TradeFlow21 managing partner Steven Towns recently reviewed Trade Myths: Globalization has left trade balances behind, a profound book weighing in at all of 75 pages with an additional ten pages of charts that bust the same myths already exposed in prose. The author, Dr. Enzio von Pfeil, is a Hong Kong-based investment adviser and fund manager. A regular in the financial media in Asia, he is a former chief regional economist at leading London-based investment banks in Hong Kong. Enzio has long studied matters related to trade, and fortunately for those looking for perspective not readily found in the mainstream media, particularly in the U.S., he has penned Trade Myths. Of the five trade myths he discusses, in each instance, Enzio explains how misguided and anachronistic beliefs about trade could lead to an impaired U.S. economy with a simultaneous jump in interest rates having widespread repercussions. The book review begins below followed by Q&A.

The first myth is that “imports kill jobs.” Enzio readily dismisses this as self-serving for politicians wanting to avoid inconvenient truths. In short, politicians (the key subjects of Enzio’s work), rather blame outside forces for their constituencies’ economic troubles, rather than acknowledge failing policies in areas such as education, and matters such as burdensome taxation.  Enzio questions how the U.S. can be expected to increase its headline trade surplus as it employs fewer people in manufacturing. And, it turns out that as imports rise, so does employment, primarily in services. Yet, if all so-called “unfair” imports were banned, America’s multinational corporations (MNCs) would suffer heavy blows since their foreign-made products could not be imported back into the U.S.; and most imports would have to be substituted by local production, resulting in higher costs, in turn pushing up inflation and thus forcing interest rates higher, which would reduce investment and slow job creation (if not resulting in massive job losses), while the higher cost of capital would sink the housing and capital markets.

The second myth is that “exchange rates drive trade,” which is again self-serving for politicians. The argument that if other countries’ exchange rates were stronger, America would not have a deficit, does not hold water, explains Enzio, since a devalued U.S. dollar brings trouble of the kind explained above.  In fact, it’s comparative advantage, not exchange rates that really drive trade.

The third myth is that “trade balances are a national matter.” While being a convenient line for politicians, it is a risk infected one. Given the interconnectedness of the global economy, viewing trade balances nationally is purely mercantilist thinking and potentially subjects MNCs to host government protectionist retaliation. Alarmingly, a tit-for-tat trade war could lead to actual war. Disturbingly however, it turns out that a closer examination of trade data shows MNCs are responsible for very little of the U.S. headline $700 billion-plus trade deficit. More importantly, when factoring in the value of MNC’s foreign affiliates’ purchases and production, the U.S. has an enormous $2.7 trillion surplus! Enzio explains that America’s highly successful MNCs are the root cause of the “bad” trade deficit, not “bad foreigners.” Among his other keen observations is that when backing out the domestic activity of MNCs in China, the latter runs a global trade deficit of $1.7 trillion compared to a headline surplus of $260 billion!

The fourth myth is that “America’s trade deficit is ‘bad.’” This follows myth number three and in short, reiterating what was said about myth number one should politicians ban MNCs from operating abroad, the outcome is likely to be an “economic 9/11.” Two keys to this myth are that non-U.S. MNCs are more than ready to take market share from U.S. MNCs; and it doesn’t necessarily require a ban on U.S. MNCs operating broad, since U.S. politicians angering a host country such as China could result in the same dire consequences. Enzio wonders just how disaffected U.S. MNCs would respond in terms of their political contributions.

The fifth and final myth is that “foreigners finance America.” Once again, he regards this as a political ploy (whether deliberate or naively inadvertent) playing on vulnerability and blaming foreigners for ills. Should foreigners be banned from holding government debt or if they dumped their holdings, the outcome could mirror the fallout from the sub-prime crisis. However, taking a step back, Enzio enlightens readers on two fronts. The first being one must review just who the foreigners that own U.S. debt are and what percentage of the whole it comprises. Interestingly and also surprisingly, Enzio explains that news reports are misleading, since foreigners as a whole owned 25% of Treasuries outstanding in 2006, but of that an increasing amount is held by private investors (such as hedge funds and also MNCs) as opposed to institutions or governments, thus lessening the impact if there were ever any dumping. Data suggests a very strong correlation since 1970 between the growth of FDI and the “foreign” ownership of Treasuries. The other point here is that even if foreign holders were to dump Treasuries, there is no other market that offers the depth, liquidity, and sophistication of the U.S. Enzio notes that the size of the U.S. bond market is greater than the EU, UK, Japan, and Switzerland’s combined.

