#ff00006Wisconsin Worldwide

#0000ffVolume 3, Issue 6: November 2002
E-Newsletter of the Division of International and Export Development
Wisconsin Department of Commerce
http://www.commerce.state.wi.us

#ff00005In This Issue:

• Lead Article – Watching Latin America
• Export Markets

-- Keep an Eye on Brazil
-- And Venezuela Too
-- Global Markets & "Shifting Patterns of Wisconsin Export Trade"
-- Canada: Some Good News
-- China: Growth Continues
-- Turkey: New Islamic Government

• Export News

• Export Events
• Upcoming Trade Shows & Missions
• International Business Information on the Web
• Contact Us
• Subscribe/Unsubscribe

Although the eyes of many of you may be focused on the Middle East, we ask you to take a hard look at a new family of problems facing Latin America. Over the past 15 years, Latin America was our fastest growing export market with exports rising over 360%. During this period, our exports to Mexico and Brazil rose by 708% and 699% respectively. At the end of 2001, Latin America took 11.6% of our exports while the Middle East took only 2.6%.

Since Argentina’s default on its debts last December, economic, political and financial problems have been rising in Latin America. Argentina is in a deep depression with no immediate relief in sight. In the past four years, Argentina’s economy has contracted by 20% - a staggering fall. The impact on our exports to Argentina is equally striking. In the first half of 2001 our exports were $31.4 million; in the first half of 2002 they were $8.6 million. In 1999, Argentina was our 19^th largest market; today it is our 46^th largest market.

Two other major countries are also at critical crossroads. Brazil, Argentina’s largest trading partner and the world’s 8^th largest economy, has elected its first left-of-center government in 40 years. Venezuela, the United States single largest source of oil imports is locked in political, social and economic turmoil of growing proportions. Smaller Latin nations are all impacted by the problems in these major countries of the region. Uruguay is trapped between Argentina and Brazil and its economy has been seriously harmed. Chile, too, cannot escape untouched without serious harm if Argentina and Brazil are both in economic crisis.

While we appreciate the importance of dealing with problems in the Middle East, we also need to think through our priorities. Latin America is at a crossroads. If we truly want a strong hemispheric economy, we need some very senior national attention paid now to the problems sweeping across the region. Remember, too, that 35% of U.S. oil imports come from Latin America and that Venezuela - not Saudi Arabia - has been our single largest foreign source of oil in recent years.

The October 27 election of Workers Party Candidate Luiz Inacio "Lula" da Silva with 61.5% of the vote marks a major milestone in Brazil, the rest of Latin America and the international community. President elect Lula went to great lengths during his campaign -- his fourth bid for the presidency -- to move his platform to the center while wooing business leaders and some of the country's most powerful, conservative politicians into his camp. For example, Vice President-Elect Jose Alencar is a prominent businessman. While most of the business community and investors would have preferred Lula's rival, Jose Serra of the ruling coalition, both appear willing to give the former union leader a chance at the helm of Latin America's largest country and the world’s eighth largest economy. What happens after the January 1 inauguration will be critical to Brazil, South America and the world trade community. The entire world should applaud if Lula can help close the wide economic gap between Brazil’s citizens while maintaining the macroeconomic gains of his conservative predecessors.

Lula faces no easy task. Ongoing concern about his possible rise to power among business and international investors coupled with economic depression in Argentina, Brazil’s largest trading partner have resulted in a variety of negative economic consequences. The Brazilian real was at 3.775 on October 28, a 38.7% fall against the U.S. dollar since the first of the year while the Brazilian stock market has fallen 29.5% during the same period. In addition, the Central Bank raised its benchmark rate to 21% on October 14.

Brazil has about $355 billion in public and private sector debt and Brazil must pay off $21 billion in foreign and foreign-denominated debt by December 31. Fortunately, only about $55 billion in Brazil’s public debt is owed to overseas financial institutions. Although Brazil falls in the general category of economies too large to let fail, the economic situation in Brazil will remain fluid in the coming months. If you have exposure in Brazil, or are likely to be taking on new exposure, you need to monitor events closely. Please feel free to call on the services of our office in Sao Paulo if we can be of assistance.

