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INTO THE DALGONA COFFEE TREND? MMM, THANKS TRADE.

dalgona coffee

INTO THE DALGONA COFFEE TREND? MMM, THANKS TRADE.

Whipping up a Trade Trend

The “cloud coffee” phenomenon making the rounds on Instagram and TikTok is a prime example of how ingenious people leverage global trade to bring us ideas and products we never knew we needed, but that we now love.

I’m talking about dalgona coffee, sweet caffeinated happiness in a cup. It is made of equal parts instant coffee, sugar and hot water whipped together into a beautiful froth and then spooned on top of your favorite hot or cold milk. This delightful and photogenic confection is *everywhere* on social media.

In the spirit of inquiring into the global origins of the products we love, here’s what we found out.

Dalgona’s “Honeycomb Toffee” Origins

Dalgona coffee isn’t new, but owes its new popularity to Korean actor Jung Il-woo, who demonstrated how to make it on a television show. Dalgona, however, appeals to both older and younger generations because it harkens back to a street food candy from the 1970s and 80s called ppopyi in Korean, meaning honeycomb toffee. The shortcut version of dalgona coffee is meant to be the Millennial version of ppopyi.

Thanks to K-pop culture and social media, dalgona coffee has spread worldwide. As it goes viral globally, more cultures are laying claim to its origins. Macau, in southern China, is where Jung’s clip was filmed earlier this year. The owner of Hon Kee Café in Macau had been making the drink since the early 2000s.

Culture warriors in India and Pakistan claim it as well. There the drink goes by phenti hui coffee, “hand-beaten coffee,” and “Indian cappuccino.” Proud coffee drinkers in Greece claim dalgona derives from its “frappe” (sound familiar?). A form of dalgona can be found in Libya. Coffee aficionados in Cuba use espresso instead of instant coffee.

ppopyi candy
Image credit: KIMCHIMARI, Dalgona/Ppopgi – Korean Sponge Candy Street Food

We Can’t Make Our Dalgona Without Trade

But these countries aren’t the superstars of coffee trade, nor is the United States. Brazil, Vietnam, Colombia, Indonesia and Ethiopia are the world’s top producers of coffee. Coffee is mainly produced in developing countries located in the Bean Belt and exported to higher income countries (we see you Finland, top consumer of coffee in the world).

The sugar in dalgona coffee (at least outside the United States) is likely to come from one of the largest producers in the world – Brazil, India, China, Thailand or Pakistan. Both sugar and coffee involve tariffs and complicated supply chains that include giant multinational corporations and myriad smallholder farmers growing crops around the world. Yet somehow, they are both quotidian or everyday products that we don’t think deeply about when we buy them. We choose our coffees and sugars from the grocery aisles or coffee shops and move on with our lives.

So the next time you find social media inspiration for your next food craze, think about the global trade that underpins it. The world is a big place, and trade brings it right to our Instagram feeds.

Take the “dalgona coffee challenge” and find out how good trade tastes: video tutorial from Yummy:

Video thumbnail how to make dalgona coffee

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Brooke Tenison is an International Economist at the Department of Commerce. She was previously a Research Analyst at the International Monetary Fund, a Graduate Research Fellow at the Mercatus Center, and an Economic Fellow at New Markets Lab. She received her Master’s in Economics from George Mason University. Any opinions expressed are her own and are not representative of her current or former positions.

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

timber

WOODEN SKYSCRAPERS PUSH TRADE IN CROSS-LAMINATED TIMBER TO NEW HEIGHTS

Closer to Nature

American biologist Edward Wilson is known for popularizing the term “biophilia” to explain the inherent pleasure people derive from being in nature. By extension, “biophilic design” incorporates natural materials, natural light, vegetation, nature views and other experiences of the natural world into the modern built environment. A relatively new building material, cross-laminated timber (CLT), is quickly becoming the darling of the biophilic design movement.

CLT is made from layers of dried lumber boards stacked in alternating direction at 90-degree angles, which are then glued and pressed to form solid panels. The resulting panels have exceptional strength, stability and fire resistance. According to a recent USDA study, a seven-inch floor made of CLT is fire-resistant for two hours. CLT structures have proven more resilient to earthquakes than many other types of building materials, fostering great interest among builders in Japan where biophilic design has been part of the culture for centuries. CLT featured prominently in the rebuild of Christchurch, New Zealand, which was severely damaged by earthquakes in 2010 and 2011.

Global Cross-Laminated Timber “Plyscrapers” Reach New Heights

The cross-laminated timber wood panel system was developed in Europe in the 1990s as an alternative to stone and masonry concrete — and to boost employment in the forests products industry. Europe still leads supply and demand in the CLT market, but use of CLT is rapidly gaining popularity in the United States, Canada and across the world.

CLT is the basis of the “tall wood” movement, as the material’s high strength, dimensional stability and rigidity allow it to be used in mid- and high-rise construction of apartment and office buildings and even power line towers. Growing investment in large-scale wood construction is evident with the completion of several prominent structures over the last several years.

They include luxury apartment buildings in Melbourne, Australia and Bergen, Norway as well as the Brock Commons on the campus of the University of British Columbia. Last year, construction began on a 24-story hotel and office tower composed of 76 percent wood in Vienna, Austria. In 2018, Sumitomo Forestry announced its plan to build the world’s tallest wooden skyscraper – at 70 stories tall, the building will be made 90 percent of wood, capable of sequestering 100,000 tons of CO2. Japan also used CLT extensively in its 2020 Olympic National Stadium to achieve a natural aesthetic.

Global Plyscrapers

Building Global Customers

The global CLT market was valued at $773 million in 2019 and was expected to grow to $1.6 billion by 2025. Production of CLT worldwide is estimated based on surveys and reported by the publication Timber-Online at 1.44 million cubic meters in 2019, although data is not available for all production sites. An estimated 65 percent is produced in Italy, Czech Republic, Germany, Austria and Switzerland. With additional production coming online, global annual output is expected to grow to between 2 and 2.5 million cubic meters this year.

How much of this production is traded internationally? It’s not entirely clear. There is no international agreement yet on how to classify CLT on the Harmonized Tariff Schedule. The product currently falls within a broader category with glulam (another laminated timber product), obscuring our understanding of specific trade flows. (With support from USDA’s McIntire-Stennis program, The Center for International Trade in Forest Products at the University of Washington is building a database to better understand international trade in wood products while governments sort this out.)

Japan’s Ministry of Finance recorded 918,000 cubic meters of laminated lumber (glulam and CLT) were imported in 2018, mainly from Europe. U.S. imports of CLT in 2018 were much smaller – less than 20,000 cubic meters, also primarily from Europe. Whether this number will grow remains to be seen – it could be that greater use of CLT drives more trade in architectural design, timber engineering and construction services.

Global ICT market

Image: courtesy of Acton Ostry Architects

Supporting the Structure of Rural Economies

CLT was pioneered and promoted in Europe in part to bolster rural employment in the timber industry. Though it is also traded, being close to construction is a big advantage in the timber industry. European companies, which dominate their own market and supply American developers, are starting to build mills in the United States to meet growing demand. Austrian firm KLH partnered with International Beams in Dothan, Alabama, to open the first CLT plant east of the Rocky Mountains utilizing the Southern Yellow Pine native to the region.

To support more CLT production in rural economies, the United States is in the process of updating U.S. building codes to expand the use of CLT, as the International Building Code has already done. The 2018 Farm Bill contains provisions from the Timber Innovation Act intended to advance domestic research and development of further applications for structural wood in the building sector.

The United States isn’t alone in its efforts to build CLT capacity. Japan’s Forest Agency instituted a road map in 2014 for greater utilization of CLT as a follow up to Japan’s Promotion for the Use of Wood in Public Buildings Act. The agency provides subsidies to drive the establishment of CLT facilities with a target of increasing the country’s CLT production capacity to supply both the domestic and international markets. Through the effort, the government also seeks to support employment of women in rural areas, including through encouraging female lumberjacks.