The remainder of Trade Myths includes an explanation of the drivers of trade flows, the history of the economics behind trade, and Enzio’s suggestions for how to remediate the discussion of trade. His first suggestion concerns myth number three or specifically, antiquated (mercantilist/nationalist) trade balance accounting, and how it needs to be modernized. His second suggestion involves tax solutions for helping the working class. And adding to that, his third suggestion relates to the necessity of improving the quality of the U.S. workforce by way of better vocational and pre-college education. In closing, while Enzio duly noted that political self-interest can prevail during economic downturns, this reader was compelled to reflect on an earlier quoted passage from the late Professor Daniel Boorstin, which Enzio recaps in stating: [America's] politicians/leadership recognizing the U.S. itself is the largest stakeholder in the globalized economy will be the necessary first step in the process of transforming mindsets about America’s trade balances and trade policies.

Q&A:

ST: What are your thoughts on the latest “currency manipulation” talk out of Washington, especially since the situation seems to be worsening with growing bipartisan support in both Congress and Senate?

Enzio: This cheap talk has to be seen against the backdrop of mid-term elections in America. It also has to be seen against the backdrop of Congressional “stimulus” packages which have resulted in 10% unemployment rates – and in 20% unemployment rates for males who are 30 – 55 years old. Another backdrop is that charade of the Treasury report on currency manipulation. Everyone bandies around the “glories” of purchasing power parity; I, for one, have severe methodological problems with this bit of nationalistic chauvinism. It is interesting that the one country whose currency has fallen the most uses this, the U.S. You never hear serious intellectual debate coming from Germany, Japan or Switzerland about how “overvalued” their currencies are – yet, they keep generating huge and growing trade surpluses.

ST: Although it’s mostly “cheap talk” at this point, there’s a palpable escalation of angst in the U.S., meantime while there seems to be firm resolution in China (re. a desired gradual appreciation of the yuan). Do you think another Smoot-Hawley type tariff and a subsequent devastating impact is a possibility?

Enzio: Absolutely not. I don’t think that Congress would be that short-sighted. But I can see its members chasing the WTO with all sorts of law suits, depending upon which constituencies these Reps and Senators are representing.

ST: Changing directions then, tell me, is trade balance accounting consistent among the U.S. trading partners, and what, if anything, is being done to modernize the accounting?

Enzio: Yes, everyone uses the same, 16th century framework. Thus, all trade balances are measured in terms of national borders. This was logical in the 16th century, when there were very few MNCs and when mercantilism was common practice.

ST: Okay, so let’s assume that politicians accept your suggestions and everyone now recognizes that the U.S. has a massive trade “surplus” when factoring in activity of U.S. MNCs’ overseas affiliates. In your opinion, what then is a healthy amount or range of debt-to-GDP? Does or should this vary much across borders, given idiosyncrasies within countries (Japan comes to mind)?

Enzio: It is not as much the ratio per se as it is who is financing that deficit. If the foreigner really is financing that deficit, then the country that is borrowing the money is vulnerable to the foreigner pulling their funds out. But a second point also is relevant: what is the currency of the fiscal deficit? If it is a small currency, then the foreigner, in fact, can pull out. But in the case of the USA, the dollar is the world’s dominant currency, so that reduces the leverage of the foreigner. Furthermore, if American politicians accepted that their own MNCs are very much “at fault” for America’s geographical trade deficit, their whole mindset would change from: “how can we punish ‘bad’ China, to: how can we re-invigorate our own competitiveness?”

ST: For my last question, I want to get your thoughts on if we recognize the massive trade surplus in the U.S. and correspondingly the huge deficit in China when backing out MNC activity, does this change the ongoing U.S.-China trade and currency arguments?

Enzio: Absolutely. Were MNCs’ balances to be included in such “global” trade balances between China and America, then Americans would be asking their very own politicians just why American MNCs are producing more and more abroad instead of back home in the United States. Answer: the politicians have, in their quest to get re-elected, made many expensive promises. That means that taxes and regulations have increased, courtesy of politicians’ desire to get re-elected. The upshot is that the U.S. (like Europe and Japan) have “priced themselves out of the market” in terms of costs and regulations. As a second fusillade primarily against U.S. politicians: instead of focusing on what could make America more competitive – namely, pre-college vocational training – those very politicians who rail against “bad and dangerous” China have a mendacious record when it comes to vocational education policy in America.

Thus, were my points regarding America’s global trade surplus and China’s global trade deficit to be heeded, then this rubbish about exchange rates “really” affecting trade flows would wilt in the face of much more important competitive considerations, e.g. domestic tax as well as regulatory regimes, along with (vocational) education policy. Laconically, you cannot import a car repair; you need a qualified local to repair that Mercedes that you have imported from Germany. Were exchange rates really as important as some politicians claim, then why do Germany, Japan and Switzerland – whose currencies have appreciated fourfold against the dollar since 1970/71 – all have trade surpluses (as I mentioned in your first question)?