Social- political tension is continuing to rise in Venezuela. Inflation has doubled in the past year to over 28%, unemployment is now over 16% and GDP has dropped by 7.1% during the first six months of 2002 versus the same period in 2001. The Bolivar has lost 49% of its dollar value so far this year. There has been extensive capital flight and the Central Bank is now using an auction system to control dollar outflows. As long as world petroleum prices remain high, Venezuela can pay its bills. Should the price of petroleum fall sharply, Venezuela’s situation could become more-- problematic.

In 2001, global economic growth of 1.3% was the lowest in a decade. The International Monetary Fund’s (IMF) latest estimate for global growth in 2002 remains at 2.8% but the UN recently revised its estimate downward to 1.7%. Both organizations have lowered their growth projections for 2003 with the UN projecting 2.9% growth while the IMF is projecting 3.7%.

The downward adjustments reflect lower estimates of U.S. and European economic growth. On October 30, the IMF further lowered its estimate for Eurozone growth in 2002 to 0.75% and lowered its 2003 Eurozone growth forecast from 2.3% to 2.0%. Industrial commodities, which are usually a good indicator of the economic future, showed strong signs of recovery from depressed 2001 prices in early 2002 but have retreated in recent months.

At the October Wisconsin Economic Summit, we presented a paper covering the shifting patterns of Wisconsin’s exports and export markets over the past 15 years. We think you may find it useful in understanding today’s global markets. To see the study, click here .

The IMF has raised its growth projections for Canada – our largest export customer - by a full percentage point above its April 2002 estimate. Canadian growth exceeded 5% over the first half of 2002 and third quarter estimates are for 4% growth. Employment growth has been strong (386,000 new jobs in the first 8 months of 2002) and manufacturing shipments are up 7% since the start of the year as opposed to only a 1.4% increase in the U.S. The Bank of Canada has raised interest rates three times this year to 2.75% because of strong economic growth.

On the negative side, world mineral prices remain low, which have weakened the Canadian dollar and reduced demand for mining equipment. Extreme drought over a two-year period in Canada’s Prairie Provinces (and it the neighboring U.S. northern plains as well) has had serious regional effects. Canadian wheat production has fallen 25% this year to levels last seen in 1974 and barley production has fallen to late 1960’s levels. Canola yields are down and farmers have been selling livestock at distressed prices because of the lack of pasture and rising feed costs. Soybeans and oats, however, are holding their own and durum wheat is doing well. For additional information, please contact our office in Toronto.

Latest government projections show Chinese growth of 7.9% and retail sales growth of 8.7% over the first nine months of 2002. Deflation continues, with consumer prices falling 0.8% over the same period. As in the past, we wish to caution that official Chinese figures tend to be very optimistic and that there are serious problems in the banking sector where up to 45% of all loans are nonperforming.

According to the Chinese Government, 411,495 foreign companies have been authorized to operate in China as of August 2002. Foreign firms now pay almost 20% of all national taxes, employ about 23 million people and are responsible for just over 50% of all China’s exports. China is now the world’s fourth largest industrial nation after the U.S., Japan and Germany. China has recently surpassed Japan as the world’s second largest market for personal computers and KFC has opened China’s first drive-thru in Beijing where 12% of the population now own automobiles.

The moderate Islamic religious Justice and Development Party (AK) has won a clear victory in Turkey’s November 3, 2002 national elections. The party has will have 363 of the 550 seats in the new Parliament. It is unclear how the Turkish army, long the guarantor of secular political national leadership, will react in the months ahead. AK party leader Recep Tayyip Ergodayn is presently banned from holding office based on a previous conviction for inciting religious hatred. Turkey’s constitutional court will be making important decisions about his status in mid-November. If your are active in the Turkish market or are contemplating export efforts, you should keep an eye on political developments.