A Breath of Fresh Air

In responding to industry feedback surveys, customers say wood construction, exposed structural wood and biophilic design have a positive impact on their shopping experience because such structures are ecological, healthful and warm. Some studies even suggest wood is a multi-sensory experience for occupants, evoking a sense of calm that can lower blood pressure.

As for environmental benefits, CLT emits less carbon dioxide during the manufacturing phase and finished buildings made with CLT even help sequester existing carbon for a longer period. Murray Grove in London was the first tall urban housing project to be constructed entirely from CLT. Due to its wooden construction, it was calculated to be carbon negative from the start and will take twenty-one years before the building will even reach carbon neutrality, far less than if the building had used concrete. Even tearing down a CLT building at the end of its life is more environmentally friendly than taking down one made of traditional materials.

oregon-conservation-center-lever-architecture-usa_dezeen_2364_hero2
Photo credit: Lever Architecture, cross-laminated timber community center added to the The Nature Conservancy in Oregon.

Trade in Sustainability

A thriving wood industry must embrace sustainability by replanting and harvesting efficiently. The CLT process allows smaller diameter softwood trees to be utilized, more so than in most commercial timber. It also makes use of millions of acres of pine that have been killed by the pine beetle epidemic. Pine beetles have penetrated forests in all nineteen western states, some eastern states and Canada, effectively decimating some 88 million acres of timber. Processing the downed trees mitigates some of the carbon emitted by the decaying wood, which remains strong enough to be useful in CLT processing for up to two years.

Cross-laminated timber provides many possible benefits, including reduced costs, rural employment, strength, fire-resistance, beauty and a sense of being closer to nature. We can also credit trade in CLT with stimulating a global movement that could help all of us live and work more harmoniously on this planet.

The author began her U.S. Government career in the U.S. Department of Commerce, International Trade Administration’s Forest Products division and is still convinced this industry has the best site visits and field trips.

Feature image: The Kajstaden Tall Timber Building by CF Møller Architects in the Swedish city of Västerås.

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Sarah Smiley is a strategic communications and policy expert with over 20 years in international trade and government affairs, working in the U.S. Government, private sector and international organizations.

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

irish

FIDDLING WITH IRISH MUSIC ROYALTIES IN THE WTO

The wee organization that took on the U.S. copyright system

Black Velvet BandMolly Malone, ,The Fields of AthenryWild Mountain Thyme and Danny Boy are among Ireland’s most famous exports. Irish bouzoukis, Uilleann pipes and Celtic harps render traditional Irish music as unmistakable as it is beloved – a cultural connection for millions of Americans to their roots.

Over ten percent of the population, or 32.6 million Americans, claimed Irish ancestry in a 2017 U.S. Census Bureau survey. That affinity (along with Irish beers and whiskeys) explains the popularity of Irish pubs throughout the United States.

The Irish music playlist broadcast in thousands of pubs and restaurants is why a small outfit called the Irish Music Rights Organization (IMRO) twenty years ago convinced the European Commission to sue the United States in the World Trade Organization (WTO). At issue is an exception in U.S. copyright law that enables U.S. businesses to play music without paying royalties to the creators. The United States lost the WTO case known as “Irish Music,” but has yet to restore rights to Irish performers.

American Irish

Pay to Play

Generally speaking, when copyrighted music is played in a small boutique, while getting a filling at the dentist, or to motivate your workout at the gym, the creators of the music are owed a royalty. It would be cumbersome for many such businesses to pay that directly, so performance rights organizations (PROs) collect licensing fees that they pass on to registered singers, songwriters and music publishers. In the United States, the two largest PROs are The American Society of Composers, Authors and Publishers and Broadcast Music, Inc.

Section 110(5) of the 1976 U.S. Copyright Act included a “homestyle exemption” to this rule that allowed small commercial establishments to avoid the royalty payment. A business could qualify for the exemption if it broadcasts through a single radio or audiovisual device that is of the type commonly used in one’s home. The Senate report accompanying the Act characterized such use as “for the incidental entertainment of patrons in small businesses and other establishments, such as taverns, lunch counters, hairdressers, dry cleaners, doctors’ offices, etc.” The provision became known as the Aiken exemption after the Supreme Court victory of George Aiken who played his radio for customers in his fast-food chicken restaurant.

Over the years, application of the law was repeatedly litigated due to its ambiguity. Rather than clarifying a narrow interpretation, Congress expanded the exemption through the 1998 Fairness in Music Licensing Act to allow all establishments under a certain square footage to play licensed music for their customers regardless of the type of sound system employed. Going a step further, Congress created the “business exemption” which allows businesses of any size to play licensed music if the number and location of loudspeakers is limited, if the establishment does not charge to see or hear the music transmitted, and if the broadcast is not transmitted beyond that establishment.

Broadcasting from both sides of our mouths

Article 9 of the WTO Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) requires WTO members to comply with Articles 1 through 21 of the Berne Convention for the Protection of Literary and Artistic Works that guarantee the rights of copyright owners. Any limitations or exceptions should be confined to certain special cases and should not “unreasonably prejudice the legitimate interests of the right holder.”

In 2000, a WTO dispute settlement panel agreed with the European Communities’ contention that section 110(5) of the U.S. Copyright Act violates the United States’ TRIPS obligations. The “homestyle exemption” as provided in section 110(5)(A) was deemed sufficiently narrow as to not prejudice the rights of copyright owners. Some 13 to 18 percent of U.S. business establishments would be covered. The “business exemption” in section 110(5)(B) however, expanded covered establishments to more than 70 percent of bars and restaurants (and 45 percent of retail), causing unreasonable prejudice to the legitimate interests of copyrights holders.

In other words, if the majority of food and drink establishments could avoid paying royalties to copyright holders of Irish music, the exception had become the rule.

70 percent exempted

An Irish goodbye

The United States accepted the panel findings and agreed to binding arbitration to determine a deadline for compliance and to determine the damages (known in WTO parlance as the level of “nullified or impaired benefits”) to the European Communities, which was set at 1,219,900 euros or about $1.1 million annually. Europe extended a December 31, 2001 deadline to provide time for the U.S. administration to work with Congress on an amendment to the copyright law.

The White House could not secure Congress’ approval so Europe agreed to negotiate a settlement. In June 2003, the United States and European Communities notified the WTO Dispute Settlement Body that the parties had reached a “mutually satisfactory temporary arrangement.”

The United States would make a one-time, lump-sum payment of $3.3 million covering a three-year period paid into a fund set up by European performing rights societies “for the provision of general assistance to their members and the promotion of authors’ rights.” The parties further agreed that, if the dispute has not been resolved three years on, they would enter into consultations to reach a durable resolution, foreshadowing what would become a never-ending exchange of letters.

In a November 2004 document labeled WT/DS160/24, the United States pledged to “work closely with the U.S. Congress and will continue to confer with the European Union in order to reach a mutually satisfactory resolution of this matter.” Every time Europe raises the outstanding item in WTO meetings, it is met with the exact same addendum to WT/DS160/24, restating the U.S. administration’s commitment (whether it be President George W. Bush, Barack Obama or Donald Trump) to work with Congress. As of February 2020, the United States had issued 179 such addendums.

US noncompliance

Unlucky

The WTO’s dispute settlement mechanism was designed to encourage members to resolve disputes through consultation. Consultations can sometimes avert use of formal dispute settlement procedures or avoid the imposition of retaliatory measures once a dispute settlement panel renders a decision.

