox estimates) in 2019. Overall, imports, however, recorded buoyant growth. The level of import peaked at $57M in 2017; however, from 2018 to 2019, imports yet failed to regain the momentum.

Imports by Country

The purchases of the four major importers of goat meat, namely Taiwan, Viet Nam, South Korea and Hong Kong SAR, represented more than two-thirds of total import. It was distantly followed by Japan (460 tonnes), making up a 5.2% share of total imports. China (317 tonnes), Macao SAR (292 tonnes), India (209 tonnes), Sri Lanka (185 tonnes), Malaysia (177 tonnes) and the Philippines (169 tonnes) followed a long way behind the leaders.

From 2007 to 2019, the most notable rate of growth in terms of purchases, amongst the key importing countries, was attained by India, while imports for the other leaders experienced more modest paces of growth.

In value terms, the largest goat meat importing markets in Asia-Pacific were Taiwan ($12M), South Korea ($9.4M) and Hong Kong SAR ($6.4M), together comprising 64% of total imports. These countries were followed by Japan, Viet Nam, Macao SAR, China, Malaysia, Sri Lanka, the Philippines and India, which together accounted for a further 32%.

Among the main importing countries, India recorded the highest growth rate of the value of imports, over the period under review, while purchases for the other leaders experienced more modest paces of growth.

Import Prices by Country

In 2019, the goat meat import price in Asia-Pacific amounted to $4,887 per tonne, waning by -2.2% against the previous year. Import price indicated a perceptible increase from 2007 to 2019: its price increased at an average annual rate of +4.5% over the last twelve years. The trend pattern, however, indicated some noticeable fluctuations being recorded throughout the analyzed period. Based on 2019 figures, goat meat import price decreased by -15.8% against 2017 indices. The growth pace was the most rapid in 2016 when the import price increased by 22% year-to-year. Over the period under review, import prices reached the peak figure at $5,802 per tonne in 2017; however, from 2018 to 2019, import prices failed to regain the momentum.

There were significant differences in the average prices amongst the major importing countries. In 2019, the country with the highest price was Macao SAR ($7,657 per tonne), while Viet Nam ($1,613 per tonne) was amongst the lowest.

From 2007 to 2019, the most notable rate of growth in terms of prices was attained by Macao SAR, while the other leaders experienced more modest paces of growth.

Source: IndexBox AI Platform

semiconductor

CONTROLS ON SEMICONDUCTOR TRADE ARE A HARBINGER FOR “TECHNO-NATIONALISM”

Major nations are in a race to achieve supremacy in the “technologies of the future” that include data analytics, robotics, AI and machine learning, surveillance technology and 5G networks. What all these new technologies have in common is the semiconductor microchips that drive them. Gaining the technology upper hand requires the secure production or supply of advanced semiconductors, which makes the controls on trade in semiconductors a harbinger for how “techno-nationalist” trade policies are reshaping global supply chains.

China’s failure to launch?

The global semiconductor industry was historically dominated by a small group of primarily American semiconductor companies. In the past two decades, a handful of Asian semiconductor companies including Toshiba (Japan), Samsung (South Korea) and TSMC (Taiwan), have managed to grow market share. Latecomers in Asia benefited from a combination of ambitious industrial policies and government support, a narrow focus on specialization and innovation, and access to key foreign partnerships and foreign direct investment.

The Chinese government seeks to replicate these models on a much larger scale under its Made in China 2025 industrial policy. Geopolitics may prevent China from achieving its goals. Key Chinese tech firms, including Huawei, HikVision, and SenseTime, now find themselves on a U.S. restricted entities list, which means “controlled” American technology may not be sold to them.

Global Semi Shares

China’s push to reduce semiconductor tech dependence

The Chinese market is almost entirely dependent on foreign firms for microchips. Domestic production accounts for just nine percent of China’s semiconductor consumption – leaving 91 percent of China’s demand to be satisfied by imports, 56.2 percent from the United States.

Yet semiconductor technology is vital to China’s manufacturing base and to China’s top exports that include smartphones, personal computers, and smart televisions. China’s continued dependence on U.S. and foreign semiconductor technology has been a catalyst for Beijing to double down on policies to promote homegrown companies.