Keep a close watch on the ongoing labor dispute between dockworkers and the Pacific Maritime Association. The Association’s September 29 lockout of dockworkers forced the closure of 29 U.S. West Coast ports. Typically, about $1 billion in goods enter the U.S. each day and any lengthy strike could have profound effects on the economies of East Asia, the United States and the world at large. Accordingly, President Bush invoked the Taft-Hartley Act on October 8 to reopen the ports after being officially informed that there was no indication that the parties "will resolve the dispute within a reasonable time".

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EU Expansion

On October 20 Irish voters endorsed the expansion of the European Union (EU), with 63% voting in favor of expansion. This was a reversal of an Irish vote of only a year ago. The stage is now set for the expansion of the EU from 15 to 25 states by 2004. This will enlarge the EU’s common market from 400 to 475 million people but add only about 5% to its overall wealth. New members will include Estonia, Latvia, Lithuania, Poland, Hungary, the Czech Republic, Slovakia, Slovenia, Malta and Cyprus.

Of course, problems still remain with the proposed expansion. Turkey has threatened to annex the Turkish north if Cyprus joins the EU and Greece has said it will veto the entire enlargement if Cyprus is left out. The EU has yet to set a date for NATO member Turkey, but has been talking about setting a target date of 2007. The EU will also face a good deal of internal strife over agricultural issues, particularly the level of farm subsidies provided to new members. Community leaders Germany and France, who are on opposite sides of this volatile issue, recently agreed to defer discussion of changes to the EU’s common agricultural policy.

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EU – US Trade Relations - Foreign Sales Corporations

In late August, the World Trade Organization granted the European Union (EU) the right to impose $4 billion in sanctions against the U.S. because of past U.S. tax breaks to U.S. exporters. The EU has subsequently published a list of U.S. products that would be affected if and when sanctions are imposed. To see if your products are affected (listed by harmonized tariff code), go to: http://europa.eu.int/eur-lex/en/dat/2002/c_217/c_21720020913en00020015.pdf. If you don’t know your products tariff codes, you can check with your shipping department, your freight forwarder or look up your products at http://www.census.gov/foreign-trade/schedules/b/#browse. For our past coverage of this issue, see our January, March, May, September and November 2000 issues as well as our September and November 2001 and September 2002 issues.

The taxbreaks in question amount to about $100 billion annually to U.S. corporations. Both political parties would like to see legislation that will provide a similar benefit to U.S. exporters. Unfortunately, all proposed legislation to date would provide benefits to very different groups of companies than those which receive benefits under the existing rules and would also have important economic impacts on foreign corporations operating within the United States. As we understand it, the Congress has been all but paralyzed from action on this issue by one of the nastiest behind the scenes corporate lobbying battles in recent Washington history.

When someone mentions to you the negative aspects of global trade, provide them with the following: Forty years ago, per capita income in Asia was below that of Africa and the poverty rate was 65%. Infant mortality at birth was 14.1% and life expectancy was 41 years. Today Asia’s per capita rate is double that of Africa, the poverty rate is 17%, infant mortality at birth is 4.8% and life expectancy
is 67.

In the ongoing, decade long political fight to reform Japan’s banking sector, recent (and long-overdue) government proposals have been watered down in the face of powerful political opposition. The importance of finding a solution to the problems of Japan’s banks was apparent in early October when the Japanese stock market fell to 19-year lows just after the end of the Japanese financial half-year. Deflation continues into its fourth consecutive year in Japan and the number of unemployed has climbed for 18 consecutive months. Analysts expect a fall in the value of the Japanese yen in view of the domestic situation and a downturn in Japanese export sales.

The fall in stock prices has also created concern over the health of Japan’s life insurance industry, which, like Japan’s banks, is a major holder of stocks and bonds. Standard & Poor’s recently downgraded five of the life insurance industry’s leading companies. The life insurance industry is the largest shareholder of Japanese bank stocks, and the banks, in turn, are large buyers of the insurers’ subordinated loans. Insurance companies are also losing massive amounts of money because present yields on investment are less than promised returns to policyholders.