The intent of consultations is to bring WTO-inconsistent measures into conformance with a member’s obligations. In the “Irish Music” case, the United States provided compensation rather than fix the offending measure (and Europe agreed as a temporary solution). But the WTO’s Dispute Settlement Understanding itself states that compensation should be resorted to “only if the immediate withdrawal of the measure is impracticable and as a temporary measure pending the withdrawal of the measure which is inconsistent with a covered agreement.”

In this case, the United States stretched “temporary” into twenty years of non-compliance, to the detriment of the rights of European music creators and the rights of other WTO members. The outcome also undercuts the very intellectual property rights the United States fought to include in TRIPS on behalf of American copyright holders.

Modern musical arrangements

In the meanwhile, sound systems and methods of “transmission” have evolved rapidly. Streaming delivers 75 percent of the music industry’s global revenues today. At this point, it seems pretty unlikely that your local Irish pub is using a radio on a shelf to play music.

The Recording Industry Association of American (RIAA) says charges for licensing account for 16 percent of total U.S. services exports. RIAA is working to ensure global copyright protections for sound recordings as digital products. Copyright enforcement in the digital realm requires measures to control access to content such as encryption and password protections, clarification of responsibilities by Internet service providers that may play host to copyright-infringing websites, and enforcement actions against so-called “stream-ripping” sites that allow free downloads of copyright-protected recordings. This may require new provisions in trade agreements, even as the United States remains out of compliance with some of its old commitments regarding “Irish Music” copyright protections.

We’re all Irish on St. Paddy’s Day

In its 1995 appeal to the EC to bring the Irish Music case, the Irish Music Rights Organization argued that the Chieftains, The Pogues, and other European creators lose as much as 28 million euros each year, not to mention hundreds of millions for American creators whose royalties also go unpaid.

Instead, it’s American bar crawlers who unknowingly benefit. Now that you know, this St. Paddy’s Day, you may as well hoist a Guinness to toast the U.S. copyright law exception that enables you to belt out a rendition of Molly Malone as it plays on the sound system – for free – at your local Irish pub.

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Andrea Durkin is the Editor-in-Chief of TradeVistas and Founder of Sparkplug, LLC. Ms. Durkin previously served as a U.S. Government trade negotiator and has proudly taught international trade policy and negotiations for the last fifteen years as an Adjunct Professor at Georgetown University’s Master of Science in Foreign Service program.

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

america

AMERICA’S FAVORITE HOG IS DRIVING U.S.-INDIA TRADE RELATIONS

American Icon in a Global Market

A couple of years ago, the Fat Boy Arnold Schwarzenegger rode in Terminator 2 sold at auction for more than half a million dollars. The bike’s on-screen presence with Arnold cruising in a black leather jacket and Italian Persol sunglasses fueled a run on the bike back in the early 1990s. Maker Harley-Davidson just released a 30th anniversary limited edition Fat Boy.

Harley-Davidson bikes have been an American icon for more than 100 years. With a classic foundation story, starting out of a small shed in Milwaukee, Wisconsin in 1903, the company and its bikes are a stand-in for the American ideal of freedom and strength, its brand recognizable across the world. Harley-Davidson weathered the Great Depression, two World Wars and the financial tsunami in 2008 to emerge as a “great American company,” as noted by U.S. President Donald Trump in 2017.

The company is focused on nurturing a new generation of riders who include young, female — and global — enthusiasts. Expanding its portfolio of motorcycle offerings for global appeal, it has set a goal to grow its international business to 50 percent of annual revenue by 2027.

Harley global sales

Taken for a Tariff Ride

Harley-Davidson bikes enjoy a well-earned prestigious reputation around the world and the price tag reflects it. Adding to its price, many countries also impose high tariffs on imported two-wheelers. In fast-growing Asia, tariffs range from 20 percent in Taiwan to 30 percent in China, 60 percent in Thailand, and 100 percent until recently in India.

Facing a declining U.S. consumer base and eyeing growing markets in Asia, Harley-Davidson is working to expand its sales particularly in South and Southeast Asia. U.S. tariffs have thrown a monkey wrench into those plans.

Here at home, the Trump administration’s tariffs on imported steel and aluminum would add some $40 million in domestic production costs, according to the company. Making matters worse, the European Union retaliated by increasing the tariffs on U.S. motorcycles from 6 percent to 31 percent, adding an average $2,200 to the cost of a Harley-Davidson bike exported to Europe. If the steel tariff dispute isn’t resolved, Europe has threatened to raise the tariff in 2021 to 56 percent.

Harley-Davidson, like so many other companies, hastened production expansion in overseas plants to mitigate costs from the tariff war, a strategy the company undertook in India more than a decade ago.

The Largest Motorcycle Market in the World

India‘s auto industry is regarded as one of the fastest-growing in the world. In 2018, India produced over 29 million vehicles (including passenger vehicles, commercial vehicles, three-wheelers and two-wheelers).

The two-wheeler category leads the Indian automobile market with 80 percent market share due to a growing middle class and a young population. India is now both the largest two-wheeler consumer market and the largest manufacturer of two-wheelers in the world. There are an estimated 170 million motorcycles, scooters and mopeds on the roads today in India. But until 2007, Harley-Davidson was denied access to the Indian market.

Size of India's Motorcycle Market

Mangoes for Motorcycles

In 2007, President George W. Bush struck the so-called “mango deal” with India, which allowed Harley-Davidson to sell its bikes in India in exchange for the end to an 18-year-ban on imports of Indian mangoes to the United States. The deal was signed a year later by then-U.S. Trade Representative Susan Schwab and Union Commerce and Industry Minister Kamal Nath.

The mango deal allowed Harley to invest in India and permitted imports of Harley-Davidson bikes with an engine capacity of 800 cc or above if it complied with Euro-III emission norms. But India remained firm it would not lower its 100 percent tariff on motorcycle imports, which continued to deny Harley-Davidson effective access to the Indian market for its bikes completely built in the United States.

In August 2009, Harley-Davidson announced plans to enter the market in India through a subsidiary and started assembly operations in 2011 in a plant located in in Bawal in Haryana state using parts imported from the United States. Through a complicated tax system, imported motorcycle parts face around a 39 percent tariff. India-built Harley-Davidson motorcycles are also exported to Europe and Asia.

Too Much for Trump

Whether standing on the factory floor in Wisconsin or making a State of the Union speech, President Trump frequently complains about India’s 100 percent tariff on Harley-Davidson bikes as a sticking point in U.S-India trade relations.

In February 2018, the Indian government responded by lowering the custom duty on fully-built imported motorcycles from 100 percent to 50 percent. However, since Harley-Davidson assembles 12 out of its 16 models in India for domestic consumption, most of its bikes won’t be subject to the 50 percent tariff either.

In a media interview with an Indian newspaper, Peter MacKenzie, Managing Director of India & Greater China for Harley-Davidson was quoted saying, “We don’t see any significant impact. Yes, there is a reduction in custom and any cut is always welcome. However, a large portion of our portfolio is locally produced.”

Beyond trade wars and tariffs, one of Harley-Davidson’s biggest issues is consumer preferences for smaller and cheaper motorcycles in Asian markets like India. The company plans to develop a more accessible, small-displacement motorcycle (250cc to 500cc) to increase sales in India and other Asian markets, but for now the country’s vast middle-income group generally prefers less expensive bikes that sell for between $1,000 and $1,500, about eight times less than a Harley-Davidson. The smaller bikes are more adept at navigating narrow, pot-holed streets choked with thousands of other bikes.
Harley-Davidson Sales in India

Big Hog, Small Trade Deal

President Trump is scheduled to go to India at the end of February and he wants to sign a trade deal with India’s Prime Minister Modi. Right now, the deal appears narrowly focused on addressing U.S. complaints regarding lack of access for the U.S. dairy and medical technology industries in exchange for the U.S. restoring India’s tariff benefits under the U.S. Generalized System of Preferences and removing India from countries hit by U.S. tariffs on aluminum and steel.