China’s National Integrated Circuit Plan calls for $150 billion in R&D funding from central, provincial and municipal governments, twice as much as the rest of the world combined. U.S. companies spent $32.7 billion on R&D in 2018, followed by European companies ($13.9 billion), Taiwanese companies ($9.9 billion), Japanese companies ($8.8 billion) and Korean companies ($7.3 billion).

Some 30 new semiconductor facilities are either under construction or in the planning stages in China – more than any other country in the world. But even the most sophisticated fabricator in China must rely on licensing chip designs from foreign firms and on high-volume commercial production lines outside of China. And foreign firms still dominate niches in China’s semiconductor market such as microchip packaging and testing, semiconductor equipment, memory and AI chips, as well as contract microchip making.

National champions require international supply chains

China is not alone in its interdependence on global value chains. Leading American, European, Japanese and South Korea semiconductor companies have all developed and optimized geographically dispersed production networks. Research and development, design, manufacturing, assembly, testing and packaging have become hyper-specialized with activity taking place across multiple countries as microchips cross borders dozens of times before being finally embedded into a finished product.

Chinese tech companies have been able to grow and innovate because of unfettered access to collaborative relationships with foreign research and academic institutions, as well as access to foreign companies through acquisitions and (often state-funded) mergers – until recently.

Semi R&D Spending

American trade countermeasures

The U.S. government has taken steps to block Chinese acquisitions and investments in American technology companies and has also made critical changes to the U.S. export controls program. The U.S. Department of Commerce manages a list of “emerging” and “foundational” commercial technologies or products which can be used for military purposes. It recently expanded the technologies included on the Controlled Commodity List (CCL). Technologies on the CCL require issuance of an export license prior to sale and transfer to a foreign market.

An export control is not, by itself, a prohibition to sell or buy a traded good. In the vast majority of cases, when the facts surrounding a controlled item are reviewed (including who the buyer is and how the controlled item will be used), U.S. government agencies issue export licenses. But export controls and related measures add a layer of uncertainty to global value chains, potentially turning long-time suppliers into unreliable suppliers.

Part and parcel of the Chinese Communist Party’s approach to leapfrogging in the semiconductor industry is to appropriate special technology funding toward “military-civil fusion,” designed to bring tech startups and private companies together with the People’s Liberation Army. The deepening of those direct links virtually ensures that innovations and technologies pertaining to industries of the future will be considered by the U.S. government as dual use technologies subject to scrutiny, control and prohibitions when it comes to exporting them from the United States, especially to China.

A special designation

U.S. companies or individuals may also be denied or restricted from doing business with restricted entities/parties or with “specially designated nationals”. In May 2019, the U.S. government designated Huawei, China’s telecommunications giant, a restricted entity. In this scenario, the application for an export license to a Huawei entity would be presumed denied, effectively banning the sale of American technology to Huawei or any of its 68 non-U.S. affiliates in other countries.

The designation has widespread ripple effects. Huawei purchased some $70 billion components and parts from more than 13,000 suppliers globally in 2018 – approximately $11 billion worth of microchips from American technology companies alone. American companies may not sell to Huawei and Huawei must replace all U.S. technology from its smart phones, which previously included U.S. radio frequency chips, DRAM and NAND chips, design software and Google’s Android operating system.

Prohibitions may be applied to individual end-users, to financial institutions that may seek to process transactions for a restricted buyer or supplier, and to academic and research institutions that may be prevented from using technologies from restricted entities in their research.

Driving a wedge and choosing sides

Washington’s countermeasures aim to impede the Chinese Communist Party’s ability to promote U.S. technology and intellectual property transfer to Chinese entities – either by stopping sales of technology, stifling investment flows into China’s semiconductor industry, or blocking the acquisition of strategic assets from U.S. and foreign companies by Chinese state-backed entities.

This evolving trade policy landscape will inevitably lead to the reconfiguration of global value chains as companies comply with export restrictions. Foreign companies that seek to maintain their relationship with a restricted entity must reduce the value of U.S. content to below an acceptable “de minimis” level, increase the value of non-U.S. made products in their sourcing and production, or avoid doing business with U.S. companies altogether. This has induced companies to move value-added operations out of the United States, to ring-fence operations in China, or to consolidate into more vertically integrated value chains.

