Future of trade policy – part II

Following up on my earlier posting, it looks like even the current USTR Sue Schwab is questioning the idea of large rounds of trade negotiations. The Financial Times reports:

She told the Financial Times on Wednesday: “It may be that this grand-scale agreements format that we have been operating under since 1947 is obsolete”, a description she quickly amended to “needs to be reviewed”.

As she also told the Wall Street Journal:

“In the future, we could have a global trade round, but we’d probably have a building block process, agreeing on issues one by one, instead of waiting until you’ve agreed on everything,” she said.

The Financial Times itself is calling for a new approach – Editorial comment – Multilateralism not dead as a Doha:

The WTO should try two things: first, take on smaller, more manageable legislative projects among coalitions of the willing; second, try to extend consistent rules over more of the existing system.
For the first project, it could start by gathering together the few countries that dominate world trade in services and hammering out a standalone deal in sectors where it can find convergence. Last weekend’s fruitful services talks were an encouraging sign, especially now that developing countries such as India are powerful service exporters as well as importers. The benefits, on the model of the successful Information Technology Agreement of 1996, would then be extended to all WTO members. Several parts of the Doha deal such as export subsidies and “trade facilitation” (getting goods easily across borders) might also be agreed separately.

And the Wall Street Journal also raises the idea – Trade Talks’ Failure Weighs on Other Issues:

Future trade deals may focus more on narrower national interests, rather than Doha-style talks that call for countries to make concessions in one area to make gains in another. One possible model is a kind of “coalition of the willing” approach. The model is the Information Technology Agreement signed in 1996, which set zero tariffs on new technology goods for countries that signed on. About half the WTO’s members have done so.

So — maybe a “intangibles trade” negotiations?

Involuntary underemployed – NY Times

The New York Times has discovered the issue of the involuntary underemployed — i.e. the part-time worker — in a nice article today entitled A Hidden Toll on Employment – Cut to Part Time:

The number of Americans who have seen their full-time jobs chopped to part time because of weak business has swelled to more than 3.7 million — the largest figure since the government began tracking such data more than half a century ago.

This is something I have been blogging on for some time — see Job numbers look worse on July’s unemployment numbers. I’m glad to see an article on this silent job crisis in a mainstream media outlet.
I will be posting a comment on the latest numbers tomorrow when the July data is released.

Oil drilling held up by an intangible

A couple of months ago, I posted a comment on the problems with trying to drill our way out of the energy problem. Yesterday’s Financial Times ran a story about another problem with that strategy — Warning over oil industry skills shortages:

A shortage of skilled engineers threatens to limit oil supply growth in the coming three to five years as companies struggle to develop complex new fields, the head of the world’s biggest oil services company has warned.

In other words, we don’t have the intangible assets needed to carry out the strategy. And frankly, if I were to concentrate resources on building up a human capital base in energy technology, I would focus those resources on developing new forms of energy resources, not on teaching the skills needed to continue the present course.

Those GDP numbers

A quick note on this morning’s Gross Domestic Product data showing growth of 1.9% in the second quarter. As BEA points out, the higher growth rate compared to first quarter is due in part to increased exports and decreased imports. But this “advanced estimate” is based on only two months of trade data — June data is not yet available. And, as I pointed out when the May trade data came out, it surprised many people who were expecting a much larger deficit. So key an eye out for the “preliminary estimate” which comes out in late August to see how much the number changes with more complete data.
It is interesting to see how the media is playing the numbers. According to the Wall Street Journal – GDP Accelerates in Second Quarter On Exports, Stimulus Spending. The New York Times had a different take – G.D.P. Grows at Tepid 1.9% Pace Despite Stimulus:

The economy grew less than expected from April to June, the government said on Thursday, and it shrank in the final months of 2007, dimming the outlook for a quick recovery.

The stock market seems to also believe the news is not that good.