India might also ratchet back the tariff hike it imposed last year on high-value farm imports such as almonds, walnut, apples, and wine, among 29 other items.

As in Terminator 2, next week is judgment day. If Modi says “Hasta la vista, baby“ to President Trump’s request to eliminate or lower the tariff on Harley-Davidson motorcycles, Trump is likely to say, ”I’ll be back.“

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PBhatnagar

Pragya Bhatnagar is a Research Associate with the Hinrich Foundation where he focuses on International Trade Research. He is a Hinrich Foundation Global Trade Leader Scholar alumnus, earning his Master’s degree in International Journalism, specializing in Business and Financial Journalism, from Hong Kong Baptist University. He received his bachelor’s degree in Economics from Lucknow University, India.

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

Grains of Global Salt Trade

Salt is readily available almost everywhere on Earth – why do we still trade so much of it?

Salt wars, salt taxes and salt revolts – how and why we traded salt for millennia

Over thousands of years of humanity, civilizations invested enormous symbolism, prevented famine, waged wars, built and lost empires over a commodity that we now blithely toss by the millions of tons all over our icy streets in wintertime – salt.

Salt has such an important and varied role in health, religious life, death, wars and trade that a 450-page New York Times bestseller – called Salt, A World History by Mark Kurlansky – was written about it.

Sodium chloride (known commonly as salt) is versatile. Considered precious and therefore a source of great power throughout ancient history, in the modern era, refined salt is common and used extensively throughout the chemical industry. Gourmet varieties like fleur de sel season our food, but most of the salt mined is low-grade and deployed to de-ice our roadways. Given modern extraction techniques and geological understanding, we know salt is plentiful, so we no longer fight wars over it, but we do still trade it.

For sustenance and power

Ancient civilizations founded major cities and built empires near sources of salt, conquering and monopolizing saltworks as needed to maintain power. The ancient Mayans controlled salt resources at Salinas de los Nueve Cerros, an area in Guatemala where natural salt springs flowed into a river gully, enabling those who controlled it to trade salt and salted goods such as cured hides with downstream consumers.

Egyptians were among the earliest civilizations to preserve food on a large scale as insurance against crop failure in dry years. They evaporated seawater from the Nile Delta, but also likely procured salt through African trade with Libya and Ethiopia, as well as through Mediterranean trade. Trade spread knowledge about the use of salt for preservation (and taste) but also, according to Kurlansky, gave rise to trade in salted foods such as cured meats and fish, which “would shape economies for the next four millennia.”

From tuna, sardines, mackerel to sturgeon, salted fish was traded extensively as both food and medicine. Fishing industries flourished around port cities, especially based on trade in Atlantic cod, a fatless fish that was easily dried and salt-cured for transport. To support cod trade, the fearsome Vikings established “salt routes” that delivered delicate bay salt from Normandy back to the Baltic.

Sfax port and salt beds

For wealth and control of trade

As the saying goes, “All roads lead to Rome.” One of the most famous was the Via Salaria or Salt Road that connected Rome to the saltworks at Ostia on the coast. Centuries later, the Italian city-states of Venice and Genoa staked their trading dominance on salt. Although Venice produced salt for themselves, the Venetian merchants realized they could make more money by controlling trade in salt.

Venice and Genoa contested control of as many saltworks throughout the Mediterranean as possible, jointly monopolizing the amount of salt available on the market and therefore the price at which salt was sold. Although the Genoese had a more sophisticated maritime industry and larger ships to hold bulk salt, the government in Venice ensured a landed price for importers by taxing its citizens. The subsidies to importers produced profits from salt trade with which to purchase Indian spices that they turned around and sold at lower prices than their competitors. The government plowed salt tax revenues back into loans to merchants, enabling Venice to dominate trade in spices, grain and textiles.

To wage war

Access to adequate salts stocks could affect the outcome of wars and is a recurring theme from early warfare through the U.S. Civil War. The livestock used to feed soldiers require salt, cavalry and workhorses hauling supplies and artillery require salt, and salt was needed to disinfect wounds. Napolean lost hundreds of thousands of troops in retreat from Russia due to starvation and lack of salt to treat wounds. The Union blocked Confederate ports in the south from receiving British salt and destroyed saltworks to weaken Confederate efforts. The Romans taxed their salt advantage to raise money to fight the Phoenicians and even paid soldiers in salt – the origins of the word “salary”.

To raise government revenue

Many governments have taxed this essential commodity, but their policies turned out to be not worth their salt. Protests against salt taxes were the proximate cause of many consequential revolts throughout history.

For centuries, French monarchs forced their subjects to buy salt from royal depots. Grievances against this practice helped spark a revolution against Louis XVI. The Moscow uprising of 1648 is known as the Moscow Salt Riot, instigated by the government’s replacement of different taxes with a universal salt tax to replenish the state treasury.

But perhaps the most well-known rebellion against oppression was the 1930 Salt March led by Mohandas Gandhi to protest British rule in India. For centuries, India had mined its ample natural salt fields, deposits and lakes. In particular, Orissa, located on India’s east coast, is home to a long and deep tract of natural salt beds, which even the poorest of residents could collect using simple techniques. Salt was traded for cotton, food and other necessities.

While it would have been convenient and cheap for the British government to avail itself of Orissa salt for gunpowder to fight its many wars with the French, doing so would have been detrimental to salt from Liverpool that could not compete on price or quality. The British took over salt production in Orissa, banning private production or sale, and subsequently imposed internal customs checkpoints to prevent smuggling. Duties were placed on salt from Orissa that were matched by duties on imports, generating government revenue and raising the price of salt for all Indians. Eventually, the government abandoned the Orissa saltworks causing a salt shortage and famine.

This breaking point became a foil for Ghandi’s “salt campaign,” a 240-mile march to the beach at Dandi where he scraped up a handful of salt in defiance of the British law that mandated the government monopoly. Soon thereafter, ordinary Indians resumed openly gathering and selling salt, fueling a movement that opened the door to future negotiations toward independence.

Today, India is a globally competitive producer with nearly 12,000 different salt manufacturers, mostly small scale, but still heavily regulated by the central government’s Salt Commissioner.

Salt trade through camel caravans in Mali

For security

Salt production was undertaken in China as early as 1,000 BC during the Xia dynasty and the Chinese can be credited with employing shaft wells, salt solution mining and percussion drilling techniques hundreds of years before anyone else.

China also has a longer legacy of state-control over production and trade of salt. Prices were kept artificially high. Salt revenues helped fund the Great Wall to defend against the Huns. Still today, the China National Salt Industry Corporation employs over 48,000 people charged with overseeing the national industry and China’s annual production of some 68.5 million tons.

For highways and factories

The many wars fought over production and trade of salt seem ironic and tragic in hindsight, considering that nearly every country in the world has salt deposits, not to mention that the salt content in the oceans is nearly unlimited.

Of course, today we enjoy the benefits of refrigeration, flash-freezing processes, and efficient transportation which all eliminate the need to preserve food by salt. Widespread use of modern drilling techniques and vacuum evaporators mean we can extract all the salt the world needs.

Why trade salt today?

Uses of salt in 2018 in US

The U.S. profile of salt consumption largely mirrors the way salt is used in most parts of the world. In 2018, 43 percent of salt consumed in United States went to de-ice our highways.

Another 39 percent was consumed by the chemical industry. Sodium chloride is a key raw material in the production of chlorine and caustic soda, which are used to manufacture glass, paper, rubber, PVC for construction, the dyes in textiles, as well as in water treatment and pharmaceuticals.

