How will This Year’s APEC Negotiations Impact Global Business in 2015?

Over the past couple weeks there’s been a profusion of rumblings throughout both business media and international news outlets regarding the 2014 Asia-Pacific Economic Cooperation Forum, otherwise known as APEC. The annual summit, hosted this year in Beijing, China, gives representation to 21 Pacific-rim countries with a combined GDP of over $16 trillion and carrying out 44% of world trade. Therefore, it’s prudent to ask what exactly is APEC, its negotiation results in last week’s meeting, and how will it impact global business in 2015?

Hosting the most dynamic and fastest growing nations on Earth, APEC functions as an economic cooperation vessel amongst the world’s top leaders in the Pacific-rim region. Over the past decade APEC has been the primary facilitator of economic advances and cooperation amongst member nations. The primary roles of the summit encompass trade liberalization, improving business facilitation, and deepening regional economic and technological cooperation.

AboutAPEC

Although this year’s week-long meeting was attended by some of the world’s top political leaders including President Obama and China’s President Xi Jinping, the meeting’s focus was not about pointing fingers and attempting to manage rocky political relations. Rather, the summit was utilized to temporarily push political agendas to the wayside in order to concentrate efforts on achieving mutual economic gain through open dialogue and discussion. In contrast to what many observers believed to be a meeting that would produce few tangible results and lots of questions the summit created some major developments in Sino-American economic cooperation. Pay attention, doing business with China is on its way to getting a lot better in 2015.

 

APEC 2014 primary impacts on global business:

China will contribute $40 billion to set up a “Silk Road” infrastructure fund to boost connectivity across Asia

The implications for this announcement are major for both Chinese and foreign businesses alike. The goal of the Silk Road initiative is to build roads, railways, ports and airports connecting Central Asia and South Asia to Mainland China.  According to President Xi, the new infrastructure framework will accommodate the needs of several countries and be utilized for both land and sea-related projects. Although it’s not absolutely clear when the fund’s operations will start or where the project will begin, one thing is clear for sure: China is openly welcoming its neighboring countries to get on board the train with China’s development.

A cross border law enforcement network will be set up to strengthen transnational anti-corruption cooperation in the region

Corruption is a major obstacle to economic development and increases the cost of doing business. “APEC members have pledged to eliminate corruption through extradition and judicial assistance, and adopt flexible measures to recover the proceeds of corruption within the law of the APEC economies.”

Extension of visa validity between China and the U.S.

Up until last week, the maximum length for student, business, and tourist visas was one year. However, as of November 12th, the maximum visa length will change to 10 years for tourists and businessmen and 5 years for students. “The goal of this new policy is to encourage international tourism between the U.S. and China. According to White House officials in a recent BBC article, Chinese tourists cite the strict visa policies as the second most important factor in their decision to travel to the U.S. The article also noted that although many Chinese tourist go abroad, less than 2% of travelers visited the United States.”

Expansion of the Information Technology Agreement (ITA) between The U.S. and China, eliminating tariffs on $1 trillion in global sales of IT products

The U.S. and China have succeeded in striking a deal that will allow for expansion of the ITA trade deal that will significantly cut tariffs on a multitude of high-tech goods. Due to disagreements in past years, this is the first major breakthrough of a U.S./China WTO deal in almost two decades. A sample of some the impacted products and the size of the tariff reduction they would benefit from, include:

  • Next generation semiconductors – Tariffs up to 25% reduced to zero
  • Magnetic Resonance Imaging (MRI) machines – Tariffs up to 8% reduced to zero
  • Computed Tomography (CT) Scanners – Tariffs up 8% reduced to zero
  • Global Positioning System (GPS) devices – Tariffs up to 8% reduced to zero
  • Printed matter/cards to download software and games – Tariffs up to 10% reduced to zero
  • Printer ink cartridges – Tariffs up to 25% reduced to zero
  • Static converters and inductors – Tariffs up to 10% reduced to zero
  • Loudspeakers – Tariffs up to 30% reduced to zero
  • Software media, such as solid state drives – Tariffs up to 30% reduced to zero
  • Video game consoles – Tariffs up to 30% reduced to zero
  • An expanded ITA would also eliminate import duties on a range of additional technology products including high-tech medical devices, video cameras, and an array of high-tech ICT testing instruments

 

The impact of this year’s APEC summit poses to create substantial cost savings and reduce business risk exposure across many industries that have dealings with the region. China’s declared investment into trans-national infrastructure will reduce rising logistic costs and improve the overall efficiency of global supply chain networks. Additionally, for those who may be hesitant about doing business with a country that’s famous for its “guanxi” networks, China’s announcement to erect a new cross-border, anti-corruption regime is a productive step towards providing a fair playing field for regional trade and commerce. Furthermore, In addition to improving the fluidity of doing business abroad, Visa extensions will provide companies with the often much needed reduction in over-head costs. However, perhaps the most delightful victory of all is the eradication of myriad tariffs throughout several high-tech industries. This will not only enhance global trade, but will also decrease the cost of goods for both businesses and consumers alike.

