Re-shoring issues may slow Asian growth

In any discussion on the economics of global trade the opposing camps rarely deal with the impact that shifting foreign trade patterns can have on socio-political issues, not just for the present but, more disturbingly, also for the future. One of these dichotomous debates is the off-shoring versus re-shoring manufacturing issues currently being exploited by the American presidential candidates. A key issue, however, that could decide if the re-shoring back to the homeland will outvie the off-shoring trend of recent years will be logistics, by which I mean all the forces that can impact the global supply chain. Some of those forces are impossible to foresee accurately but are, nevertheless, highly potent, while others are of a more sinister nature. These include natural calamities, fears over rampant intellectual property theft and ubiquitous, staggering corruption.

Off-shoring, of course, is nothing new. It has been part of the global trade scene for over 100 years but with one big difference. In the past, when manufacturing centres were set up in another market, they were confined largely to industrialized, developed countries. Over the last few decades, however, there has been a huge shift of such jobs to developing countries, or what was called the Third World. This has led to substantial job losses in countries where businesses outsourced to cheaper countreis like China. In the 10-year period, 2000-2010, America lost nearly 6 million manufacturing jobs, many to off-shoring. The adoption of JIT delivery techniques, however, over the last two decades or so, has exposed the vulnerability of the global supply chains to natural calamities like earthquakes and floods. Other risks yet to test the JIT model include pandemics, catastrophic crop failures and political upheavals.

These concerns are are now encouraging global corporations, in particular, to redesign their global supply chains to make them more resilient to unquantifiable but serious shocks. This means re-shoring back to the mother country or at least near-shoring to eliminate the threats to JIT supplies posed by natural calamities,  which could worsen if global warming accelerates.

The prime reason driving the trend to off-shoring was and remains the much lower production costs in developing countries. That advantage, however, has diminished as costs in these countries, especially China, have risen sharply to close the costs gap. In 2005, for example, Chinese production was 31% cheaper than in advanced nations, according to one group's calculations. By next year that gap is likely to be only 16%. Add on the logistics costs of shipping half way around the world, which could be 5-10% of sales values, and in many cases it would make sense to re-shore at least some production back to the homeland country.

Global corporations are now considering a change of tack on off-shoring of manufacturing, which if realized could slow development in poorer countries. According to an online survey by Boston Consulting Group, some 37% of manufacturers with sales over $1 billion and about half of those with more than $10 billion of sales plan or actually are considering bringing production back from China to America. Other corporations, however, are choosing to switch from China to other, cheaper sources in the Far East, but these countries are just as prone to natural calamities , like the floods in Thailand this year which seriously hit global businesses geared to JIT component supplies.

There are many other reasons driving even medium-sized businesses to re-shore back to their homeland, and possibly others yet to be tested. These include serious concerns over staggering intellectual property theft in China, poor quality, demands for large orders which imposes higher costs on importers and thus negates the JIT principles, unreliable supplies and long delivery times. The last of these places importers at a disadvantage to nimbler, locally-based producers, able to react more quickly to changes in customer demand.

Lest it be thought otherwise, outsourcing is not inherently deleterious to the global community. Far from it. When corporations outsource to cheaper countries they do not do so just because labour costs are much lower. They also look to develop sales opportunities in new markets, which does not only enhance their own earnings. Germany, for example, has done well from its exports of luxury cars to China because the rapidly-growing Chinese economy has created many Chinese millionaires, a phenomenon greatly helped by foreign countries outsourcing production to China. It is a classic example of how growing global trade is of mutual benefit.  Perhaps the greatest single benefit of outsourcing has been China's major role in helping to keep the lid on Western inflation rates.

Never underestimate customer power 

The rush to outsource, however, should not be based purely or largely on lower production costs without careful consideration of all the relevant issues. If customer considerations are ignored the results could be dire. In Britain, many functions have been outsourced to Indian call centres. This has led to customer backlash for the simple reason that customers had difficulty understanding the Indian accent. Now, companies like BT, Britain's biggest telephony/broadband supplier, is re-shoring all its call centres back to
Britain before year's end.