In an attempt to close the de minimis loophole, the U.S. government has modified the “foreign direct product” rule. In the example of Huawei, this change prevents foreign manufacturers from supplying Huawei, the Chinese tele-communications manufacturer, with microchips and other products, if the production of these items uses any U.S. technology, including manufacturing equipment, designs or software. U.S. firms dominate these technology niches.

This change was clearly aimed at Taiwan Semiconductor Manufacturing Company (TSMC), which manufacturers microchips for HiSilicon, Huawei’s subsidiary. Cutting off the supply of microchips to HiSilicon presents an existential crisis for Huawei, as no Chinese companies are capable of producing leading-edge microchips on par with TSMC and other foreign manufacturers.

Compliance has become more complicated as the ranks of restricted entities swell. Nearly 170 Chinese individuals and entities (across a wide swathe of industries) are on the U.S. Specially Designated National list. U.S. companies must navigate restrictions that are enforced by more than a dozen different U.S. government agencies.

American firms are also concerned about diminished opportunities to do business in key global value chains, effectively ceding market share to Chinese and other foreign firms not under similar restrictions. Limited or foregone sales in China may reduce funds for R&D. Restrictions also choke off collaborative innovation across specialized clusters and between human capital networks. Huawei and other Chinese tech companies are looking to withdraw from U.S.-influenced supply chains, forming alliances with non-American technology companies, putting TSMC, Samsung and others in the position of having to choose sides.

Just the beginning

When Washington announced Huawei would be placed on the U.S. Restricted Entity List, Huawei’s management tapped 10,000 engineers, requiring them to work continuously in shifts to re-write code and re-design specifications so that Huawei might minimize the damage of U.S. export controls.

The United States is not alone in its trade countermeasures. Europe is also turning to techno-nationalism. Brussels recently issued a report that emphasized the importance of working with America to create an economic model that would compete directly with Beijing, particularly with the intent of blocking the Chinese Communist Party’s attempts to influence global standards in 5G and other next-gen technologies. Japan has blocked Huawei 5G technology.

By enacting policies intended to protect against theft or transfer of domestic semiconductor technology from opportunistic or hostile state and non-state actors, governments have opened more fronts in the deepening tech war with China, which portends to reshape existing global value chains for semiconductor production. And semiconductors are just the beginning.

This article is drawn from a detailed research report: Semiconductors at the heart of the US-China tech war

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Alex Capri

Alex Capri is a Research Fellow with the Hinrich Foundation, Senior Fellow at the National University of Singapore, and Lecturer in the Lee Kuan Yew School of Public Policy. He was previously the Partner and Regional Leader of KPMG’s International Trade & Customs practice in Asia Pacific, based in Hong Kong.

This article originally appeared on TradeVistas.org. Republished with permission.
manufacturing

Why Technology – Not Tariffs – Is the Key to Reviving US Manufacturing

Reshoring has captured the imaginations of politicians and economic developers for years, particularly in parts of the country hit hard by the loss of manufacturing jobs. The COVID-19 crisis gave reshoring advocates another rallying cry, as supply chain disruptions rippled through the economy and the general public awoke to the fact that we are dependent on Chinese manufacturing for most of our medical supplies.

Some will no doubt call for a response in the form of tougher trade policies – tariffs that aim to level the playing field and to deter Chinese “dumping” of cheap, below-profit goods with which US manufacturers can’t hope to compete.

But while tariffs can be an effective weapon in the short term, they won’t help revive American manufacturing. In fact, they might do serious damage, especially amid an economic downturn. Most economists now believe the 1930 Smoot-Hawley Tariff Act, which leveled crippling tariffs on US imports from all over the world, played a significant role in sinking the country deeper into what would become the Great Depression.

Fortunately, tariffs aren’t the only way. We can reverse the decline of domestic manufacturing and return factory jobs and investment to US soil, but the key isn’t policy – it’s technology.

American manufacturers can regain their global competitive advantage by widely investing in and deploying automation and robotics that will enable them to produce everything from auto parts to cellphone screens cheaper, faster and better than factories in China and elsewhere.

