Category Archives: Global Trade

Geopolitical Damnation 27: UNCLOS

No, that’s not a typo. We’re not talking about UNCLES, we’re talking about UNCLOS, short for the United Nations Convention on the Law of the Sea — an international agreement that resulted from the third United Nations Conference that took place between 1973 and 1982 and finally came into effect in 1994 (a year after the 60th nation signed the treaty). (So if you think your Legal department is slow approving your latest contract, they’re running at breakneck speeds compared to the glacial United Nations.)

This international agreement, that has been agreed to by 166 countries and the European Union as of 2015, replaced the conventional freedom of the seas concept that was the de-facto, unwritten, agreement between nations from at least the early 17th to the late 20th century that stressed the freedom of all nations to navigate open waters.

However, as of the early 20th century, this de-facto unwritten agreement was not enough for those wishing to engage in global trade as nations that wanted to protect mineral resources, fish stocks, or pollution-free waters started to stretch the conventional definition of territorial waters from the accepted 3-mile limit all the way up to a new 12-mile zone in 66 cases and, in 8 cases, a 200-mile limit. If every country has a different territorial claim, how do you know if your ship suddenly leaves international waters and enters a nation’s waters, and, conversely, how do you know how long you have the protection of your nation while entering or exiting your waters?

Under this new agreement, countries have, from the low-water line or a straight baseline (when the coastline is deeply indented, has fringing islands, or is highly jagged) a:

  • 12 nautical mile territorial zone
    where the nation has complete control as it is free to set laws, regulate use, and use any resource; in this zone, vessels generally have the right if innocent passage
  • 12 nautical mile contiguous zone
    where the nation can continue to enforce laws in four specific areas: customs, taxation, immigration and pollution, but only if the infringement started within the state’s territory or territorial waters, or if this infringement is about to occur within the state’s territory or territorial water
  • 200 nautical mile exclusive economic zone
    where the coastal nation has sole exploitation rights over all natural resources.

This all sounds crisp and clean, but there are a number of caveats that you need to be aware of if you are the Procurement person responsible for managing ocean freight.

You have no protection against theft or piracy beyond the 12 nautical mile territorial zone.

Unless the product originated from, or is being shipped to, the nation the contiguous zone belongs to, then the nation has no claim to customs or taxation, and can’t do anything. So, from a shipping perspective, the continuous and extended zones offer you nothing.

You have no protection from the nation within the 12 nautical mile territorial zone (or even the 12 nautical mile contiguous zone under certain circumstances).

The right of innocent passage is only valid so long as you are passing through waters in an expeditious and continuous manner, which is not “prejudicial to the peace, good order or the security” of the coastal state. If the nation decides that your vessel is a threat, it can be stopped, seized, and the crew brought up under criminal (or terrorist) charges and held indefinitely without release.

You don’t even have protection against the nation in the extended zone.

If your vessel or crew gets associated with a crew or vessel that is trying to illegally exploit natural resources in any way, shape, or firm, your vessel can be stopped, seized, and the crew brought up under criminal charges.

Now, the chances of these last two happening are low, unless your vessel is registered to a nation that is currently at diplomatic odds with the nation whose waters it is passing through. For example, if there are embargoes or military conflict, the vessel can be captured simply to use as a negotiation point. Not always likely, but always a possibility hiding in the darkest corners of the shadows just beyond the corner of your eye.

The crux of this post is that when it comes to open waters, it doesn’t matter whether your ship is in a zone or not, because either way it’s not safe. Protection from pirates leaves it open to seizure by law enforcement and freedom from law leaves it open to pirates. Damnation covers the open sea.

Geopolotical Damnation 29: Trade Embargoes

Today’s supply chains depend on global sourcing and global trade. However, a single trade embargo with a single country on a single commodity can disrupt an entire supply chain. If you depend on apples for your primary CPG product line, beef for your restaurants, or rare earth minerals for your cell phone, and your primary supply line gets cut off, now what?

Or, even worse, if the country in question decides that gaming systems are destroying society and your main product is a gaming system, that gambling is now illegal and your main products are video lottery machines, or that coal is too dirty to burn and your company is a mining operation, instead of case closed, it could be business closed. (And all of these situations have happened in recent years!)

Note that an embargo is more than just a block on trade, it’s also a restriction on trade that restricts how much can be imported or exported or the tariffs that are charged to import or export. For example, China recently ended it’s export quota for rare-earth minerals essential for high-technology products including smartphones. But what if it’s re-instituted, and re-instituted more restricted than before? Especially when they supply up to 97% of the rare earth minerals needed worldwide?

