Commerce quarterly trade bulletin sept 2010


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Commerce quarterly trade bulletin sept 2010

  1. 1. Commerce Quarterly Trade Bulletin Vol. 2, No.3, September 2010 As the global economy continues to sputter along at an ane- quarterly year-over-year basis, varied between 81.9% growth (Q1 mic pace, trade tensions are inevitably on the rise. In early Sep- 2008) and 15.6% contraction (Q1 2007). While the exchange rate tember, the United Steelworkers union filed a formal, 5,800 page does affect exports, there are many other mitigating factors that complaint to the Obama administration requesting action on al- influence total export flows. In the case of our non-aerospace, leged illegal trade subsidies and other World Trade Organization non-agriculture exports, a large portion of these are technology (WTO) violations by China in support of its (fast growing) clean exports, which may be less sensitive to exchange rate fluctuations energy sector. On September 14, the administration filed two for- than other merchandise goods and commodities. Lag times be- mal complaints to the WTO, on payment-processing companies tween product orders and deliveries also play an important part. and steel duties. While these issues are federal, Washington state Agriculture exports exhibited more consistent year-over-year has a real stake in the outcome of these disputes over unfair trade growth, with only two quarters between Q1 2006 and Q3 2008 policies. China has been our state’s second largest market for non- exhibiting negative growth in exports to China (a 22.4% decline aerospace, non-agriculture products; exports in this grouping in Q1 2006, and 26.8% decline in Q3 2006). reached more than $971.3 million in the first half of 2010, a 35.8% increase over H1 2009. And despite the Chinese government’s Trends through the First Half of 2010 announcement in June that it will allow the renminbi (RMB) to Total exports increased 1.8% quarter-over-quarter in Q2, fluctuate within a wider daily band, the currency has appreciated though the non-aerospace, non-agriculture exports (using the only 1.8% against the dollar since then. In Japan, the govern- crude acronym “NANA”) grouping fell 3.6% over the previous ment’s unilateral decision to intervene in currency markets for the quarter, following a 2.3% quarter-over-quarter drop in Q1. How- first time in more than six years to weaken the yen (in response ever, seasonality may have played a role—comparing year-over- to strengthening of the yen due to Chinese large-scale purchas- year, Q2 2010 NANA exports were 25% above Q2 2009. While im- ing of Japanese government securities) is perhaps a sign of things pressive, this actually lagged overall U.S. NANA export growth in to come over the next 6–12 months. Yet despite all this, after a Q2, which surged to 30.6% over the same quarter in 2009 (Figure 12.2% contraction in global merchandise trade volumes in 2009, 1). Roughly 60.6% of the decline in exports from Q1 to Q2 can the WTO now forecasts a record 13.5% year-over-year increase in be attributed to declines in three markets: Japan (30.3% of total 2010.1 declines in exports), Chile (21.9%), and Mexico (8.4%); overall, ex- How much does China’s exchange rate affect Washington’s ports to these markets collectively declined 40% from Q1 2010. exports? From Q1 2005 to Q4 2008, the Chinese RMB nominally Exports to Taiwan, however, grew 32.5% from Q1 to Q2, reaching appreciated roughly 21.1% against the U.S. dollar. During this pe- $210.5 million (Figure 2). riod, Washington’s non-aerospace, non-agriculture exports, on a Year-over-Year Change in Non-aero- Figure 1. Washington’s Top Non-aerospace, Figure 2. Figure 1. Year-Over-Year Change in NANA Figure 2. Washington's Top Five Markets, Q2 2010 space, Non agriculture Exports (NANA) by Quarter 2007-2010 Non-agriculture Markets (NANA), Q2 2010 Non-Aerospace, Non-Agriculture Goods (NANA) Washington U.S. Data source: WISER Trade Q2 2010 Q2 2009 Data source: WISER Trade 40% 1,318.9 CanadaCanada 1,039.0 30% 482.1 20% China China 396.7 10% 378.1 0% Japan Japan 324.9 -10% 203.1 Korea, Korea, Republic Of 159.5 Republic of -20% 210.5 -30% TaiwanTaiwan 129.5 -40% 0 500 1,000 1,500 Q1 '07 Q2 '07 Q3 '07 Q4 '07 Q1 '08 Q2 '08 Q3 '08 Q4 '08 Q1 '09 Q2 '09 Q3 '09 Q4 '09 Q1 '10 Q2 '10 Millions USD 1 World Trade Organization, “Press release: Trade likely to grow by 13.5% in 2010, WTO says,” 20 September 2010. Commerce Quarterly Trade Bulletin, September 2010 | 01