Just six percent went to agricultural and food processing. We can only eat so much of the stuff. Despite producing 42 million tons of salt worth $2.3 billion in 2018, we imported another 17 million tons, mostly from Chile, Canada and Mexico, mostly for our roadways and factories.

Who wins today’s salt wars?

These days, salt is traded peacefully – the wars are simply for market share. Leading salt exporters include The Netherlands, Germany, India, Chile and the United States. Given salt’s lead role in industrial manufacturing, it should be no surprise that the leading consumers of traded salt are Japan, China, Germany and the United States.

But while the chemical industry relies on sodium chloride to make so many things in our households, the majority of salt we pull from the Earth and trade around the world now lands unceremoniously beneath our feet and our car tires in winter.

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Andrea Durkin is the Editor-in-Chief of TradeVistas and Founder of Sparkplug, LLC. Ms. Durkin previously served as a U.S. Government trade negotiator and has proudly taught international trade policy and negotiations for the last fourteen years as an Adjunct Professor at Georgetown University’s Master of Science in Foreign Service program.

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

Comparative Advantage Revealed: What the U.S. Could Gain from an FTA with Brazil

Olá Brasil!

President Trump and Brazilian President Jair Bolsonaro announced their desire to “build a new partnership” after meeting in August, potentially through a bilateral free trade agreement. For the time being, the United States and Brazil are starting with some pragmatic approaches, for example by streamlining customs procedures, agreeing on safety standards for Brazil to import U.S. pork and beef, increased imports of U.S. ethanol, and possible ways to expand energy trade.

But Brazil would be a good target for a full U.S. free trade agreement. It is by far the largest South American economy. With total two-way trade reaching $103.9 billion in 2018, Brazil is our ninth-largest export market. Beyond any political merits or challenges, the potential commercial benefits can be shown through textbook economics.

Two-way trade between the US and brazil totaled 103.9 billion in 2018

“Revealed” Comparative Advantage

In a 1965 paper entitled Trade Liberalisation and “Revealed” Comparative Advantage, economist Bela Balassa developed an index for identifying where the comparative advantage of industrial countries lay in regard to their trade with one another.

Comparative advantage basically means one country can produce a particular good at a lower opportunity cost than another, which doesn’t necessarily mean at a lower absolute cost. The revealed comparative advantage (RCA) index is a useful tool that cuts out the laborious work of trying to assess all the factors that might determine comparative advantage but still captures relative costs and differences in non-price factors. Here’s how it works.

The Power of One

A country’s RCA in a certain class of goods is calculated by dividing the proportion of the country’s exports in that class by the proportion of world exports in that class. If the resulting RCA is greater than one, then a comparative advantage has been discovered. If it is less than one, the country is said to have a comparative disadvantage in that class of good.

The RCA is therefore useful in identifying areas where large gains from trade are possible but currently untapped. If one country’s RCA in a product is below one and another’s is above one this may be a potentially lucrative pairing.

Furthermore, if the country whose RCA is below one has either tariff or non-tariff barriers on that good and is importing from an inefficient source or producing for its own consumption, there is even greater potential for benefit.

The U.S.-Brazil Trade Relationship Revealed

Applying the RCA method to the U.S.-Brazil trading relationship in 20 sectors, the relative strengths and weaknesses of the United States and Brazil are complementary in 11 of them. There are only three categories in which both countries have RCAs higher than one, in which they would compete head to head.

For Brazil, export gains could be made in minerals, animals, food products, hides and skins, metals and raw materials such as alloys and iron ores, all sectors where Brazil has a high revealed comparative advantage compared to the United States. The United States has a revealed comparative advantage in exporting capital goods, chemicals, miscellaneous goods, plastics, rubber and transportation.

US-Brazil revealed competitive advantage RCA

Classic Trade: More Sales and More Savings

When it comes to importing raw materials from Brazil, the United States already has zero or low tariff rates in most categories, but there are some products where demand is high, but tariffs remain, creating opportunities for savings for U.S. consumers. For example, U.S. tariffs on building materials such as cut stone and shaped wood range from 3.2 to 4.9 percent. The United States does not have a comparative advantage in these materials and currently imports 24 percent of its building stone and 30 percent of its shaped wood needs from Brazil.

Tariff savings may also shift consumer purchases in Brazil’s favour. For example, Brazil enjoys a comparative advantage over the United States in coffee (we don’t produce it except some specialty in Hawaii). At present, 50 percent of U.S. imported coffee comes from countries we have an FTA with including Colombia and Guatemala, so Brazil would be well poised to increase its share of U.S. coffee imports under an FTA.

The products the United States has a revealed comparative advantage in compared to Brazil are more diverse, from capital goods to chemicals. Brazil’s lowest weighted average tariff among the good represented on the chart is 6.24 percent for chemicals; the highest is 21.01 percent in transportation. Reducing tariffs on U.S. industrial and agricultural goods would benefit both Brazilian importers and U.S. exporters.

A U.S.-Brazil FTA Could Be Positive

Overall, these numbers suggest a high complementarity in revealed comparative advantages between the United States and Brazil such that removing barriers to cross border trade in goods and services between the United States and Brazil has the potential yield gains for both sides, with increased trade flows both ways.

If only negotiating a trade agreement were as easy as following the numbers. The United States has a number of pension and tax reforms it would like Brazil to enact before getting serious about an FTA, and Brazil is a member of MERCOSUR, a South American trading bloc that precludes members from negotiating tariffs on an individual country basis. And so, the two countries will continue to nibble at the margins of an agreement, achieving “free-er” trade where possible, but when they are ready, the comparative advantages are now revealed.

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Alice Calder

Alice Calder is a program manager at the Mercatus Center at George Mason University. Prior to this she worked as a graduate research assistant while pursuing her MA in Applied Economics at GMU. Originally from the UK, where she received her BA in Philosophy and Political Economy from the University of Exeter, living and working internationally sparked her interest in trade issues as well as the intersection of economics and culture.

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

trade

Peeling Away Trade Protections for Bananas

Simple in appearance, pleasantly sweet, nutritious, and nearly universal in appeal, that Cavendish bunch of bananas on your counter comes off as pretty unassuming. In reality, it has been through jungle wars and trade wars and now sits on the precipice of extinction. More than half of the bananas traded globally are the Cavendish variety. But with two diseases threatening the world’s largest Cavendish plantations, growing to love more varieties could help save trade in bananas.

Still an Important Cash Crop

Grown in more than 150 countries, bananas are the eighth most important food crop in the world – fourth most important in developing countries. Bananas are among the most traded fruit in the world, generating revenues of more than $8 billion a year for the top banana exporters including Ecuador, the Philippines, Costa Rica, Colombia and Guatemala. However, most are produced for local or national consumption.

For example, the Food and Agriculture Organization estimates that between 70 and 80 percent of bananas in Africa are produced by smallholder farmers. Around 114 million tons are produced globally beyond what isn’t too small to be counted, yet only 19 million tons were shipped globally. That said, for the top five exporters, bananas are a major contributor to the total value of their agricultural exports. India and China are among the biggest producers but their output mainly serves the large domestic markets.

global bananas trade

Peeling Away Trade Protections

The Banana Wars, centered on the European Union’s (EU) banana trade regime, spanned 20 years as the longest running series of disputes in the multilateral trading system to date (although the Boeing-Airbus dispute may be on track to take that title). As one of the most significant episodes in trade law, the Banana Wars are deserving of more attention, but here are some abridged highlights.

Europe’s banana regime began as an umbrella for complex arrangements at the individual EU Member State level that were designed to offer exclusive or preferential access to former colonies in Africa, Caribbean and the Pacific (ACP), and at the same time shield EU producers from competition.