Future of trade policy

At the same time on Tuesday when the Doha Round of multilateral trade negotiations was once again falling apart (see earlier posting), the Senate Finance Committee was holding a hearing on The Future of U.S. Trade Policy: Perspectives from Former U.S. Trade Representatives. The hearing heard from four former Trade Representatives: Mickey Kantor, Bill Brock, Carla Hills, and Charlene Barshefsky. Interestingly, all of them talked about overall competitiveness as well as trade. As Charlene Barshefsky put it:

Structural change in the global economy is creating new industries and overturning familiar old ones; outdating old domestic policies, social arrangements and elements of our trade regime; and, as China and India rise, raising questions about America’s status as the world’s economic leader.
This hearing, accordingly, is a remarkable opportunity to reflect and develop consensus on our response to a profound set of challenges. My first and most important point is that trade policy can be only one element in this response, and not the principal element. We should place national competitiveness at the center, examining our finances, our commitment to science and innovation, our high-tech and traditional infrastructure, our human resources policies in both education and immigration, and other matters. We should also restructure our domestic social contract, to remove powerful sources of anxiety, notably fear of the loss of health care, as well as to spread the benefits more equitably and mitigate the risks for individuals. Together with this, we need a battery of trade, financial and other global policies that allow us to draw maximum benefit from the global economy, tap new areas of growth, and support our goals in national security, development and poverty reduction, and environmental quality.

Mickey Kantor laid out an overview agenda:

I. Building a competitive America
  A. Renewal and rebirth of public education (K-12);
  B. Energy security and addressing global warming, climate change and environmental challenges;
  C. Rebuilding and updating our infrastructure;
  D. Emphasis on science, discovery, research and development;
  E. A sound fiscal policy.
II. Restoring a credible, open and expanding trade agenda
  A. Enforcing trade laws and trade agreements;
    (1) Vigorous enforcement of our trade laws and full use of the WTO and other dispute settlement systems;
    (2) Establishment of a trade prosecutor at USTR;
    (3) New comprehensive trade negotiations with China to ensure full compliance with international trade commitments;
    (4) Review and update all existing significant trade agreements;
    (5) Enforce legislative standards in all preference programs;
    (6) Initiate discussions with Mexico and Canada re: NAFTA, labor and environmental provisions and dispute settlement agreements;
  B. Advancing U.S. trade and economic interests
    (1) Seeking multilateral and pluralateral sectoral agreements in critical areas;
    (2) Renewed efforts to implement the FTAA and APEC;
    (3) Complete the Doha Round;
    (4) Negotiate convergence and mutual recognition agreements on a multilateral, regional and bilateral basis;
    (5) Seek to resolve problems with the pending FTA’s with the Congress;
    (6) Seek an FTA with Japan or an expanded agreement involving the Quad (Canada, the European Union, U.S. and Japan);
    (7) Opening markets for U.S. agriculture.
  (C) Fair Trade Initiatives
    (1) Passing and implementing an expanding TAA program;
    (2) Seek to abolish abuse of child labor worldwide;
    (3) Include enforceable labor and environmental provisions in all trade agreements;
    (4) Implement stronger dispute settlement understandings in all trade agreements;
  (D) Promoting developing countries access to international trade and spreading the benefits of an open, rules-based trading system
    (1) Removing barriers to entry of products no longer produced in the United States;
    (2) Provide technical assistance and training to developing nations in negotiations and in WTO processes;
  (E) Encourage presidential leadership and advocacy.

Kantor also said something that echoes what I have said about the current trade strategy:

we should begin to fashion initiatives to promote the most prominent growth industries in the United States. Industries such as biotechnology, nanotechnology, environmental controls, health care, education and financial services are prime examples. This, of course, is not to ignore the other important areas of agriculture, telecommunications and other copyright industries. The attempt to negotiate a new and comprehensive Doha development round agreement has stood in the way of sectoral agreements, which have the potential of large impacts on global growth.
. . .
Agreements covering convergence of standards, mutual recognition agreements, regulatory regimes and transparency should be pursued. As we become increasingly connected, the ability to reach understandings covering accounting standards, corporate governance and financial reporting, product standards and safety and internet protocols can have a large impact on global growth and efficiency. Our businesses, workers and investors would profit immeasurably from progress in these areas.