Businesses may feel dismissive about future, dimly perceived political threats arising from their off-shoring activities. "Our business is business, not politics," they might declare, but they would be crass to ignore the latent risks from political upheaval, even within their homeland countries. When people have had a taste of high living standards, whether earned or not, they don't like losing it through persistently high and rising unemployment. In such circumstances, scapegoating of multi-nationals could arise, and governments could be forced to re-evaluate how they could arm twist companies to keep jobs in their own countries. Worse still, perhaps, people-power could lead to crippling repercussions for off-shorers through widespread boycotting of their goods.

In a savage indictment of a long-term stagnant economy, Japan's young, unemployed graduates are a disturbing pointer of what could await other advanced, industrialized countries. In a country of 127.8 million people the suicide rate is 24 per 100,000, one of the world's highest, and it appears to be linked to socio-economic negative factors. Data analysed between 1985-2009 found that suicide rates were significantly correlated with unemployment rates. About a third of the suicides were in their twenties, including many graduates seeking jobs unsuccessfully.

Pundits are often fond of mouthing mantras like the need to improve maths and science among the middle-skilled and medium-waged occupations, but that is easier said than done and try telling it to the well-educated Japanese graduates still looking for jobs after years. Corporations that ignore these warning signs risk unimaginable consequences.
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How Mitt Romney could threaten global logistics

Just as politics and economics are often deeply entwined so, too, politics can impact logistics for better or worse. That scenario could soon be tested after America's presidential elections later this year if the republican candidate, Mitt Romney, wins the presidency. Such a victory could have unfavourable, seismic implications for global logistics, not because Romney is inexperienced in smart business that makes use of morally questionable tax havens like the Cayman Islands, (his personal wealth has been put at between US$190 million- $250 million) but because his foreign policy nostrums have an almost xenophobic, pugilistic air.

Among his reportedly pugilistic posturings is a promise to launch a US-Israeli war with Iran if the latter continues to develop its allegedly nuclear weapons capabilities. He has also described Russia as the number one geopolitical foe and in the primaries he vowed to start a trade war with China. As if that were not enough he wants to extend the war in Afghanistan until the Taliban are defeated.

Such rhetoric is akin to the virulence of America's hard right evangelicals on the make, to whom he looks for support, and as a Mormon Romney's theological naivety has much in common with the evangelicals. Both are rooted in the belief that America can do no wrong owing to their exceptionalism. Both have parallels with Israel's 'chosen race' belief and, indeed, Romney has a long-standing, close relationship with Israel's Benyamin Netanyahu. But playing the Israel card may just be Romney's way of soothing any suspicions his evangelical base may have.

Romney has surrounded himself with advisers like Eliot Cohen, the man who wrote the forward to Romney's foreign policy manifesto and who wrote that Saddam Hussein not only helped Al Qaeda but developed weapons of mass destruction. Such a monstrous lie, however, does not seem to have tarnished his image in the Romney camp.

No austerity for the military

Romney is campaigning on an austerity ticket but with one big difference. Reportedly, he wants to grow the Pentagon budget so fast that it will reach 4% of GDP, a huge hike over the increase under George Bush's tenancy. By 2016 his military spending would be close to 40% more than budgeted under Obama, a level not seen since the cold war.

Such a huge increase can only be financed in two ways: higher taxes and spending cuts, particularly in the welfare budget. But Romney has already promised tax cuts so the burden will fall heavily on those least able to defend themselves: the old, the poor and the ill, through welfare cuts. This seems curiously at odds with the Christian ethos of righteous living, which must include feeding His sheep, but more of that later.

Some believe that once in office Romney would mellow his pugilistic posturings and be a far more traditional republican than George Bush but what if they are wrong? How could that affect logistics costs and does he have any justification for his dubious foreign policy stance that almost demonizes certain countries?

Trade is the handmaiden of prosperity and prosperity the lasting foundation of peace. Any talk of a trade war with China, therefore, can only be irresponsible and unstatesman like. China is certainly no angel in foreign trade, its record on intellectual property theft, in particular, is a running sore that must be excised. But the American electorate should not lose site of the facts that not only has China kept world inflation down it has helped save America from serious economic upheaval by purchasing American IOUs.

War and the American debt problem

America's total public debt, including intra-Government debt, is put at $15.7 trillion, or a disturbing 102% of GDP. Of the $10.95 trillion of debt held by the public, nearly half, or $5.1 trillion, is owned by foreign investors, the largest of which are Japan and China, with just over $1 trillion each. Without Chinese bank rolling of the American government debt it would be difficult to see how America could keep its interest rates low. There appears to be a correlation between America's soaring debt problem, $500 billion a year since 2003, and the prosecution of costly overseas wars in the Middle East. The Iraq war has certainly cost America over $1.5 trillion and the Afghanistan intervention is estimated at $2 billion a week, and that does not include the aftermath costs of dealing with the permanently maimed, the widows and orphans.