  2. 2. Among Washington’s top ten largest NANA exports in Q2 2010, in 2009. Between Q3 2006 and Q2 2010, China has ranked as Wash- the largest year-over-year increases were in iron and steel ($436.2 ington’s largest aerospace export market for nine quarters, includ- million, 70.6% increase over Q2 2009); wood and articles of wood ing the last three. More to the point, over this time span, aerospace ($586.6 million, 53.7%); industrial machinery, including computers exports to China constituted nearly 15% of all Washington’s aero- ($955.5 million, 38.5%); inorganic chemicals, precious & rare earth space exports. China has also purchased nearly $4 billion in aero- metals and radioactive compounds ($602.5 million, 31.4%); and space goods from Washington state over the past four quarters. vehicles and parts, excluding railway or tramways ($227.2 million, A more interesting breakdown disaggregates export flows by 23.1%). Aerospace exports grew 5.6% over the previous quarter, country and product. The single largest NANA export flow through but were 20.4% below exports sales for the same period in 2009. the first half of 2010, was for mineral fuels and oils to Canada Comparing the first half of 2010 with the same period in 2009, ($573.8 million). This was followed by exports, also to Canada, of Washington’s NANA exports grew 27.8%, and each of the top five industrial machinery ($258.2 million) and electrical machinery markets in H1 exhibited a minimum of 20.5% growth over H1 2009, and sound equipment ($222.0 million); and exports to Japan of led by Taiwan at nearly 107%. In terms of gross increases by prod- inorganic chemicals, precious & rare earth metals and radioactive uct category, aerospace was the largest single contributor (28.5%), compounds ($215.2 million), and wood and wood articles ($189.4 followed by wood and wood articles (7.8%), industrial machinery, million). including computers (5.7%), and wheat and meslin (4.4%). The larg- est drags on growth, measured by their quarter-over-quarter net loss as a share of gross loss, were mineral fuels and oils (a decline of $317.8 million, or 49.7% gross losses by product) and pharmaceuti- cals (decline of $172.0 million, 26.9% of gross losses). Figure 3. Major Technology Exports Tech exports, using the definition developed by TechAmerica Q2 2010 Q2 2009 Data source: WISER Trade (for a full description, see our December 2009 edition, footnotes 8 Ultrasonic scanningscanning Ultrasonic apparatus 114.6 and 9), increased 0.3% from Q1 to Q2, though they were 17.0% over apparatuses 102.5 the same period in 2009 (Figure 3). Ultrasonic scanning apparatus TV receivers, including 96.7 video monitors and TV receivers, including video monitors & projectors was the largest tech export in Q2 2010, reaching $114.7 million— projectors 93.6 Electronic integrated 75.8 though this was 7.6% below exports in Q1 2010, and the lowest circuits & microassembly Electronic integrated circuits & microassembly and parts and parts 59.1 quarterly amount since Q2 2009. Television receivers (including Automatic data processing 72.4 machines and magnetic Automatic data process machines and magnetic readers video monitors and receivers) grew 32.1% over Q1 reaching $96.7 readers 55.6 million, followed by electric integrated circuits and micro-assembly Oscilloscopes, spectrum Oscilloscopes, spectrum analyzers, andparts 53.6 analyzers, and parts 41.0 parts ($75.8 million, a 15.9% increase over Q1) and automatic data 0 40 80 120 processing machines and magnetic readers ($72.4 million; 18.0% Millions Millions USD decline over Q1, but a 30.2% year-over-year increase over Q2 2009). Aerospace exports grew 5.6% quarter-over-quarter in Q2, though this was 20.5% below export flows during the same period Market Focus: Brazil Often lost in the discussions over China and India is the emer- Economic Overview gence of Brazil as the “other” engine of global growth in the twenty- Brazil is the largest economy in South America and eighth larg- first century. More than the other “BRIC” countries (Brazil, Russia, In- est in the world as measured by gross domestic product (GDP). Af- dia, and China), Brazil is perhaps best positioned as a natural trade ter a difficult period of hyperinflation in the 1990s (2,477% in 1993), partner with the United States: a per capita GDP twice that of China, Brazil has made significant strides and has emerged as a major in- close proximity to the United States, and arguably the “freest” and ternational hub for clean energy, information and communication most market-oriented economy of the four. In this edition of the technologies (ICT), and biotechnology in recent years. In recent de- trade bulletin, we take a closer look at Brazil and opportunities for cades, aircraft manufacturer Embraer has grown into a world-rec- Washington exporters in the near and medium term. ognized original equipment manufacturer (OEM) of business and Commerce Quarterly Trade Bulletin, September 2010 | 02