Barshefsky made a similar point:

Fundamentally, trade policy should turn from bilateral agreements with relatively small partners toward the fast-growing industries and major economies that we can tap for growth. Among these industries are services generally, energy and environmental technologies, infrastructure-linked industries where Asian countries in particular are large buyers, and medical and health industries. Our goal should be to ensure that American-based service providers and manufacturers can supply the goods and services where demand is greatest. Major targets should include the EU and Japan, China, India, Brazil, ASEAN, the Persian Gulf and similar large developing country
A quick conclusion of the Doha Round would be a good start here, though not at all sufficient. Whether Doha succeeds or fails, we should move quickly to a new approach, based on the negotiation of plurilateral sectoral agreements among the main economies. These would seek broad liberalization of large and rapidly growing industries: energy and environmental industries perhaps first, also selected medical and health industries, based on agreement among the major players rather than requiring participation of each one of the WTO’s 153 members. The model would be the Information Technology Agreement of 1996, and the WTO’s later agreements on financial services and basic telecommunications. Here is where we will tap rapidly growing markets, and ensure that America remains a leading player in the industries that will lead the 2010s and 2020s. These agreements have the further advantage of being sectoral in nature, not country-specific, and are therefore based upon MFN policies that work with rather than against supply chains and other business trends.

But she was even blunter about the failure of the current strategy of “comprehensive rounds”

It worked reasonably well for the Kennedy Round in the 1960s and the Tokyo Round in the 1970s, spottily for the Uruguay Round in the 1980s and 1990s, and is now a hindrance.

(Something I completely agree with – see After Doha: What The WTO Is Not Talking About. See also Barshefsky’s Foreign Affairs article With or Without Doha.)
On a different point, Bill Brock made another interesting comment about job loss and insecurity:

This Congress clearly needs to think about an urgent change in the way we address people whose jobs have been affected by all these varied economic forces, not just trade.
One of the problems in doing so is that our trade adjustment assistance is based largely on giving workers some help when their jobs are affected by trade. Well, what if it wasn’t trade that cost them their employment? What if it was just the fact that Americans preferred hybrid cars to buggy whips? They are still out of work, and we need them just as much as they need a job. Why do we lead them to believe that we only care if they lost their job due to some competitor overseas, for that is at least the implicit message of our present trade adjustment assistance program?
I suggest that one critical step in a new trade policy would be to address this issue. In a world where the pace of change seems locked into ‘warp’ speed, hard‐working men and women are going to be faced with changes in their job situation time and again throughout their working lives. The studies we did when I was at Labor indicated that our youngsters coming out of school could expect to hold eight to ten jobs, and have two to three careers during their working lives. If anything, we may have underestimated the magnitude of the problem. To date, this nation has done virtually nothing to address this fact, but the loss of skills, which occurs because we do not, costs us dearly.
If we could create a far more comprehensive worker adjustment and training system, it would not only be more humane to those individuals who are suffering, through no fault of their own, but it would expedite their return to the workforce, perhaps more effectively than ever.

Amen to that. I have long advocated for a comprehensive adjustment system, including a system of Community Workforce Partnerships.
The US clearly needs a new trade strategy, as this hearing pointed out. The insights from these former Trade Representatives are a good start at leading the way toward the development of that new strategy — by people who have been there and done that.

Financial analysts and brands

From the brand analysis blog Dim Bulb: Pick Up the Phone come this discussion of why financial analysis don’t get brand value:

The financial community has always had an arms-length relationship with branding. It’s slotted in as an intangible, or goodwill component on a company balance sheet, which makes it an exception to most anything else that is measured and attributed to (or debited from) estimates of corporate value.
Analysts, like the executives they haunt, like to use the word brand to reference or explain lots of things that aren’t dependably explainable, like awareness, momentum, buzz, and any word that has a future tense to it. These are all reasonable, qualitative observations about human behavior and society in general, but they’re certainly not primary sources of information like the other data used in financial analysis.
. . .
Brands can and should matter to how we understand and predict corporate performance, only now we’re seeing that they’re just nice-to-have references in annual reports and in newspaper quotes. Now could be the time for the financial community to come up with an inventive, new definition of what goes into branding, and perhaps agree on a methodology to assign values to companies…values that are tangible useful to them, to reporters, and to the working shlubs like yours truly who buy and sell the stocks.

I agree that now could be the time for new methodologies to assign values. But we need that with all intangibles, not just brands. And that is a much more complicated undertaking.

Changing the Big Pharma Phrama model?

