Sunday, July 05, 2015

The world has moved on from the quaint old EU

If you look at the latest package of DfID measures aimed at mitigating the migration crisis in Africa, we see a splurge in humanitarian measures of the type you're all fairly familiar with. You will see posturing politicians on Twitter announcing why this makes them proud to be British. It suits their vanity. Sadly they never stop to ask what happens when the money runs out. When you're adopting a sticking plaster strategy no money will ever be enough. You would think that a department for international development would know this.

But then it isn't just DfID who have a wrong-headed approach to aid and development. On the one hand we have the Ukip's of this world demanding a massive reduction in foreign aid and on the other eurosceptics who assume we can quit the EU and simply trade with the Commonwealth through free trade agreements. If only it were that simple.

Border tariffs are no longer the central obstacles to global trade. Global trade is more about the removal of technical barriers to trade, and negotiations are centred around regulatory convergence. Differing regulatory regimes create trade chaos, adding multiple layers of bureaucracy to the process. It is often said that less regulation would be good for business whereas what we need is more and better regulation shared by more partner nations. At the very least this eliminates the need for port inspections which leave trade open for theft, fraud and delays incurring demurrage and detention fees (over $70m annually in Ghana).

And of course if you have delays in the ports, you have long tailbacks, wage costs and warehousing capacity problems which halt production. In turn that results in the loss of contracts or damages a manufacturers credit facilities leading to bankruptcy and foreclosure. This results in a high turnover of companies popping up to service only one contact at a time with little in the way of business longevity, leading more and more untraceable fly-by-night companies exploiting the chaos, often introducing components into the supply chain which fail to meet international standards. The natural response to this is yet more inspections and delays.

To take one Commonwealth nation, Nigeria, it is said that the maritime industry alone could sustain the economy but not without massive modernisation. The road leading to the Lagos port, which handles nearly everything that Africa's biggest economy imports, is one of the most congested in a megacity whose traffic jams are legendary. Wide enough to accommodate only two lanes on either side, along it move the goods that Africa's top crude producer uses its huge oil receipts to buy - everything from designer wear to dried fish, champagne and shampoo. In the case of perishable or degradable goods from woodchip, coal through to foodstuffs it can result in a loss of of value or abandoned consignments.

And it's not just the roads that cause delays. Importers say that rules are not always followed, and officials can still hold back shipments while they await bribes. They've all got a scam going, from the man that wheels your trolley out to the senior customs officers. Nigerian authorities "inspect" 70 percent of cargo, compared with around 5 percent in the European Union.

Of course none of this actually matters if goods never reach their destination. Piracy is still a huge problem - and not just for Africa. Piracy has overtaken natural disasters as the leading cause for insurance claims in ASEAN states according to those in the marine insurance industry. While most claims are genuine there has been a disturbing rise in the number of ‘insider jobs’. Insiders may be members of the crew or even shipping companies themselves.

There is also the issue of antiquated dock equipment. For example, wood pellets exhibit two undesirable handling attributes. Due to multiple handling some pellets degrade back to dust which can block the cooling system heat exchangers resulting in engine overheating. The dust is also highly flammable and must be prevented from settling in the engine compartment. The implications of the loader overheating or catching fire extends far beyond the cost of damage to the machines.

Efficient unloading of wood pellets is crucial to maintaining a port’s schedule. Any delay means that a ship will miss tidal deadlines and incur additional high demurrage costs. An overheated conventional loading shovel takes 45 minutes to lift out of the hold in order to clean the heat exchangers and remove dust from the engine bay, then a further 45 minutes to put it back in. This has a significant impact on the productivity of the trimming operation so having the right wheeled loader is critical.

Then we get to regulations. Here is an illustration. Back in May, Chinese customs stalled Australian and South African coal deliveries that exceeded fluorine limits under the country's new quality regulations. Australian 5,500 kcal/kg thermal coal was sold to a Chinese cement producer and is understood to have been rejected by the local inspection and quarantine bureau. The cargo was later redirected to a buyer in Taiwan, and the South African 4,800 kcal/kg coal was sold to a Chinese trader but underwent a third round of inspections after failing the first two checks.

China's main economic planning agency the NDRC mandated that coal imports must meet quality standards for five trace substances - with mercury content of less than 0.6 microgram/gram (µg/g), arsenic below 80µg/g, phosphorous below 0.15pc, chlorine below 0.3pc and fluorine below 200µg/g. These are in addition to restrictions on ash and sulphur content of a maximum of 40pc and 3pc, respectively. The quality regulations took effect on 1 January and have raised waiting times, which have in turn increased demurrage costs and the risk of rejection at ports.