  3. 3. regional jets. Brazil is also home to forty-five of the top fifty largest ery, electrical and transport equipment, chemical products, oil, multinational companies in the world. The country is a leading ex- automotive parts, and electronics.6 In 2008, machinery and elec- porter of coffee, soy beans, beef, poultry, sugar, and orange juice. In trical equipment accounted for 26.49% of Brazil’s imports, oil and the clean energy space, roughly 75% of Brazil’s entire grid is pow- derivatives for 18.17%, chemical products for 14.25%, and transport ered by hydro, and 50% of all cars on the road use biofuels. In ad- equipment and parts for 12.6%.7 dition to Embraer, major Brazilian multinationals include Petrobras, Vale, CSN, Gerdau, Aracruz, Suzano, Sadia, Imbev, Itau/Unibanco, Information Technology and Bradesco. Per capita GDP adjusted for purchasing power par- Brazil’s IT sector is the eighth largest in the world and largest in ity was US $10,100 in 2009. With a cumulative stock of US $319.9 Latin America. Notable firms with operations in the United States billion in inbound foreign direct investment (FDI) as of the end of include BRQ, Ci&T, CPM Braxis, Politec, Stefanini, TOTVS, and Spring 2009, Brazil ranks thirteenth in the world for investment attraction.2 Wireless (with their U.S. headquarters in Seattle). There are more With a population of roughly 200 million, Brazil is the fifth most than 1.7 million IT professionals; each year another 100,000 new populous country in the world.3 About 10% of their total popula- professionals enroll in IT-related courses. Last year, the Brazilian IT tion in 2009 was over 60 years of age, with this forecasted to increase market was worth US $31.0 billion, constituting 3% of the coun- to 29% by 2050. The old age support ratio for 2009 showed ten try’s gross domestic product (GDP). Roughly 35% of the sector is working people (aged 15–64) for every retired person (aged 65+). in IT services, with the business process outsourcing (BPO) market However, the forecast for 2050 showed only three working people worth US $4.5 billion. For 2010, the IT market growth is forecasted for every retired person—a decline of more than half.4 The Econo- to expand 15%, with total IT exports expected to reach US $3.5 bil- mist Intelligence Unit’s 10 year forecast shows a general downward lion. And despite the recent slowdown in the Brazilian economy, trend in GDP growth; a predicted drop from 7.8% in 2010 to 4.5% the Brazilian IT industry thrived, growing by 7.8% (software, hard- in 2011, then a slight increase to 4.7% in 2013, followed by a steady ware, and services) in 2008.8 and gradual decline to 3.3% by 2020.5 The IMF’s estimates are similar, with GDP growing 7.1% in 2010 and 4.2% in 2011. Drivers Global Recession and Recovery of economic growth over the next 10 years include Brazil’s exports Brazil’s economy contracted by 0.2% in 2009. The World Bank es- of commodities to China, the country’s leading ethanol production timates Brazil’s current account deficit increased in 2009, though as industry, continuing growth in information technology, and the a percentage of GDP, it declined from 3.3% to 3.2%. Foreign direct presalt oil reserves off the coast of Brazil. In preparation for the 2014 investment dropped from US $42 billion in 2008 to US $25.9 billion World Cup and 2016 Summer Olympics, the Brazilian government in 2009. There was a significant reduction of investment during the will spend close to US $100 billion on infrastructure and other in- deepest throes of the recession, including a 30% reduction of in- vestments. vestment into Brazil’s mining sector. However, Brazil was in recovery Brazil’s biggest import partner is the United States, accounting position by the end of 2009—faster than most major economies.9 for 16.12% of all imports. China, at 12.61% of imports, Argentina, at 8.77%, Germany, at 7.65%, and Japan, at 4.3%, follow on the list of Brazil’s main import partners. Brazil’s main imports are machin- Washington Exports to Brazil In 2009, Washington’s exports to Brazil totaled $836.1 million. port markets, 2008 was a peak year for sales, followed by a contrac- This was more than 17% below 2008 export levels, but still the sec- tion in 2009 (Figure 4). Nonetheless, exports to Brazil have been ond highest annual total recorded between Washington and Bra- on the upswing for some time now, with a per annum growth rate zil. As seen with many markets, the largest single export good was of 4.3% seen from 2001 to 2009. If we stretch our period of interest aerospace products, totaling $659.2 million in 2009, and constitut- to 2000–2009, exports have grown on average more than 28.1% ing 78.1% of all exports to Brazil. This was down from $807.8 million per year, though much of this follows the volatile ups and downs of in 2008, an 18.4% decline. As with many of Washington’s major ex- aerospace exports. 2 Central Intelligence Agency, World Factbook. 3 Central Intelligence Agency, World Factbook, July 2010. 4 United Nations, Population Ageing and Development, 2009. 5 Economist Intelligence Unit, Country Data, August 2010. 6 Central Intelligence Agency, World Factbook, 2009. 7 Economist Intelligence Unit, Country Data, August 2010. 8 Brazilian Association of Information Technology and Communication Companies (Brasscom). 9 US Department of State and US & Foreign Commercial Service, “Doing Business in Brazil: 2010 Country Commercial Guide for US Companies,” 2010. Commerce Quarterly Trade Bulletin, September 2010 | 03