The technology won’t replace workers. They’ll be needed to operate and maintain the sophisticated machinery involved. Much of the investment I’m calling for will be in people – training Americans to work with the kind of technology that can transform and revive our manufacturing sector. We call this Industry 4.0.

Doing What Americans Do Best

Before I explain further, I should lay some groundwork. Even as wages for Chinese workers have risen in recent years, they remain much lower than US workers’ pay. Other countries can undercut China, leaving Europe as the only part of the world where American manufacturers have any sort of cost advantage.

That means we must do what America does best: innovate. If we can get ahead of the curve by investing technologies such as robotics, Internet of Things and 3D printing, we can automate shop floors in a way that speeds production, sparks new-product development and creates new high-skilled factory jobs. We can also produce competitively priced goods that enable our local manufacturers to grow by taking market share from rivals overseas.

Jergens Inc. is a 78-year-old company in Cleveland, with a campus on an abandoned railyard site. The company, one of the world’s largest manufacturers of standard tooling components, vises and other workholding equipment, has fully embraced automation – but not as a way to eliminate jobs.

“With every robot, more jobs at Jergens are created,” says Jack Schron, the company’s president. “We use one robot to get higher production on one of our popular items. Right next to that robot are skilled technicians assembling these same items for small-run, custom applications. Because of the one, the other follows.”

Automation has actually increased headcount in some Jergens departments; because the robots helped increase production and broaden its offerings, Jergens has hired more sales, marketing and shipping workers.

A Technological Cold War

Jergens is far from alone, even among the subset of Northeast Ohio manufacturers I work with. What we learn from them is that automation is more affordable, more accessible and more effective than ever.

Unfortunately, far too many small and mid-sized companies in our industrial heartland understand this. That’s partly why few have taken the first steps toward automation. In a February survey by our organization, 94 percent of manufacturers in Northeast Ohio said they were actively innovating – but more than 60 percent said they weren’t using or just starting using automation, and half said they didn’t plan to increase automation spending.

Too many American manufacturers don’t understand the technology, or how their shop floors or market strategies could benefit from automation. Others see the potential but don’t have the funds to invest, or see the investment as too risky, or fear the lag between investing and seeing a return would destroy their balance sheets.

None of those things is true, but various combinations of flawed perceptions, lack of knowledge, lack of funding and risk aversion prevent factory owners and leaders from investing in technology that would make them more profitable and competitive.

Meanwhile, China has been investing in automation technology for years. The country has now become the world’s largest and fastest-growing market for industrial robotics, according to the International Federation of Robotics. The mental image of Chinese sweatshops is no longer accurate (though other countries still use those methods). Google “manufacturing process” and you’ll see highly automated, high-tech manufacturing facilities in China.

Put simply, we’re in a cold war of technological advancement that very few people – including many manufacturing leaders – see and even fewer understand. And we’re losing. Could COVID-19 provide the motivation we need to fully embrace innovation, advance toward Industry 4.0 and win the innovation war? It absolutely could. Or perhaps American manufacturers will embrace Industry 4.0 for simple business reasons – it will undoubtedly make them more profitable.

Whatever it takes, investment in technology is a critical step toward a new, sustainable era of reshoring. And at the very least, widespread investments in technology will create better-paying, safer, more stable jobs in parts of our country hit hardest by the deindustrialization of the last 30 years.

That is the promise of Industry 4.0.

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Dr. Ethan Karp is an expert in transforming companies and communities. As President and CEO of the non-profit consulting group MAGNET, he has helped hundreds of manufacturing companies grow through technology, innovation, and talent. He is passionate about driving economic prosperity in his home region of Northeast Ohio. Dr. Karp is a recognized thought leader on manufacturing issues and a frequent media commentator on the future of manufacturing in America. Prior to joining MAGNET in 2013, Dr. Karp worked with Fortune 500 companies at McKinsey & Co. He received undergraduate degrees in biochemistry and physics from Miami University and a Ph.D. in Chemical Biology from Harvard University.

MAGNET is part of the NIST and Ohio Manufacturing Extension Partnership (MEP) program to support small and medium manufacturers across the US.