Or what happens when a country decides that it wants to enforce a buy-local policy and increases import tariffs on a category from 10% to 100% or more? For example, last December the US Department of Commerce announced new anti-dumping and anti-subsidy rates for PV (photovoltaic) products imported from China and Taiwan, with the primary CVD (chemical vapour decomposition) rate for Trina Solar increasing from 18.56% to 49.79% in less than six months. This is nothing compared to the “China-wide” rate of 165% for smaller PV providers! But the US isn’t the only company that does this. Every country in the BRICS is constantly changing their import rates as well, sometimes in response to North American or Europe rate changes, sometimes in response to local taxpayer and/or lobbyist demand. (Brazil recently updated its HS code 80 times in one year!)

Needless to say, a tripling of the import/export rate or a restriction on exports that cuts your limited supply in half can be almost as damaging as a full embargo against a commodity or product. If the restriction results in a widespread failure to meet the demand, which in turn results in bad press, the end result could be considerable brand damage and a widespread migration of your customers to your competitor. This drop in revenue puts the entire company at risk, which will greatly impact the Procurement budget and the ability of the department to perform!

Geopolitical Damnation 26: The WTO

The WTO, or World Trade Organization, is an intergovernmental organization that regulates international trade, and one you need to be intimately familiar with if international trade is core to your business. Officially commencing operations twenty point five years ago on January 1, 1995 as a result of the Marrakech Agreement, signed by 123 nations, it replaced the General Agreement on Tariffs and Trade (GATT) that had governed international trade since 1948.

It serves to provide a framework for negotiating trade agreements and for establishing a dispute resolution process for alleged breaches of WTO agreements. Now, it is true that most of the agreements negotiated, as well as most of the mediations that take place, are between nations and, more specifically, their governing bodies, but the agreements that are negotiated, and mediated, limit what your private sector organization can import and export.

Being aware of what is going on is critical if you are involved in trading a commodity that is governed by an agreement being mediated or enforced by the WTO; if your government body is trying to enforce buy local or foreign exchange restrictions (as measures requiring the use by an enterprise of domestics products or measures restricting access to foreign imports to export amounts are explicitly prohibited as all members of the WTO agreed to the Agreement on Trade-Related Investment Measures [TRIMs]); or if your organization is trying to protect, and enforce, its intellectual property rights internationally as the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights [TRIPS] governs IP with respect to trade, for example.

Similarly, it’s important to be up to date on what’s not going on. For example, the current round of negations between member countries, which was dubbed the Doha Development Round, which was supposed to make globalization more inclusive and help the world’s poor by slashing barriers and subsidies in farming, has been ongoing since November 2001, with no end in site. As a result, many countries are resorting to establishing their own bilateral trade agreements, which they may or may not be all too public about until the agreements are signed. Case in point — The Trans Pacific Partnership (which is so egregious it is a Damnation in itself).

But if you keep up with what’s going on, you know whether the material, product, or service you’re interested in is covered under a WTO (mediated and regulated) agreement, whether it’s a bilateral agreement between your country and the country being exported from or imported into, or whether an agreement is being negotiated that will cover the material, product, or service and, more importantly, whether your lobby group, or your local manufacturers’ association lobby group, should be sticking their nose where the government may not want it to make sure that the negotiators understand all of the issues and what is good for private industry.

It’s important to remember that these agreements not only define the framework of international trade, but the bilateral agreements being negotiated now by those countries too impatient to wait for the close of the Doha round (which could take another decade) define the tariffs that private industry has to pay. And if tariffs come into effect that are too high on your primary product lines, your organizational existence could be in jeopardy. Unless Supply Management can find another source (or sink) in another country, the organization could be forced to change product or service lines or even go out of business.

For the most part, having framework and agreements is a good damnation, but it’s still a damnation nonetheless.

Geopolitical Damnation 28: Customs Acts

Customs is the agency, authority, or regulatory body in a country that is responsible for collecting tariffs on, and controlling the flow of goods in, and out, of the country. While there is nothing wrong with, or damning about, controlling the flow of goods, as it ensures that products entering and leaving are safe, or collecting tariffs, as that is how many countries acquire the taxation revenue they need, the flow has to be understandable. [Moreover, import tariffs are one of the earliest forms of tax in many countries. For example, in the beginning, there were three types of taxes in the US, poll taxes (which is a type of head tax or per-person tax that pre-dated modern income tax), property taxes, and import taxes.]

Nor is there anything wrong with, or damning about, creating regulations and acts that clearly define the purpose of a customs agency, the authority it has, the documentation it requires, the taxes that can be levied, and the penalties it can apply for non-compliance. The damnation comes into play when the number of sheets of paper required to capture the rules, regulations, and constant updates to the regulations exceed the quantity of goods flowing into, and out of, a country.

For example, Brazil once updated its HTS code, that defines the import tax rates on different types of goods, 80 times in a single year. But its not just the plethora of confusing HTS codes, associated rulings, and updates that an organization needs to keep track of (which, globally, can require 2 Million data warehouse updates a year), it’s the dozens of regulations that each country subjects importers and exporters to.