As we continue to march forward into the 21st century the Sino-American business environment remains cautiously optimistic. Although U.S.-China politics are often agitated by mutual distrust and misunderstanding it’s important to acknowledge that both countries continue to put forth an earnest effort in expanding trade, alleviating regulatory restrictions, and improving global business practices through mutual cooperation. As for the result? China and the U.S. un-deniably possess the most crucial bilateral relationship in the world. If both countries continue to patiently work towards mutually advantageous economic gain the long-term results could prove to usher in a golden age of global business, something in which, everybody can benefit from.

APECNations

Michelle Scheblein is China Business Analyst at BaySource Global. She has a B.A. in international business from the University of South Florida and has resided in China from 2013-2014. She can be reached at Michelle.scheblein@baysourceglobal.net

 

Is Your Offshore Operation Staffed By U.S. Based Professionals?

doing business in chinaOne of the greatest perceived disadvantages of Chinese based manufacturing firms is the lack of having a U.S. contact who is knowledgeable about and engaged in your business. 

Our firm, with its intimate understanding of China is based in the U.S. with a China based operating staff. Things can and do go wrong and having the peace of mind that you have a contact in the U.S. is invaluable.

This goes a long way, particularly in the start-up phase of a project as you require hands on involvement with your project.  It is important that you have a day to day contact in your time zone for trouble shooting, planning and preparation.   Too often small but critical details can be lost in translation as operators try to work through cultural barriers, time zones and misunderstandings.

ManufacturingInChina

Even those dealing with a satellite factory right in the U.S. have to deal with production issues, timing and other miscues.  If you’ve ever played the secret game as a kid, where one person begins a story, then passes it around a ring of people until the last one hears it, then you have seen how details are lost and the story is altered from its original concept.  The same is true when passing along instructions to your offshore manufacturing partners.

Unless you have a consistent source, who speaks your language and understands the objectives, you can end up with a mess.

A Community of Opportunity

Last fall I visited a state of the art precision die cast factory in Southern China. By my estimate they do a turnover of ~USD$400MM. This facility had two very sophisticated machines that were designed and manufactured by the Japanese and could essentially be used for highly technical military products although they were simply utilizing these for their advanced automation in making automotive (carburetor) parts. After a long lunch, the owner took us to their R&D building where they had something they wanted us to see. It was…a turkey fryer. That’s right. They had devised a turkey fryer that uses 80% less oil than deep frying. Already they had complete prototypes for cooking French fries.

You may be wondering where this story is headed. I had to admit I was a bit taken back by this “top secret” invention they whetted our curiosity over during our meal. But in their thorough marketing analysis, they had deduced there was no similar Western device yet on the market. It just so happened to be November and thus the American Thanksgiving holiday was just around the corner. This factory had a business plan in place, knew their total market universe in the U.S. of those who deep fried turkeys vs. oven, and even recognized this was a stronger activity in the South. In fact, they had determined that their distribution channel likely needed to begin with HSN or QVC and migrate into traditional retail.

What they didn’t have is a contact in the U.S. to assist with the launch nor did they know anyone who could introduce them into this market. They explained they were missing a key intermediary who could introduce this new product to a leading cookware company, someone familiar with infomercials, or a firm that could handle direct sales and distribution. If so, they believed annualized sales could reach USD$50-100MM. Have you seen this product on the market yet?

Sure there are low value added jobs that have gone offshore. And by the way, we haven’t stopped manufacturing in Central and South America and Eastern Europe. But there is an interdependency between China and the U.S. that can’t be ignored. There is also a huge market in China for our goods and services. Take the story of Dais Analytic whose desalination and wastewater technology will add up to 1,000 jobs in Tampa, FL over the next five years. Just this week, Warren Buffet’s Berkshire unit purchased Burlington Northern Santa Fe which is a huge bet on increased trade with China. And as a growing consumer market, the number of millionaires in China is 825,000 and growing, many under 40 years of age.

If you take this story out of the realm of turkey fryers, the Chinese are innovating every day but will rely on marketing expertise here to be successful. Likewise, there are Western companies who require cutting edge innovation and new product development to maintain and gain market share. Possibly this could lead to Eastern entities establishing beachheads in the U.S. The typical hurdle rates that private equity and investment banking firms require to do deals may be cast aside by Chinese courtiers who seek a foothold in the U.S. to incorporate their intellectual property, low cost labor structure and “can-do” spirit with U.S. brands.

It is truly a global landscape yet we seem to be protectionist by default. If we start embracing opportunities as a global “community” vs. simply a global business landscape, we have the chance to merge our creativity and assets to serve one another.

David Alexander is President of BaySource Global, specializing in project management, supply chain and cross border opportunities with China. www.baysourceglobal.com

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