If Mitt Romney had any idea of how geo-logistics* can make or break combatants in a land ideally suited to guerrilla warfare he might think twice about ramping up military effort there at a time when America's finances are shaky along with most of Europe's. As for demonizing Russia he may care to reflect that Russia has agreed to let the coalition forces in Afghanistan send their military baggage home by rail through Russia. Such an act will save Britain alone £4 billion in military hardware write offs because the cost of airlifting the lot to western Europe would exceed the value of the hardware. By recalling a far greater debt the free world owes Russia, the appalling sacrifices the Russian peoples made in ridding the world of Nazi tyranny, Romney might moderate his political nostrums, but that would require a comprehensive grasp of modern history.  
China and Russian bashing, therefore, is both unwarranted and unstatesman like.

Dangerous attitudes over Iran

What of Romney's attitude to a Judeo-Christian attack on Iran's nuclear capabilities and the implications for global logistics? If carried out, a worst case scenario would be to plunge the world into a depression, hardly the best time given the West's current flirtation with recession. The closing of the Hormuz Strait, for example, as an Iranian retaliatory measure, could send already painfully high oil prices soaring and that alone would cripple global logistics. And if attacked it would be a blatant act of war and any riposte against Israel's nuclear capabilities would be justifiable by the standards of warfare. Not surprisingly, perhaps, there was never any talk of chastising Israel when it embarked on a nuclear armament programme. Is it surprising, therefore, that Iran feels threatened by Israel's nuclear arsenal and might want to have its own nuclear weapons as a safeguard. After all, Israel has bombed Iran's nuclear facilities before. Israel, however, is more politically stable than Iran, if somewhat too bellicose at times, and the latter would be wise to eschew nuclear weapons if, indeed, it is pursuing that path.

Politics has always been a low profession but it becomes more dangerously so when leaders espouse theocratic elements, a good reason why America's founding fathers ensured that state politics should be purely secular and unfettered by theological clutter. The problem is, however, that political mountebanks could woo and win over the theologically naive. The American people are basically good at heart and the world owes an indelible debt to their sacrifices for democracy. But many Americans, especially in the Bible Belt, are insular and gullible and it is these traits which in the hands of a manipulative president could become a dangerous weapon.

The price of freedom may be eternal vigilance but that vigilance must be righteously minded. Can one say that of Mormons and the more virulent scions of hard right evangelicals? Quite apart from the touchingly naive origins of Mormonism, their pioneering days were not without blemish. In the relatively peaceful 1857-58 Utah Mormon war, leaders of the local Mormon militia ordered the Mountain View Meadows massacre of civilian emigrants merely passing through Utah, hardly a saintly act, latterly or otherwise. As for the hard right evangelicals, could it not be said that their TV evangelist leaders' true God is mammon? They have exploited generous American tax law which grants tax exemptions to religious movements. In other respects, however, they run their operations like well-oiled businesses and have amassed huge property fortunes. Can man serve both God and mammon? By their fruits ye shall know them and to the hyprocrites and false prophets the Nazarene had this to say: "I never knew you: depart from me ye that work iniquity." Perhaps the next time that the plate comes around with behests to give generously because the cost of maintaining the fleet of corporate jets is soaring the gullible might question if they are backing the right horse.
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*How geographical issues can impact logistics.   

Systemic corruption rapes Ireland's fair land

In the global corruption stakes Ireland is not a front runner but arguably it leads the field for allowing corruption and cronyism to bring a country so low so quickly with near disastrous, environmental consequences. The economic consequences of reckless bank lending to beguiled, naive mortgagees are bad enough as Ireland once more sees its brightest and best young generation forced to emigrate for lack of work, leaving behind broken-hearted parents but, according to Prof. John Sweeney, president of An Taisce, (Ireland's National Trust) the rape of the environment brought on by the economic crisis could dwarf that crisis through an international energy shortage, ecological collapse or runaway climate change.

Ireland is still a land of stunning, melancholic beauty, where lakes, rivers and the seas attract anglers and tourists from around the world, so is the environmental risk fuelled by corruption at all levels in the planning process and national government as serious as An Taisce claims and can the economy be turned round quickly enough to avoid decades of stagnation?