  4. 4. As we often do in this bulletin, we prefer to look at the NANA million; 14.2% growth). export segment of Washington’s exports portfolio. Exports in this Brazil ranked as Washington’s second largest export market in grouping increased every year from 2005 to 2008. Even in 2009, to- South America in 2009, just slightly behind Chile; this was true for tal NANA goods exports were the second highest on record, reach- both total exports and after removing aerospace products. How- ing $162.3 million. ever, 2009 was the first year Brazil was not Washington’s top export The largest NANA exports by product type in 2009 were: (1) market in the region for non-aerospace goods, owing more to sig- petroleum coke ($64.5 million; 12.9% year-over-year increase); nificant growth in the Chilean market than to a decrease in exports (2) voice/data/imaging and data machines ($10.6 million; 143.4% to Brazil (though exports did decline from 2008, they were still well growth); (3) ultrasonic scanning apparatuses ($9.3 million; decline above previous years). Over the past ten years, Brazil and Chile have of 37.0%); (4) fork lifts and work trucks ($8.4 million; decline of frequently swapped positions as Washington’s top NANA export 75.2%); and (5) relays for voltage between 60 and 100 volts ($7.4 market in the region. Figure 4. Brazil: Brazil: Economic Growth and Washington Exports Economic Growth and Washington Exports Figure 4. Data source: WISER Trade and International Monetary Fund (IMF) Gross domestic product based on purchasing-power-parity (PPP) valuation of country GDP Washington exports to Brazil NANA exports 2500 1,200 1,000 Millions USD 2000 PPP GDP (US billions) 800 PPP GDP(Billions USD) 1500 Millions USD 600 1000 400 500 200 0 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 New Exporter Profile: Flux Drive In September, we spoke with Libby Dunkin, Vice President for Flux Drive Flexible Coupling line is designed for soft starting con- Operations at Sumner, WA-based Flux Drive. Flux Drive is a small stant speed applications. Both the ASD and Coupling product lines engineering design and new manufacturing firm specializing in can be installed in-line between the motor and load or can be belt magnetic couplings for industrial- and heavy-load motors used un- driven. Flux Drive’s orders are split roughly 50-50 between retrofits der harsh conditions. After several years of in-house testing and and new applications. design, Flux Drive began business operations in 2007, and currently Earlier this year, after placing a free company listing in a global employs eight full time equivalents (FTEs). Their main product is business supplier catalogue, Flux Drive was contacted by Vulcan In- the Adjustable Speed Drive (ASD), designed for soft-start and vari- dustries, a large Brazilian original equipment manufacturer (OEM) able speed mechanical applicants. Flux Drive has developed two specializing in the assembly and some component manufacture of product lines that offer industry the benefits associated with this motors used in mining and agriculture applications. Brazil’s agricul- power transmission technology. The Flux Drive Adjustable Speed ture and mining industries, while sizable, still use many antiquated Drive (ASD) is designed for variable speed applications while the technologies, including hydraulic couplings in heavy-load motors. Commerce Quarterly Trade Bulletin, September 2010 | 04
  5. 5. Flux Drive’s magnetic couplings can be retrofitted onto older mo- new to the export of an actual product. As a small company with tors, are far more energy efficient, and significantly reduce mainte- little exporting experience, Flux Drive lacked the clout needed to nance costs and ecological and environmental damage compared navigate through Brazil’s labyrinthine system of import product with hydraulic couplings. Vulcan has since visited Washington codes and tariffs. To get around this, the company arranged for twice and has placed two initial orders for Flux Drive’s magnetic Vulcan to purchase the couplings in Washington and then assume couplings. the responsibility of importer, including the use of their own freight Flux Drive has done overseas services work in the past, but is forwarder. Trade Issues: Brazil Probably the biggest trade issue with Brazil involves the U.S. countries approved tariff increases for hundreds of products in the compliance with a WTO panel ruling against U.S. cotton subsidies. CET, including dairy, textiles, bags, backpacks, and suitcases. Bot- The question is whether the deal to postpone the imposition of tom line: There is quite a bid of uncertainty on tariffs. Brazil applies retaliatory duties on U.S. products will hold. Brazil and the United federal and state taxes and charges to imports that can