The rejections trigger a fresh wave of concerns in the Chinese import market. Buyers will take responsibility for the coal, because they are likely to have bought the cargoes on a Free On Board basis. While they have sought to minimise risks by requiring suppliers to offer guarantees on the five trace elements on a loading or discharge port basis, China relies on its national standards for the quality checks rather than the widely used international ISO and ASTM standards.

Many of the major testing agencies in Australia and South Africa do not offer checks based on the Chinese standards, although tests for China's standards are available in Indonesia with costs of 20-25¢/t already factored into prices. In addition, the longer shipping journey to China from Australia and South Africa will probably result in some coal quality degradation.

Here there is a clear need for a memorandum of understanding between these trading nations, agreeing to one standard and one inspection regime to facilitate trade. That in itself is no small undertaking. The introduction of such an agreement in a package deal (like TTIP) means that if one article fails to reach agreement, the whole package of measures are dropped. When a market as large as China is starting to make regulatory demand of its own for imports, there has never been a time where international agreements were more necessary. But they are not happening between the EU and China but between regulatory commissions and authorities at the level above.

Just securing an agreement with Japan's automotive industry to join United Nations Economic Commission for Europe (UNECE) would eliminate much of the regulatory divergence in the automotive industry. A comprehensive "trade deal" between the EU and Japan then becomes largely redundant. If we can work toward a similar agreement in electronics then again the EU is totally irrelevant.

Similarly the The International Air Transport Association (IATA) and (UNECE) has signed a Memorandum of Understanding (MoU) to strengthen their support to developing countries seeking to implement the World Trade Organisation (WTO) Trade Facilitation Agreement. All the bluster about the EU negotiating with other blocs is a mentality belonging to the last century, with global trade bodies now securing their own interoperability frameworks, leaving the EU far behind.

What this points to is the need for independent nations to be in at the very top tables arguing the case for the industries they have rather than taking a back seat and waiting to see what what compriomises the EU can come up with, in a bloc where nations will vote through measures affecting industries not even present in their own states.

Were we to leave the EU, we would be in the almost unique position of having first rate infrastructure, favourable trading conditions with the EU but also the freedom to negotiate individual deals that make our own industries more competitive. Our car industry may depend on it.

The future points to a model of aid for trade by which we invest not in schools and drinking wells in the middle of the desert, but in ports, roads and security. If we are to have a statutory minimum spend on aid then some of our defence spending in policing shipping lanes could very well count toward that to ensure goods get to market. In pooling our sovereignty and delegating trade to the EU we miss opportunities and fail to get the agreements we need.

Superficially, favourable tax regimes and low tariffs look attractive but the reality of trade tells another story. Multinationals can easily decamped from advanced nations in search of lower overheads and favourable tax regimes only to find the level of under-development and corruption is an overhead in itself.

As we can see, merely eliminating trade tariffs (which is not always desirable) is not enough. There is a long road to travel before we get anything like functioning global trade. In some cases, import bans are essential to helping grow key industries. Ghana has banned imports of Tilapia fish, estimating the ban will create about 50,000 jobs in the aquaculture sector of the economy, where young unemployed persons are being targeted. There's an immigration target met right there. Such industries are needed to stimulate a tax base so that African states are more dependent on the revenue from their peoples than oil giants. This is one example where EU "free trade" conflicts with other desirable global outcomes.

A humanitarian aid effort does nothing to mitigate the need for migration and slowing the flow is not going to come cheaply. The EU's answer is to put up fences and mount aid operations. It doesn't work. What we also don't need is the EU ploughing into Africa pulling down tariff barriers (as it has in Kenya) - and rather than package trade deals between blocs such as the EU TTIP, we're better off going for individual agreements targeted as specific industries, which are not only more effective but can be agreed upon in much shorter time frames resulting in more rapid dividends.

What is clear on both sides of the Brexit debate is that on matters of trade an international development we are not even past first base in the level of understanding. It's pitiful. Understanding all of this is essential to tackling the multifarious problems we face, not least immigration and asylum, and yet they're stuck in shallow debates about TTIP and trading blocs, blissfully unaware of how irrelevant the EU is to the process.

In reality, UNECE is the single market and the gateway to globalisation, yet it is seldom mentioned or monitored. The Brexit debate is mired by a little Europe mentality on both sides, to which the concepts we are talking about hereabove are entirely alien to them.

What is at stake here is the opportunity to add trillions to global growth, while solving many of Africas most acute problems and many of our own in the process. Meanwhile from the EU we get compromises, half measures and yet more vanity aid, while failing to address the very real and pressing issues - many of which are caused by the fundamental flaws in the EU's own DNA, along with its trade psychology that belongs to the middle of the last century.

Brexit offers us a real opportunity to to step into the modern world of globalised trading and to drag Europe kicking and screaming along with it. The federalist dream is dead. The global dream is only just beginning and we're not even in the game.