Under the EU’s original regime, ACP countries received a zero-tariff rate while imports from other countries were taxed at 20 percent. However, each Member State was allowed to “derogate” and maintain special protective provisions for imports from their overseas departments. For example, France set aside two-thirds of its market for Guadeloupe and Martinique and the remaining third for the ACP Franc Zone states of Cameroon and Cote d’Ivoire. The Spanish market was reserved for shipments from the Canary Islands. Greece banned imports to protect its own production in Crete. Only Germany opened to free trade.

The Single European Act of 1986 mandated an integrated EU market by January 1993, which required that Member States consolidate their programs into a common regime for bananas. As devised, this version still enabled members to discriminate among imports by source, offering better terms to their overseas departments and to imports from ACP countries. Colombia, Costa Rica, Guatemala, Nicaragua and Venezuela (supported by the United States) challenged the regime as inconsistent with the EU’s obligations under the GATT.

The EU’s ability to offer tariff preferences was upheld because it had a waiver in the GATT for its general tariff preference program; but the GATT Panel found the EU’s discrimination through tariff quotas to be inconsistent with its obligations. However, prior to the WTO, a GATT member could simply veto the outcome of a panel decision, enabling the EU effectively to ignore the GATT Panel ruling.
EU banana imports

Second Banana

The EU revised its banana regime in 1993 to include new special distribution licenses under a general quota. Licenses were divvied up among primary importers and importers performing secondary activities such as customs clearance, warehousing and storage; licenses were dependent on historical performance, subject to country allocations, market share and other criteria. After yet another challenge by the five Latin American countries, a GATT Panel found in 1994 that the EU’s licensing system was excessively restrictive and not covered by its waiver.

After 1995, with the WTO’s enforceable dispute settlement system in place and additional obligations to avoid discrimination in trade in services, the EU recognized it would face more challenges to its regime. The large multinational producers involved in shipping, warehousing, ripening, marketing and distribution had an even stronger case to make. The EU negotiated with all of the disgruntled Latin American producers but Guatemala to head off the legal challenge. Having offered additional or expanded quotas, they temporarily pleased some countries but further worsened the discriminatory effect for those countries not a part of the negotiation.

A third complaint against the EU’s banana regime was reviewed in the WTO in 1996, this time with the United States as the lead plaintiff in response to complaints from Chiquita and the Hawaiian Banana Association. A WTO decision in 1997 again concluded that, although the EU’s discriminatory tariffs were covered under its historical waiver, its tariff quota allocations and convoluted import licensing administration violated its WTO obligations. The EU’s next version of its banana regime did little to remedy the discriminatory elements, which led to the imposition of tariffs by the United States and Ecuador in response to the EU’s failure to comply with the WTO ruling. By 2001, the EU made another attempt to transition its system, but not until 2006 would the EU decide to phase in a tariff-only system, dispensing with quotas.

Banana Splits

At the end of 2009, after negotiations with non-ACP producers, the EU agreed to reduce the tariff rate it applies to all WTO members. Tariffs would come down from 176 euros per ton to 114 euros per ton by January 2017 (stipulating it could revert to higher rates if exporting countries exceed a “trigger” amount of imports). It wouldn’t be until 2012, that the EU and 10 Latin American countries finalized signed an agreement in the WTO to codify the revised EU banana tariff schedule (“The Geneva Banana Agreement”), officially closing the longstanding legal disputes.

As a prologue, the EU signed trade agreements with Andean and Central American countries in 2013 and Ecuador in 2017. Ecuador has seen a large bump in global export volume as its agreement with the EU is implemented. By next year, the tariff on bananas from Ecuador to the EU will go down to 75 euros per ton with no quota on the amount eligible for this rate. As the EU continues to edge toward “freer” trade in bananas, the ACP producers will face considerable adjustment.

2009 Geneva Banana Agreement

Going Bananas

Having survived the banana trade wars, the popular Cavendish banana faces a new challenge, one that could actually wipe them out.

“Panama disease TR4” has ravaged thousands of acres of Cavendish plantations throughout Southeast Asia and Australia and is spreading to Africa and the Middle East. It can lie dormant in soil for decades and has proven resistant to fungicides and fumigants. It is only a matter of time before TR4 takes hold in Latin America, which supplies nearly the entire U.S. market. Banana plantations in the Caribbean are threatened by another disease called Black Sigatoka, which has been reducing banana yields by 40 percent every year in affected areas.

Before Cavendish was top banana, a banana called the Gros Michel (Big Mike) dominated the banana trade in the early 1900s until the fungus TR1 took it to the brink of extinction in the mid-1950s. At that time, the Cavendish variety from China was discovered to be resistant to TR1 so it replaced Mike. But bananas don’t have seeds. They breed asexually so they cannot recombine their genes to ward off threats. In other words, the Cavendish is ripe for attack because it cannot evolve – every generation is a clone of the previous.

Try Hanging with a New Bunch

If scientists don’t make a breakthrough, TR4 and TR1 could spell the end for the beloved Cavendish. With over 1,000 different varieties of bananas growing around the world, why not get to know some others that might grow more popular through trade – here are a few to get you started.

For your next dessert, try using Niño, Manzano (“apple bananas”) that have a hint of apple and strawberry flavor, or Goldfinger, a newer variety from Honduras. Intriguingly, there’s also Blue Java, named for its blue skin, which has a creamy, ice cream-like texture and purportedly offers a subtle vanilla flavor.

Cooking bananas include the Macho plantain and other fun-sounding varieties like the Burro which has squared sides and a lemon flavor when ripe, and the Rhino Horn from Africa, which can grow up to two feet long. If consumers demand it, perhaps global trade in bananas will finally branch out.

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Andrea Durkin is the Editor-in-Chief of TradeVistas and Founder of Sparkplug, LLC. Ms. Durkin previously served as a U.S. Government trade negotiator and has proudly taught international trade policy and negotiations for the last fourteen years as an Adjunct Professor at Georgetown University’s Master of Science in Foreign Service program.

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

 

pomegranates

Pomegranates Are Symbolic Even for Trade

613 Seeds

It’s the Jewish New Year, a time for introspection and atonement and of course every Jewish holiday has its food customs. Celebrants dip apples in honey to symbolize hopes for a sweet year ahead. Pomegranates also figure in celebrations at this time of year. Its many seeds are associated with the 613 commandments in the Torah. Before eating the pomegranate seeds, Jews traditionally say, “May we be as full of mitzvot (commandments) as the pomegranate is full of seeds.”

The pomegranate is one of the seven species of Israel listed in the Torah, along with grapes, figs and dates. They’ve been cultivated throughout the Middle East for thousands of years and remain a staple in the cuisine. Outside the United States, consumers can enjoy dozens of varieties, from those with sweeter pink seeds to yellow-green Golden Globes. The only kind I’ve ever seen in my grocery store are the ruby red Wonderful variety, which make up 90 to 95 percent of the U.S. market.

Ancient and Modern Purveyor of Good Fortune

Pomegranates are drought tolerant so they can grow in tropical to warm climates, but they do best in regions with cool winters and hot, dry summers. They thrive throughout Latin America, southern Europe, Asia, Africa and Fresno, California. Due to this heartiness, there’s almost always a season for pomegranates somewhere in the world and – thanks to trade – we can enjoy them nearly all year-round. Recently, the U.S. Department of Agriculture approved imports of Peruvian-grown pomegranates, which U.S. retailers say won’t compete directly with California production because they’ll be harvested and shipped as California’s season ends.

Known to be a good source of antioxidants and vitamin C, pomegranates are more popular than ever, finding their way into juices, fruit strips and other processed foods. Higher demand has been especially great for exporters from developing countries. Pomegranate exports are even playing a role in moving farmers in Afghanistan from opium poppy or coca farms to growing legal as well as profitable crops.