According to a recent story in the Times of London, at least one big drug company may be changing it business model – GlaxoSmithKline to break up research and development operations:

The world’s second-largest pharmaceuticals group is to abandon its big-is-beautiful model and run its businesses more like small biotech outfits.
Andrew Witty, who took over as chief executive of GlaxoSmithKline in May, unveiled the change in strategy yesterday as he said that profits had fallen from £1.3 billion in the second quarter last year to £1.2 billion this time.
The company will also make its first move into the branded generics market through an alliance with Aspen Pharmacare Holdings, a South African group, in a sign that it is trying to target emerging markets as the West becomes more challenging.
. . .
Mr Witty expressed concern for the state of the pharmaceuticals industry, saying: “I can’t help but see that the sector has lower ratings by shareholders and that anxiety exists about where the sector is going.”
GSK is trying to tackle the problem by dividing its research and development, which is in seven centres, into smaller groups of up to 80 scientists. The groups will have to apply for funding to a central investment board.
Rather than the traditional model of chasing blockbuster drugs that achieve more than $1 billion in annual sales, GSK hopes that its new approach will lead to more drugs that earn a modest amount being developed by the company, reducing the risk of relying on a few big sellers.

One more example of how companies are moving away from the large corporate lab approach to a decentralized research strategy. The one thing the article doesn’t talk about is the fact that big pharma has been practicing this model for years — relying on smaller, mostly bio-tech companies to keep their product pipeline full. Looks like GSK is just internalizing what companies have been doing in their external research relationships.
It is interesting to note that part of the strategy is a link up with generics. As we discussed earlier, such a tie-up has benefits for both sides. Look for more changes in the drug industry’s business model as they work through how to compete in this new I-Cubed Economy.

End of Doha?

The Wall Street Journal is running a story that the WTO trade talks have collapsed — Global Trade Talks Falter. The speculation is that this was the last chance for the Doha Round (so named because the talks began with a meeting in Doha). Of course, this is not the first time that the trade negotiations have been said to be at the end. I can’t count the number of posting on this blog about the “end” of the Doha Round.
Part of the problem is what the Round was trying to accomplish. Originally, the Round was supposed to be the “services round” — the so-called Millennial Round which fell apart in Seattle in 1999. But it quickly became the “development” round at the meeting in Doha. The idea was that developing countries would gain access to markets in the developed world, especially of agricultural products. As the Journal story puts it:

The nine-day meeting, the longest trade summit diplomats in Geneva could recall, aimed at concluding a simple bargain: The European Union and U.S. would lower farm subsidies and tariffs in exchange for China, India, Brazil and other emerging economies opening up their markets for industrial goods like chemicals and cars.

Boiled down to this trade off, the Round has become less and less relevant to the world economy as the talks have stretched on. The Round seemed premised on an international division of labor that long longer exists: “developed” nations make products and “developing” nations have an advantage in agriculture. It seems that this trade off is not worth it to India and China. Rather than wanting to lower agricultural barriers in the US so that they can export more farm products, India and China are more worried about a surge of agricultural products coming into their markets. They want surge protection clauses in the agreement on sugar, cotton and rice. India’s trade and commerce minister, Kamal Nath, the Indian Trade and Commerce Minister, reportedly said, “I’m not risking the livelihood of millions of farmers.” The proverbial shoe is apparently on the other foot now.
More importantly, the nature of global economic activity has shifted. Let me repeat my comment back at the beginning of the Round in 2001 (in After Doha: What The WTO Is Not Talking About), many of the real issues weren’t even on the table:

Slightly less than a decade ago, I played a small part in the implementation of the Uruguay Round and the birth of the WTO. As a Senate trade policy staffer, I had fly-on-the-wall view of the pushing and shoving. At the time, I could not help but think that I was witnessing the last major trade round. I may be proven wrong. But, regardless of whether a new round is launched and successfully completed, it will be outdated before it begins. As we engage in the first war of the 21st century, we may be entering into the last trade negotiations of the 20th Century.
This is not to say that the negotiations are unimportant. There are numerous areas, ranging from agricultural subsidies to the dispute settlement process, that need to be addressed. These are, however, the loose ends of trade in the Industrial Age – not the emerging issues of the Information Era.

Maybe the new Administration can move beyond the past and craft a new approach to trade negotiations. Clearly, the current one isn’t working.