ST: Thank you for your time, Enzio.

2) Primacy of DP World: Dubai World’s marine and port subsidiary, DP World, maintains deep-water terminals in over 30 countries from the Americas to Asia. It is simply too valuable a commodity (commercially and politically) for the government to abandon to creditors in courts. DP World’s port presence across the globe is central to the UAE’s identity and prestige.

3) Capitalism 2.0: The Dubai crisis was an inevitable and necessary step in the maturation process of an emerging free-market economy. Sheik Mohammed bin Rashid Al Maktoum’s undisciplined approach to development, coupled with investors who naively assumed their bets were covered by state revenues derived from oil, created conditions that plunged the Emirate $80B in debt. Despite the poor timing of Dubai  World’s announcement of a standstill just prior to the Muslim holiday of Eid al-Adha, Dubai and its flagship company should emerge from the crisis with a new sense of purpose and propriety. Abu Dhabi will likely take the lead in helping Dubai restructure its financial institutions and reshape its strategic thinking as part of a wider effort to regain a measure of market integrity and public trust.

4) Human Capital: Dubai’s “oil reserves” are its people. They are educated (77.9% literacy rate), able, and multi-lingual with commands of Arabic, Persian, English, Hindi, and Urdu. The  serious, sophisticated investor recognizes this as a key attribute in any successful venture. Human capital is the critical “X factor” on a balance sheet.

For information on the latest global economic competitiveness ranking and how the GCC ranks (note Saudi Arabia moved up to #13 this year and is knocking on the door for a top-10 spot), see Doing Business 2010: Saudi Arabia nears goal; UAE climbs ranks.

clipped from www.thenational.ae Diplomat warns US firms are losing edge RIYADH // The new US ambassador to Saudi Arabia yesterday warned American businesses to wake up to the fact that they are losing their edge in an increasingly competitive Saudi market. Ambassador James B Smith, a retired air force general, also told his audience of about 100 US company representatives that it was time for both Saudis and Americans to “rethink some opinions” of each other forged in the wake of the September 11 terrorist attacks. Noting that many US companies are “on the sidelines waiting to see what’s going to happen in Saudi Arabia”, he added: “My message back to them is: What’s happening is the train has already left the station. You are losing market share to India, China, Russia and if you don’t move you’re never gonna catch the train.”

Tag Mendillo
Entertainment Biography/Credits

Tag began work in entertainment as a production assistant at Paramount Television. He worked in a variety of capacities in television at Paramount, MGM and Universal. Tag and producer Andrew Form (currently a partner at Michael Bay’s Platinum Dunes) started their company Mendillo/Form Productions in 1994.

As a producer Tag made three independent movies. TRADING FAVORS stars Rosanna Arquette and was released by Trimark Releasing with Sondra Locke directing. Tag also produced KISSING A FOOL which was sold to Universal Pictures, which stars David Schwimmer, Jason Lee and Bonnie Hunt. And lastly, THE SHRINK IS IN stars Courtney Cox and David Arquette. It was directed by Richard Benjamin.

Tag was hired at Norsemen Productions as the Chief Operating Officer in 2002 and there worked closely with CEO Mike Sears at Norsemen productions on interstitial shows such as the TBS hit “Dinner and a Movie” and “The Man Made Movie”.

Over time, Tag has also worked as a screenwriter. Among his studio projects are: MONEY PLANE with Jerry Bruckheimer producing. THE LAST APOSTLE and END OF THE ROAD were both set up with Mark Gordon producing. HAMMER DOWN was sold as a spec to DreamWorks in 2002. The moto-cross script HOLE SHOT for Disney. DRAGON FIRE for Revolution. And most recently, THE LAST RESORT, for Kevin James to star in at Sony.

Tag also co-wrote three television pilots for the networks, including: YCU CRIME UNIT for Touchtone/ABC, a BARRETTA for Universal/USA. And HOUSE ARREST for Warner Brothers Television and FOX.