Economics will not be mocked

On the second point the jury is still out but the lesson is clear enough. When greed bestrides the saddle the devil will finally exact its merciless due. Venal politicians often trump economics but ultimately economics will always trounce politics, leaving in its wake shattered, bewildered, ordinary folk least able to defend themselves from the worst excesses of intractable, casino-style mercantilism, whilst the catastrophe's architects enrich themselves.

The EU and the IMF have done about as much as they can to ease the burden on Irish taxpayers by cutting the interest rate and repayment terms on the Euro85 billion bailout from 5.8% to 3.5-4% and extending the repayment period from 7.5 years to 15 years, which according to Irish officials will save the Irish taxpayer Euro600 million to Euro700 million a year. As part of the agreement to this revised deal the Irish government drew up an austerity programme detailing four years of tax rises and spending cuts.

The potential problem with austerity programmes is that it could reduce rather than raise economic growth and so leave a country less able to repay its international debts. Reneging on those debts, however, is not a sensible option. If nations are not chastised for their fiscal delinquency then they will never learn from economic history and, like Greece, are likely to become recidivist sovereign debt welchers, par exellance. Greece is a classic example of allowing political aims and endemic corruption to override economic good sense, and like Ireland, when adopting the Euro currency, it was like catching a falling knife. Both countries could not adjust their own interest rates to cope with changing national fortunes while at the same time they were allowed to borrow at ludicrously low interest rates which fuelled the Irish and Greek property booms.

Nemesis was not unpredictable

As in America, the unsustainable Irish property boom, fuelled by cheap credit and corporate greed, was the country's economic nemesis but it could not have been realised without a scandalous disregard of financial good governance, which was certainly not confined to Ireland. German banks, in particular, were only to eager to lend to Irish banks to stoke the housing and commercial property boom. But there is something in the Irish Psyche which loves a gamble but when the gamble involves borrowed money on a national scale then it becomes a potentially disastrous, destabilising force. That, however, does not mean that Joe public should be treated contemptuously simply because Joe public is, by and large, untutored in economics. They look to those they voted into power for good governance but the elected have betrayed them for their own venal ends.

There was nothing opaque and unpredictable about the growing banking storm in 2007. As I warned in print* five years ago: "The Bank of England's rate policy since being spooked by the dot com bust six years ago, aided by overly eager banks to lend irresponsibly, is a major cause of dangerously high national indebtedness. The banks and credit card companies may well pay a high price for their rapacious stupidity through record numbers of strapped consumers seeking voluntary insolvency deals." If a mere, hack journalist can foresee these events then readers can be assured that Governments, their advisers and irrepressibly greedy financial institutions also saw it but to their indelible shame did nothing to avert it. But in Ireland's case it took in far more than self-serving financial institutions on the make. It also involved corruption on an unimaginable, unprecedented scale in the property planning process.

In the State of the Nation, a Review of Ireland's Planning System, 2000-2012, the National Trust for Ireland said: "It is now clear from the recent publication of the final report of the Mahon Tribunal that together with a failure of the regulation of the financial sector during the 'Celtic Tiger' property bubble there was a catastrophic and systemic failure of the planning system which was characterised by endemic corruption, lack of transparency and marginalisation of voices that tried to draw attention to inherent weaknesses."

Environmental issues could dwarf economic crisis

Prof. John Sweeney, president of An Taisce, said on April 12, 2012: "In carrying out our work in the planning system An Taisce's purpose is not blinkered opposition to development but opposition to blinkered development. The lesson that must be learnt from the 'Celtic Tiger' era is that the persistent marginalisation of questioning voices weakens our democracy, economy and our society. Without greater perspective and even handedness to ensure we tread more lightly on the Earth we become more and more vulnerable to systems failures -- any of which could dwarf the current economic crisis such as international energy shortage, ecological collapse or runaway climate change."

A report by Mr Justice Mahon exposed endemic and systemic corruption and cronyism at the heart of the Irish planning system and which reached the highest levels of government. "There is no doubt that the systemic failure of planning in Ireland helped inflate the property bubble, leaving in its wake a great deal of poor quality development , reckless over zoning, chaotic sprawl, a legacy of 'ghost' developments and widespread environmental degradation," he said. Of particular long-term concern is 'locked-in' long-term costs of high dependency on greenhouse gas emissions. "The reality is that Ireland is now reaping the devastating consequences of those who promoted development-at-all-costs and seismic miscalculations," he added.