The intangible in a very basic industry

Our normal habit (or should I say bias) when thinking about intangibles is to divide the world into intangible and tangible producing industries. Services and manufacturing is the crudest form of this breakdown. However, we forget that intangibles are a fundamental input in all industries, even the most basic of them such as mining.
The IBM Institute for Business Value has released a report reminding us of this —
Unlocking the DNA of the Adaptable Workforce: The Global Human Capital Study 2008/Metals and Mining Edition:

Today, the metals and mining industries are rapidly changing. As business becomes more global and competitive, companies are being challenged to reassess where and how products are made and marketed. A less understood challenge, however, is how to make the best use of the enterprise’s most important asset: the workforce.

The key factor is effectively utilizing the knowledge of the workforce:

Our findings suggest that three key capabilities influence the workforce’s ability to adapt to change.
First, workers must be able to collaborate across their organizations, connecting individuals and groups that are separated by organizational boundaries and different physical locations. Only 7 percent of the metals and mining survey respondents say they are very effective at collaboration – the ability to bring together workers to solve problems and to innovate, either formally or informally. To address this, a number of leading metals and mining companies are actively using technology enablers today for collaboration, knowledge sharing and learning. However, our evidence indicates that the real hurdles to collaboration are not technology, but issues of the company culture.
Workers also need to effectively identify and locate experts. Only a small number of metals and mining respondents (14 percent) believe their companies are very capable of identifying individuals with specific expertise.
And last, organizations must be capable of predicting their future skill requirements to keep ahead of changing conditions. Only 13 percent of metals and mining respondents said that their organizations have a very clear understanding of the key workforce skills required in the next three to five years.

By the way, this report is a part of a larger series/study with the same title: Unlocking the DNA of the Adaptable Workforce.
The full report opens with this wonderful quote:

“The only sustainable competitive advantage is the type of people you have and the way they work together.”
– Klaus Kleinfeld, President and Chief Operating Officer, Alcoa

(The quote is from an interview conducted by Patrick Foster in The Times“In a world that technology has made flat, where do firms find a competitive edge?”.)
The study and this quote reinforces what I have been saying for sometime: there is no separate “intangible” or “knowledge-intensive” sector of the economy. All industries and sectors need to embrace intangibles, innovation and information in order to compete. The distinctions we make between old and new industries , between high-tech and basic, between services and manufacturing are out of date. They may tell us about certain characteristics of the sector. But they tell us little about what companies and individuals are doing to add value and foster competitiveness. In my mind, it’s not old versus new; its companies who understand the I-Cubed Economy and those who don’t. Those who do will be able to make (and remake) themselves into prosperous institutions. Those who don’t will fail, even if they are in so-called “new” sectors.

Under reporting of intangibles

The brand valuation firm Intangible Business has produced two studies on reporting of intangibles under US and international accounting rules. Those rules (SFAS 141/142 and IFRS 3) require companies to break out the value of acquired intangible assets from the overall category of “goodwill.” The US report (SFAS 141: The First 5 Years) concluded that goodwill is substantially over reported and intangible assets under reported. Some examples:

Bought PIXAR for $7.5bn and allocated only 3% to intangible assets. 75% was goodwill.
Conoco Phillips
Bought Burlington Resources for $35bn allocating just $0.1bn to intangibles, 0%.
Bought Unocal for $20bn and determined that intangible assets had no value at all.
Bought YouTube for $1.2bn and allocated $0.2bn to intangibles and $1.1bn to goodwill, 92%.
Bought Bank One for $95bn. Only 9% was allocated to intangibles but 36% to goodwill.
Bought Golden West for $75bn with intangibles like customers, brands, contracts valued at 1%.

On the international side, the results appear to be somewhat better (Goodwill Reporting Internationally):

IFRS3 disclosure requirement on the components of goodwill is just about adequate for stakeholders’ needs. USGAAP is still some way short of even this level of disclosure and, most disturbingly, compliance frequently consists of “going through the motions” and sometimes doesn’t happen at all.
Auditors seem unwilling to make an issue of this, and perhaps this is because compliance still results in such woolly, ‘motherhood and apple pie’ type statements. The attitude seems to be that if disclosure requirements are considered to be bland and uninformative, it doesn’t matter if they are overlooked altogether. The absence of any effective monitoring of compliance with IFRS by reporting companies and their auditors, along the lines of the SEC in the United States, means that the quality of disclosure is likely to remain poor.

Not a good result. Maybe SEC needs to do its own analysis of the impact of the 141/142.