1. Do your homework: learn something about your target country; no, you don’t have to learn Arabic, but do learn some greetings; and understand that the Middle East is not only what you see on CNN or the evening news (usually scenes of violence or of money in Dubai). Note that relationship building is especially important.
2. Be culturally sensitive: both the business week and business hours are different in the region, with SUN – THUR and later hours the norm; Friday is mosque day (communal prayer). Remember, the region has a long, rich history and people want to be treated as equals with the West. Also, be ready to drink a lot of tea. Don’t expect much, if any, alcohol.
3. Learn even a little about political issues: Arab/Israel (eventually your local business partners may inquire of your opinion); government sanctions (U.S. businesses face certain restrictions such as in Iran); and illicit payments (referring to bribery, which U.S. companies are prohibited by law from engaging in — and it’s not necessary to do business, says the Ambassador).
4. Patience needed: don’t present the image of being in a hurry, a rather common stereotype of Americans. Can’t expect to fill your order book right after leaving the airport; doing business begins with relationships.
5. Use the U.S. govt.: the Dept. of Commerce, embassies and consulates all have information and resources available to U.S. companies looking to do business overseas.
6. Think about security: while the Middle East is not the 24/7 violence portrayed on the news, recognize that like anywhere it is important to be aware of your surroundings; you can’t do business if you’re uncomfortable. Review State Dept. travel warnings; contact the consulate if you are planning an extended stay.
7. Find a local partner: “most important” step when targeting a market; may be an agent, representative, or a distributor; a local partner can also facilitate with any cultural sensitivities that may arise.
8. Consider intellectual property issues: as with any market you enter, ensure that you’re intellectual property rights are protected. Don’t assume protection if you’ve only registered in the U.S.
9. Beware of the “V” word: don’t make promises regarding immigration visas to the U.S.; issue may eventually arise with local business partners; U.S. concerned with security and immigration, but serious commercial implications if business lost to more “open” European markets, for instance.
10. Understand M.E. buyers’ criteria: quality is king, and there’s a willingness to pay, but it’s not everything (can’t charge too much premium); also looking for service and personal relationships. Preference to do business or at least interact with more senior ranking company representatives.
11. Be prepared to compete: true of any market, but there are some distinct advantages/disadvantages for U.S. exporters. The former include existence of free trade agreements in select regional economies. The latter is largely in light of European competitors (proximity and longevity).
12. Be realistic, be bold, and be patient (see #4), as you strive for success.

Along with his “12 Rules,” Ambassador Donnelly also mentioned the importance of foreign currency exchange rates. He advised that business counterparts in the Middle East are sophisticated with forex, and the fluctuations in the dollar can impact business since for example, euro-denominated goods or services may be priced more or less favorably. On that note, TradeFlow21 is continuously tracking economic and capital market developments, and we look forward to helping your company engage in business in the Middle East.

1)      demands the cessation of hostilities between Israel and its neighbors, including the creation of a sovereign Palestinian state as the only viable means of resolving the Palestinian question

2)      requires a U.S. policy that summarily rejects those in all quarters who use division and discord as a means of maintaining their “competitive advantage” in the region

3)      dictates that economic development, through investment and trade, be embraced as the preferred path to establishing a more stable, secure world for all

In his long-awaited speech on American-Muslim relations today in Cairo, President Obama responded, arguing that

1)      “America will not turn our backs on the legitimate Palestinian aspiration for dignity, opportunity and a state of their own”

2)      “as long as our relationship is defined by our differences, we will empower those who sow hatred rather than peace…conflict rather than cooperation…this cycle of suspicion and discord must end”

3)      “on economic development, we will create a new corps of business volunteers to partner with counterparts in Muslim-majority countries…I will host a summit on entrepreneurship this year to identify how we can deepen ties between business leaders, foundations and social entrepreneurs in the United States and Muslim communities around the world”

Thank you, Mr. President.  The partners of TradeFlow21 will join you in the cause to build a prosperous, secure Middle East through commerce and trade.  Let us now begin our work.

Necessity demands the cessation of hostilities between Israel and its neighbors, including the creation of a sovereign Palestinian state as the only viable means of resolving the Palestinian question.

Necessity now requires a U.S. policy that summarily rejects those in all quarters who use division and discord as a means of maintaining their “competitive advantage” in the region.

Necessity dictates that economic development, through investment and trade, be embraced as the preferred path to establishing a more stable, secure world for all.

For over 60 years, the Middle East, which is comprised of over 20 nations spanning Northern Africa in the west to Southern Asia in the east, has been defined by conflict and oil. This is a new era. Real GDP non-oil growth in the region, which is projected to expand by more than 3.5 percent this year, suggests that Middle Eastern nations are actively pursuing commercial diversification as they seek to become full partners and competitors in the global economy. It also presents tremendous export opportunities for companies who want access to an emerging market of 500 million consumers.

The world is waiting for President Obama to signal a new turn in U.S. – Middle East relations where strategic alliances are built principally on commerce and trade. The partners of TradeFlow21 welcome such a change as both vital and necessary.