For example, in the US, an organization involved in global trade has to be intimately familiar with, at a minimum, the following acts:

  • Trade Act
    that allows the President to negotiate trade agreements on behalf of the US for presentation to Congress.
  • Customs Modernization Act
    that amended the Tariff Act of 1930 and introduced “informed compliance” and “shared responsibility” that requires traders to provide CBP with accurate and timely classification, necessary data for appraisal, and to ensure adequate security of goods
  • North American Free Trade Agreement
    which is a free trade agreement between Canada, the United States, and Mexico
  • 10+2
    which is short for the Importer Security Filing introduced in 2009 that requires importers to notify CBP of impending cargo imports 24 hours in advance
  • C-TPAT
    which is short for the Customs-Trade Partnership Against Terrorism, a voluntary supply chain security program focused on improving the security of private companies’ supply chains with respect to terrorism

And may also need to be familiar with dozens of other acts, including:

  • Generalized System of Preferences
    which is a preferential tariff system which provides for a formal system of exemption from the most favoured nation principle and the more general rules of the WTO
  • U.S.-Caribbean Basin Trade Partnership Act
    which forms a trade agreement with the 23 independent countries of the Caribbean basin
  • International Traffic in Arms Regulations
    which controls the export and import of defence-related articles and services on the United States Munitions List (USML)
  • Lacey Act
    which prohibits trade in wildlife, fish, and plants that have been illegally taken, possessed, transported or sold.
  • Reciprocal Tariff Act
    which replaced the Smoot-Hawley Tariff Act which raised tariffs on over 20,000 imported goods to record levels in 1930 and which paved the foundation for modern HTS schedules

And this is just to manage import and export in the US. Some countries have lists of acts that are just as extensive. Now imagine your company does business in 100 countries. It’s damnation to the power of 100!

Geopolitical Damnation 30: The TPP Poison Pill

Sourcing Innovation first brought this up back in late 2013 when it pointed out the great post by Nathan Lee that provided a simple guide to the Trans-Pacific Partnership Trade Agreement “benefits” which is an agreement being negotiated in secret that is lopsided towards the corporation and essentially gives them more rights then individuals, communities, and in some cases, entire governments. Proposals even include giving corporations the right to sue governments if laws put citizens or the environment above corporate rights. The piracy laws are so draconian that you can be criminally charged if copyrighted material ends up on your computer without your knowledge or consent. (For example, if you visit a website that was hacked and malware on that site uses your computer as part of a bittorrent network without your consent and stores part of a copyrighted file, the owner, with the backing of the RIAA or MPA, can have you charged criminally even if you didn’t ever access the file — not the hacker that created the malware and forced copyrighted content onto your computer without your knowledge or consent).

For those of you who do not yet know what this is, it’s a proposed regional and investment treaty between twelve countries: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam that is being conducted almost entirely in secret despite the far reaching implications that are being discussed and the considerable impact it could have on every citizen of every country participating as it covers a broad range of issues including, but not limited to, agriculture, industrial goods, intellectual property, investments, labour, services, and telecommunications.

As a result, everyone, and every supply chain, has a reason to dread, if not fear, this act. The Electronic Frontier Foundation (EFF) has a good summary of the issues corresponding to intellectual property on their What Is TPP page as the act would rewrite global rules on intellectual property enforcement. The IATP does a good job of overviewing some of the agricultural issues in its article Whose Century is it? where it notes that nearly every country involved has food safety regulations on the chopping block as the TPP proponents are arguing that free-trade and cheap food is the best thing for a country, regardless of economic or health consequences. Every year there is a new salmonella, e-Coli, mad-cow, or similar outbreak of a deadly food-borne infection — do we really want to weaken safety standards? With respect to labour, while some US negotiators are apparently demanding meaningful and enforceable worker protections, many of the other countries are not and, more importantly, most of the developed countries are claiming that increased worker mobility will encourage a disruptive inflow of low-skill workers from developing countries and pushing for less worker mobility in our globally connected world (while the less developed countries want to level the playing field).

Regardless of what gets agreed to, the sheer fact that this trade agreement will override existing law presents every Procurement organization with a minefield just waiting to be activated. Will your supplier still be able to afford its current pricing? Will it even be able to supply you? Will you be able to expect the same quality and safety standards? Will new sources suddenly become available? How will they change the supply-demand balance? Will new tariffs materialize? Will you be forced to abandon your “Buy American” policy? Will you be forced to consider suppliers you don’t want to? All of these questions and dozens of others become valid the minute this act, negotiated in secret where it is pumped full of poison pills, gets signed into law.

If the (wiki)leaks are even remotely reflective of what’s in the act, it might make the controversial, scary Orwellian provisions of the Patriot Act look like a cuddly bunny in comparison!