The legacy of profligacy

The profligacy of the 'Celtic Tiger' era has bequeathed an insidious legacy of very high per capita greenhouse gas emissions, significant water quality deterioration, a crisis in biodiversity and nature conservation, consistent breaches of EU law and a chronic over dependence on imported fossil fuels, mainly oil, storing up major costs for the future.

Perhaps purblind, An Taisce  was arguably too critical of out-of-town mega stores which research shows that 1.4 jobs are lost in town centres for every new job created out of town. According to one US study a general failure on the part of mega stores to trade with local suppliers and recirculate money back into the local economy sees a net loss of at least 150 jobs for each new out-of-town mega store constructed. But this seems to ignore that it is not just all about jobs. Large, out-of-town shopping centres are logistically more efficient than deliveries to many, small in-town shops, and by extension more benign to the environment. They are also cheaper and so allow shoppers to save money that could be spent elsewhere in the economy and so accelerate money's circulation.As regards failure to trade with local suppliers that is something that could always be remedied, at least in part, by the willingness of local suppliers to use the law of comparative costs in their favour.

No good governance --- No solution

Dire though the banking crash in Ireland is, the country will recover. Its well-educated, industrious, youthful workforce suits the country well for attracting high, value-added industries like consumer electronics, pharmaceuticals and even forklifts, albeit encouraged by a benign corporate tax rate which other EU member countries would like to see changed. But emigration of the country's brightest and most entrepreneurial is a worry, for Ireland can least afford such losses if it is to prosper and repay its loans.

Banking establishments, as Thomas Jefferson warned, are more dangerous than standing armies but if that is so then venal politicians and corrupt officials everywhere are their willing harlots and recruiting sergeants. Gelding both parties would go far to preventing a recurrence of the worst economic crisis to befall Ireland since the 1930s depression. The problem is how to do it, for politics, business and honesty are never easy bedfellows.

A good start would be a yes vote in Ireland's referendum on the EU fiscal pact on May 31. To give it its full title, The Treaty on Stability, Coordination and Governance in the Economic and Monetary Union, a yes vote would allow Ireland access to the Eurozone's future permanent bailout fund, the ESM. The pact's key word must surely be "Governance". Two thousand years ago a great publicist opined: "Without charity I am nothing." Could it not be said today that "without good governance we are undone"?
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*Warehouse & Logistics News, London, February 1st, 2007

Debt and logistics defeat Britain in Afghanistan

Politicians and the military castes rarely have a firm grasp of economics and the impact that warfare can have on national finances. But a firm understanding of economics without a similar grasp of logistics is dangerously incomplete when the war trumpets beckon. Nowhere is this more obvious than in Afghanistan, where an 11-year war has humbled the coalition forces, including Britain, despite their overwhelming fire power against the Taliban. The reason is that the geo-logistics* have worked tremendously in the Taliban's favour. It is a war that will probably enter the annals of British military history as not only an unpopular war but one that cost so much and achieved so little.

Politics often trumps economics when calling on national finances but it is economics that will ultimately smite politics with a rod of iron and leave the people's aspirations dangerously unfulfilled. This scenario is now unfolding throughout Europe and America as years of debt-fuelled growth, often helped by war, and irresponsible fiscal governance come home to roost.

It could be reasonably argued that since losing an empire Britain has continued posturing on the world stage as though it were a world super power. But punching above its weight has dire economic consequences. Just as Government debt allowed Britain to finance foreign wars since the establishment of the Bank of England in 1694, and along the way helped create the world's greatest empire, war-created debt finally became the empire's nemesis, forcing the sale of many overseas assets, years of austerity and taking on of American loans that took decades to repay. Debt is a great instrument for expanding economic growth but it is not to be treated insouciantly. Such disdain, at all levels, ever since World War 2, now drives nations finally to  realize the consequences of ignoring soaring debt and good economic governance.

So how come that a far off, arid land that most people might have difficulty locating on a world globe could humble not just Britain but the NATO coalition forces and the world's leading super power, America? Military logistics is not just about controlling the supply chain effectively to deliver all that is required to the war theatre at the right time. Britain's own army logistics corp, supported by centuries of experience, does a fine job delivering the goods, despite the lamentable record of an incompetent Ministry of Defence that has cost taxpayers billions of pounds. Logistics is also about how the chosen battlefield can be used to degrade an enemy's military ambitions.