Where efforts to shift into other crops have failed, the pomegranate holds promise. Afghan varietals are prized for being especially delicious, creating demand for Afghan farmers to supply pomegranates to buyers around the world. Last year, Afghan farmers exported nearly 23,000 tons of pomegranates, up 35 percent over the previous year. Non-profit organizations have provided startup seeds and planted hundreds of thousands of pomegranate saplings in Afghan fields. If successful, Afghan producers could also move into finished products like fruit bars. More than a symbol, pomegranates are a tangible vehicle for renewal in Afghanistan.

Global Seed Trade

Sowing Trade Seeds

Although pomegranates no longer seem “exotic” to us, Americans are increasingly open to trying new varieties of fruits and vegetables in pursuit of innovative flavors, in response to health trends, and out of affinity for local growers who often produce heirloom and other varieties we can’t find in the grocery store. To enjoy a variety of foods – and importantly, to sustain basic crop production – growers must have access to a variety of high-quality seeds.

Founded in 1883, the American Seed Trade Association (ASTA) represents over 700 companies involved in seed production, plant breeding and related industries in North America. According to ASTA, a seed can cross up to six borders between the breeder to the farmer who plants it in the field. The United States exported $1.8 billion in seeds in 2017, $610 million of which went to Canada and Mexico.

The global seed market was an estimated $66.9 billion in 2018 and expected to reach $98.1 billion by 2024. According to the International Seed Federation, the Eastern European countries of Czech Republic, Slovakia, Hungary, and Poland are the largest exporters of seeds for field crops after France and the United States.
Food supply and seed trade

Good Genes

Despite a robust seed trade, the Food and Agriculture Organization worries about the steady loss of biodiversity for food and agriculture. Through a network of more than 1,750 gene banks, the Global Crop Diversity Trust supports a global seed conversation system to ensure a diversity of genetic resources from the ancient, traditional and heirloom varieties to the raw genetic material needed to breed nutrition-packed, high yield, weather- and pest-resistant modern crops.

Seeds can be made available from the gene banks to help farmers recover from natural disasters. After Hurricane Maria devasted 80 percent of Puerto Rico’s crop value, farmers turned to the Tropical Agriculture Research Station run by the U.S. Department of Agriculture for seeds and tree grafts to replenish their farms.

One of the largest seed collections resides in the Svalbard Global Seed Vault, nestled inside a mountain on an island halfway between mainland Norway and the North Pole. It houses over 983,500 seeds with room to conserve 4.5 million varieties.
Svalbard
Seed conservation is about more than saving for a rainy day. Food production around the world depends on the availability and international trade in seeds. According to the Global Crop Diversity Trust, many countries strongly depend on crops whose genetic diversity originates from foreign regions, both in their food supply and in their production systems.

So while we should all be thankful that gene banks preserve our food heritage, it’s the free movement of seeds in trade that helps protect today’s food production and supply. Now, if we can only get the stores to carry those Golden Globe pomegranates.

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Andrea Durkin is the Editor-in-Chief of TradeVistas and Founder of Sparkplug, LLC. Ms. Durkin previously served as a U.S. Government trade negotiator and has proudly taught international trade policy and negotiations for the last fourteen years as an Adjunct Professor at Georgetown University’s Master of Science in Foreign Service program.

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

chip

THIS TINY CHIP IS PLAYING A BIG ROLE IN THE TRADE WAR

Small and mighty

In one of the most successful branding campaigns, “Intel Inside” helped us all become aware that semiconductors are the brains behind modern consumer electronics in our computers, in our mobile phones, in our televisions and in our cars. It’s wondrous such power begins life as grains of sand (and other pure elements). The silicon in sand is purified and melted into solid cylinders that get sliced into one-millimeter thick wafer discs. The discs are polished, printed with circuit designs, and cut into the tiny individual semiconductor chips that get embedded into our devices.

The next generation of smarter and more powerful machines will rely on even more sophisticated semiconductors to achieve new capabilities. The pace of change is dizzying. Pressure is on to “win” in the global chip race, which is why efforts to protect innovations in chipmaking are front and center in the current trade war – for better and for worse.

Strength in numbers

The American semiconductor industry dominates the field with close to half of the global market share. Some industry leaders thrive by maintaining a high degree of vertical integration, but most have achieved a competitive edge by developing reliable value chains that leverage industry clusters located in different regions, while also tapping into the expertise of thousands of small, niche firms inside and outside the United States.

Some firms focus on supplying raw materials or manufacturing equipment, others create “intellectual property cores” or the building blocks for chips, or cultivate skilled engineers who lay out the circuitry of chips. Closer to the end users are companies that have achieved efficiencies in manufacturing, assembling, testing, packaging and distributing semiconductors.

According to the Semiconductor Industry Association (SIA), Canada, European countries and the United States are leaders in semiconductor design and high-end manufacturing. Japan, the United States and some European countries are main sources for equipment and raw materials. China, Taiwan, Malaysia and others in the Asia-Pacific tend to concentrate in the manufacturing, assembling, testing and packaging segment of the industry. R&D hubs are spread across the world.

One American company might have over 7,000 suppliers across almost every state and also have another 8,500 suppliers outside the United States. In creating strategic value chains, American companies can invest in R&D to advance the science while keeping production costs down.

Top traders in semiconductors

China’s growing chip army

The Trump administration approaches trade with China through the lens of national security as well as economic preeminence. As the Economist rightly points out, in this clash of economic titans, “the chip industry is where America’s industrial leadership and China’s superpower ambitions clash most directly.”

China currently spends as much on imported semiconductors every year as it does imports of crude oil. Importing semiconductors was crucial to China’s ascendance as an assembler of telecommunications equipment, computers, displays, monitors and a variety of electronic components that China exports around the world.

But it’s high-end semiconductor development and manufacturing that China has its eye on now as the foundation for sustained economic growth and military might. Under its “Made in China 2025” strategy, the Chinese government set a goal to supply 40 percent of its own semiconductor needs by 2020, increasing to 70 percent by 2025.

China purchases of semiconductors

Enlisting the big guns

U.S. firms spend twice as much on R&D as their Chinese counterparts – 17.4 percent of sales versus 8.4 percent. How to counter? Pull out some big funding guns. China’s Ministry of Science & Technology orchestrated the $800 million Hou An Innovation Fund to acquire technologies to help its industry semiconductor industry leapfrog. The fund purchased a controlling stake in the world’s leading developer of semiconductor IP blocks. The Ministry of Industry and Information Technology also built a $31.7 billion war chest, even opening its China Integrated Circuit Industry Investment Fund to foreign investors.

According to Price Waterhouse Coopers, China has gone from 16 integrated circuit design firms in 1990 to 664 in 2014. Chinese wafer production firms tripled over a similar span, and the number of testing and packaging firms has increased by 50 percent. E-commerce giant, Alibaba, acquired in-house capacity to design semiconductors tailored for artificial intelligence in a bid to compete with Microsoft and Google. Baidu, Huawei and other major Chinese firms are also enlisted soldiers in the fight.

Secret Weapons

Powerful chips are critical for any industry that relies on collecting, managing and computing with data – and that includes the defense industry. Our most sophisticated defense weapons depend on them. The U.S. Department of Defense has a strategy for “Microelectronics Innovation for National Security and Economic Competitiveness.” The U.S. government has imposed billions in tariffs on imports from China to generate leverage in negotiating an agreement to crackdown on forced technology transfers and theft of intellectual property. But it is also deploying other tools to control U.S. exports of critical technologies, another avenue for China to access U.S. innovation.

The U.S. government has proposed expanding its list of “emerging and foundational technologies” (microprocessors for example) deemed essential to national security that would be subject to licensing under the Export Administration Regulations before U.S. companies could export them. Also under review is the Commerce Control List (CCL) to assess any changes that should be made to controls on items to embargoed destinations, which may include China.