effectively States reached a deal on June 17, 2010, under which Brazil agreed double the actual cost of importing products into Brazil. to refrain from imposing $830 million in annual sanction on U.S. im- ports as a result of the U.S. failure to comply with a WTO dispute Government procurement panel against U.S. subsidies for cotton growers. The sanctions will Brazil is not a signatory to the WTO Government Procurement remain suspended until 2012 when the United States will adopt a Agreement, which precludes discrimination against goods and new farm bill establishing agricultural spending for the next 5 years. services from other signatory countries. As a result, U.S. compa- In return, the United States agreed to continue financing a national nies have found it difficult to participate in Brazil’s public sector fund that will pay out $147 million annually in financial technical as- procurement unless they are associated with a local firm. Without sistance for Brazilian cotton farms. The United States also agreed to a substantial presence in Brazil, U.S. companies frequently face sig- add additional restrictions to the GSM-12 export credit guarantee nificant obstacles in winning government contracts. They are usu- program to minimize their subsidization impacts. ally more successful in subcontracting with larger Brazilian firms. Brazil has recently removed import duties on aircraft, flight Note that in July 2010, there was a Brazilian decree establishing a simulators, and all aeronautical equipment and spares. The govern- “Buy Brazil” policy for government purchases. The decree allows the ment also reduced the import duty from 14% to 2% on 410 capital government to favor domestic suppliers over foreign firms even if goods items, including IT and telecommunication products. This the Brazilian company prices are up to 25% higher. In addition, the reduction is due to expire on June 30, 2012.10 decree states that the government may designate goods and ser- vices in the areas of information technology and communications Tariffs as “strategic” and require that a supplier use technology developed In 2009, Brazilian tariffs ranged from 0% to 35%, with an average in Brazil. applied tariff rate of 11.5%. However, Brazil’s average bound tariff, i.e., the rate that generally cannot be exceeded under WTO rules, is Intellectual property rights (IPR) protection significantly higher at 31.4%. Given the large gap between bound IPR piracy continues to be major issue, although Brazil has made and applied duties, U.S. exporters face quite a bit of uncertainty in important progress in enhancing the effectiveness of intellectual terms of tariffs because Brazil is allowed to raise the applied rate property enforcement, particularly with respect to pirated audio- up to the bound level. Brazil has used this flexibility on many occa- visual goods. Among other things, the U.S. Trade Representative sions to increase tariffs. For example, in August and September of (USTR) has urged Brazil to increase raids and seizures of pirated and 2009, the country raised tariffs by as much as 14 percentage points counterfeit products, and increase actions against book and Inter- on several industrial products including industrial fatty alcohols, re- net piracy. The United States is also concerned with patent protec- fractory bricks, valves for oleohydraulic or pneumatic transmissions, tion for pharmaceuticals and medical devices, including with re- and parts of electric appliances. spect to the role of Brazil’s health authority (ANVISA) in the patent Brazil is a member of the MERCOSUR common market which application process; inadequate protection against unfair commer- includes Argentina, Paraguay, and Uruguay. MERCOSUR maintains cial use of undisclosed test and other data generated to obtain mar- a Common External Tariff (CET) which averages 11.5%, but ranges keting approval for human-use pharmaceutical products; and an from 0% to 35% ad valorem. MERCOSUR currently is allowed to inter-ministerial decision against granting patents for polymorphs maintain 93 exceptions to the CET. Brazil recently used these excep- and second-use inventions. tions on some steel products. In December 2009, all MERCOSUR 10 Mike Godfrey, “Brazil Cuts Import Tariffs,”,10 August 2010. Commerce Quarterly Trade Bulletin, September 2010 | 05
  6. 6. How Washington State Can Help You Export The Washington State Department of Commerce provides free export assistance for Washington state companies, including client searches, export leads, and consultation on a variety of export-related issues. For export-related inquiries, please contact Mark Calhoon, Managing Director for International Trade, Inquiries on trade data and activities can be sent to: Washington State Department of Commerce Attn Spencer Cohen Research Manager 2001 Sixth Avenue, Suite 2600 Seattle, WA 98121 Phone: (206) 256-6100 Commerce Quarterly Trade Bulletin, September 2010 | 06