Pay close attention to official warnings regarding travel to Indonesia. At present, American citizens have been asked to defer travel to Indonesia. There had been strong indications of terrorist presence in Indonesia prior to the October 12 Bali bombing, Americans have been specifically targeted, and the U.S. Embassy has ordered all of its non-essential personnel out of the country. President Megawati is expected to be granted special powers to crack down on terrorism and Minister of Trade and Investment Rini Soewandi is planning visits to Indonesia’s major export markets in an attempt to ease fears.

An economic slowdown, growing competition from mainland competition and a huge local government deficit has led Standard and Poors to signal that it might lower its double-A minus rating of the Hong Kong dollar. This year’s government deficit of $8 billion is now equal to 5% of output and the government has only four options – cut spending, increase taxes, further reduce reserves or devalue the Hong Kong dollar. The dollar has been fixed in value against the U.S. dollar at 7.8 to 1 for almost 20 years.

On September 30, the Mexican government placed a new, plastic 20-peso note in circulation. The plastic note will replace paper notes, is more durable and more difficult to counterfeit. Australia was the first to introduce plastic notes in 1988; some 20 countries around the world now use plastic notes.

On September 30, Dun & Bradstreet Israel announced that 17% of Israeli companies are currently facing the threat of halting operations. Some 30% of all Israeli companies are at the highest risk of danger and have difficulty paying creditors. Only 30% of all Israeli companies are rated at minimum risk. Just over 50% of all firms in the food, paper, printing and wood industries are rated high risk, as are 26% of construction contractors. The strongest firms are clustered in the electronic components, chemical and fuel sectors. Companies in the tourist sector have been devastated by the lack of tourists since the breakdown of the peace process and the renewal of hostilities two years ago.

The situation in the Palestinian areas is much worse. Since the start of the Second Intifada in October 2000, the Palestinian economy has lost the equivalent of half of its GDP, unemployment has increased by threefold and poverty has risen substantially with more than two thirds of Palestinian families now living below the poverty line. The International Red Cross is now providing food aid to 1.5 million Palestinians. On November 5, Prime Minister Sharon’s government announced that national elections will be heldon January 28 after his government barely survived three no-confidence votes in the Knesset.

In October, the conservative judiciary closed down the Iranian National Institute for Research Studies and Opinion Polls and announced that it would take its director and the head of the Iranian state news agency to court. The reason for these actions was the September 22 release to the public of a survey commissioned by the reform-minded Iranian Parliament. The study found, inter alia, that: 74% of all respondents over the age of 15 supported dialogue with the United States and that 45.8% of all respondents believed U.S. policy towards Iran was "to some extent correct".

Ecuador's Reventador volcano erupted on November 3, blanketing the capital of Quito and disrupting the country's transport system. The 11,775-foot high volcano is located 59 miles from the capital.

November 14 Doing Business with China Workshop, Madison International Trade Association / UW Madison Center for International Business & Research.

November 20 Doing Business with Mexico, Waukesha County Technical College, Pewaukee; see http://www.nafta-asociados.com/

Western Canada's premier agricultural show, Agri-Trade is the venue to explore innovative farm and livestock products. With more than 70,000 visitors from western Canada, this is an excellent opportunity for agricultural industry suppliers to gain visibility and meet potential partners. Catalog show and matchmaker appointments options available. For a full list of Wisconsin Department of Agriculture promotions, go to: http://datcp.state.wi.us/mktg/business/marketing/international/services/pdf/calendar.pdf

#ff0000All Across Canada - We're There for You

#ff00005International Business Information on the Web

We do our best to provide you with free international trade information available in our International Business Internet Guide

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at http://www.commerce.state.wi.us/IE/IE-Int'lGuideForBusiness.html . The guide is now in its fifth edition after being expanded and updated this summer.

You may also be interested in the U.S. Department of Commerce’s new international electric marketplace at http://www.buyusa.com/. Free Internet listings are available for qualified Wisconsin exporters and the site has a wealth of other features including trade leads and market research.

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