The Commerce and Justice Departments have visibly stepped up enforcement and applied existing authorities in novel ways against Chinese companies that might steal technology. In November last year, the Department of Justice announced it would proactively investigate and prosecute Chinese companies for alleged trade secret theft and economic espionage. The announcement was swiftly followed by an indictment of Fujian Jinhua Integrated Circuit Company, Ltd., a state-owned Chinese semiconductor manufacturer, for alleged crimes related to a conspiracy to possess and convey the stolen trade secrets of Micron Technology, Inc., an American semiconductor company. The Commerce Department added Fujian Jinhua to the list of entities to which U.S. companies cannot sell without obtaining a license.

The United States is not alone in applying policies designed to prevent technology transfer to Chinese companies either through export or acquisition. Taiwan and South Korea have done the same. Foreign firms are also wary of violating U.S. laws. According to Reuters, Japan’s Tokyo Electron, the world’s third-largest supplier of semiconductor manufacturing equipment, announced in June it would not supply to Chinese firms on a U.S. list.

Global Semi Market Share

On the front lines

The Administration’s tariff war is leaving almost no industry or product untouched, affecting semiconductors, semiconductor manufacturing equipment, raw materials, printed circuit boards, and a variety of other products in the industry’s supply chain. American semiconductors often criss-cross the globe during production, so U.S. firms might end up paying this import tax on its own product — not to mention the higher costs of tariffs on the consumer products that run on semiconductors.

While supportive of the administration’s goals, the U.S. semiconductor industry has urged a balanced approach that will protect its intellectual assets from theft and preserve U.S. national security while not unduly hamstringing innovation and growth that is in part derived from international collaboration.

Current technologies and methods of fabrication proprietary to incumbent firms keep them in the lead, for now. But in the near future, chips will run on light rather than electricity. Artificial intelligence and quantum computing will be applied to gain computing speed. Breakthroughs like these will determine who are the future industry leaders, and China has an opportunity to gain entry on the ground floor of those frontiers.

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Andrea Durkin is the Editor-in-Chief of TradeVistas and Founder of Sparkplug, LLC. Ms. Durkin previously served as a U.S. Government trade negotiator and has proudly taught international trade policy and negotiations for the last fourteen years as an Adjunct Professor at Georgetown University’s Master of Science in Foreign Service program.

 

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

U.S.-CHINA FDI GOES COLD WHILE VENTURE CAPITAL HEATS UP

Two-way FDI is plummeting

With trade talks between the United States and China running hot and cold, it’s irresistible to get sucked into daily U.S.-China trade war updates with its unexpected tariff announcements. In the bigger picture, the underlying uncertainty caused by ongoing trade tensions between the United States and China is having a large impact, particularly on two-way foreign direct investment (FDI).

So far this year, combined two-way U.S. and Chinese FDI has totaled just $9.9 billion— its lowest six-month value in five years, according to research firm Rhodium Group. At its peak in 2016, combined FDI totaled over $60 billion a year.

The slow start in 2019 is a continuation of a rough year for FDI in 2018, when flows between the United States and China dropped 60 percent year-over-year. Rhodium Group cites a deteriorating political relationship and regulatory intervention as two big reasons for the sharp decrease in investment.

U.S.-China FDI troubles are part of a bigger trend happening across the world, as global foreign investment flows fell to their lowest levels since the financial crisis in 2018, according to UNCTAD. Global FDI flows totaled $1.2 trillion in 2018 – down 20 percent from 2017.

U.S.-China FDI flows over last 30 years

Invested in each other

With trade tensions rising to a fever pitch, it may be hard to remember that American and Chinese companies have invested a lot in each other’s success over the last 30 years – over $420 billion, to be exact. U.S. FDI in Chinese industries adds up to over $275 billion since 1990. While Chinese investment in the United States is almost half of that at $148 billion, according to Rhodium Group’s U.S.-China investment tracker.

U.S. China FDI totals 420 billion

Beyond the sheer volume of money invested, foreign companies bring much more intangible value to the table. In his book, “Developing China: The Remarkable Impact of Foreign Direct Investment,” Michael Enright used an economic impact analysis to better understand the full impact of FDI in China. Enright estimates that foreign companies have contributed as much as one-third of China’s GDP and 27 percent of China’s employment through the accumulated impact of their investments, operations and supply chains in China. American companies alone contributed 4.2 percent of China’s GDP and nearly three percent of Chinese employment in 2014, according to Enright’s analysis.

Enright also pointed out that foreign companies have helped China develop by creating suppliers and distributors, introducing modern technologies, improving business practices, modernizing management training, improving sustainability performance, and helping to shape China’s legal and regulatory systems.

Chinese companies operating in the United States also bring benefits. As the second-fastest growing source of FDI in the United States in 2016, Chinese-owned firms supported nearly 80,000 U.S. jobs, invested nearly $600 million in innovative R&D, and expanded U.S. exports by $4.7 billion in 2016, according to Select USA.

Growing regulatory hurdles

The ongoing U.S.-China trade war is not entirely to blame for the recent dive in FDI. Both nations have stepped up regulatory oversight of foreign investment in recent years. Following the 2016 peak of global outbound investment by Chinese firms, the Chinese government tightened its grip on outbound capital flows, drastically slowing outbound investment by Chinese firms.

In the United States, the Committee on Foreign Investment in the United States (CFIUS) has stepped up investment screening of Chinese FDI, especially in sectors related to national security like infrastructure and information and communications technologies. Rhodium Group estimates $2.5 billion was left on the table in 2018, as Chinese investors abandoned deals in the United States due to unresolved CFIUS concerns.

The U.S. investment landscape may get more complicated for Chinese companies to navigate in the near future, as investors await the implementation of the new Foreign Investment Risk Review Modernization Act (FIRRMA) and Export Control Reform Act (ECRA), both expected to increase U.S. regulatory oversight of foreign investments.

Foreign direct investment by American companies in China has also decreased, but not as drastically as for its Chinese counterparts. Yet, concerns about technology leakage have led to a cooling in U.S. FDI in China’s technology sectors.

FDI cooling, venture capital heating up

At the same time FDI is slowing, venture capital investment is becoming an increasingly bigger piece of the U.S.-China investment puzzle.

Chinese VC investment in the United States has increased dramatically since 2014, with Chinese-owned VC funds contributing an estimated $3.6 billion to U.S. companies over the course of 270 different funding rounds in 2018. This is just a fraction of what U.S.-owned VC firms have spent in China, but an important trend. U.S. VC firms invested a record $19 billion in Chinese start-up companies last year, according to Rhodium Group.

US venture capital firms invested $19 billion in Chinese startups

Firms on both sides of the world have utilized VC investment to invest in companies in sectors where FDI has faced growing regulatory scrutiny. Chinese VC firms have invested in semiconductors, for example, while U.S. VC Firms have invested in sectors limited to foreign firms in China like digital payments and internet start-ups.

Confidence is key

In order for foreign investments to work, companies are dependent on the success and stability of the nations where they choose to invest. Both American and Chinese companies have invested a lot in each other, through decades of foreign direct investment and now growing venture capital investment.

As the U.S.-China trade war rages without an end in sight, it’s worth remembering that ongoing tensions cost more than just tariffs on the products in your shopping cart. They are also a roadblock to long-term investments that bring additional capital, exports and jobs to each other’s economies.

Lauren Kyger

 

Lauren Kyger is Associate Editor for TradeVistas. Prior to joining TradeVistas, she was a Research Associate at the Hinrich Foundation focused on international trade issues. She is a Hinrich Foundation Global Trade Leader Scholar alumna, earning her Master’s degree in Global Business Journalism from Tsinghua University in Beijing. She received her Bachelor’s degree from the Walter Cronkite School of Journalism and Mass Communication at Arizona State University.

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