Logistics favour the Taliban

As previously pointed out in my blog: "Logistics will be Britain's Afghanistan calvary," Afghanistan is a harsh, arid, unforgiving land, prone to temperature extremes, two thirds mountainous and honeycombed with caves -- ideal guerilla warfare terrain. It is this geography, admittedly helped by surrounding countries' suspicions of the occupying forces, which is the Taliban's greatest weapon, a weapon that in per capita terms costs the coalition forces on the ground at least 10  times as much as the Taliban.

The financial costs of the Afghan war beggar belief, and even more tragic is that the hoped for return for the outlay has not and will never be realized. As the former British ambassador to Afghanistan, Sir Sherard Cooper-Coles, explained to the House of Commons, the only solution to the Afghan problem can be political one. He believes that the Afghan war is costing Britain £6 billion a year but the British Government claims  that between 2001 and 2010 the cost was only £11.1 billion, even though it now admits that the Afghan war is absorbing 30% of the MoD's £35 billion annual budget. The real figure will be much more and, of course, will continue to rise for many years after the last of the coalition troops have left to pay for the maimed, the war widows and their children.

Just how Afghanistan's terrain can send the cost of logistics soaring can be gauged by the coalition's exit plans for the 2014 pull-out, which would have been very much more if Russia had not decided to allow NATO to fly all its 140,000 troops and supplies to Russia for onward journey by rail to western Europe. Until now, much of the coalition's supplies have been flown into Afghanistan at a cost of about US$14,000 per tonne. A railway solution through Russia would have cost only US$500 a tonne. Using a land route for bringing all the military supplies through the passes to Karachi would have been too risky so the daunting prospect of a new Dunkirk lay ahead. Airlifting all the supplies to western Europe would have cost so much that much material would have had to be abandoned. In Britain's case that would have meant leaving £4 billion worth of military kit behind. If that had been lost, one British officer opined, "Without it we will not recover for a generation." NATO and Britain, in particular, has much to thank Russia and President Putin for their accommodation, but even so the exit cost will be staggering and the withdrawal has been described as the biggest logistical challenge for the military since the second World War.It will involve moving 11,000 cargo containers and 3,000 vehicles.

Armaments and wars currently cost the world an estimated US$1.479 trillion annually, but the true costs of anything are the alternatives foregone. Such a staggering sum could have provided much hope rather than despair for the impoverished, sick and oppressed. Mistrust of one's neighbours is, perhaps, mankind's greatest tragedy. It is also humanity's most damning indictment.
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*How geography impacts logistical operations

Somali pirates face nemesis?

If Press reports are true then at long last Somali pirates face their nemesis from a military solution that this writer has been advocating since December 2008. It seems that an Anglo-French naval force will attack pirates' camps and target their boats before they put to sea. Such action would be legal, says Britain's Attorney-general, Dominic Grieve.

Such an approach makes sense because hitherto naval action was only taken at sea when fast pirate skiffs were attacking vessels or had hijacked them, and when pirates were captured they were often released to resume their depredations because no country wanted to assume responsibility and costs for bringing them to trial. If pirate vessels cannot leave their ports then they cannot hijack any more vessels, but it is not enough to simply blockade them. The Anglo-French fleet cannot stay indefinitely offshore so that is why fishing vessels large enough to act as pirate mother ships and their skiffs must be sunk in their lairs and their fuel and repair facilities levelled. But the force should resist any land engagements and leave that to the African Union peacekeeping troops already in Somalia. There is also the thorny problem of several hundred captured seafarers languishing in squalid conditions. The MV Iceberg, a ro-ro vessel, has just past two years in captivity, the longest ever, and of its multi-national crew of 24 one has committed suicide. Tragically, too, innocent fishing vessels would be lost.

'Calculated risk' approach was not cheaper

But why has it taken so long to reach this conclusion, a delay that has seen the murder of over 40 seafarers, the torture of many more and costs to the global economy of between US$7 billion and US$12 billion a year? There were, after all, historical precedents like the bombardment of Algiers in 1816 and 1824 which successfully ended the scourge of Barbary pirates permanently.

There were, understandably, fears by international umbrella unions like the ITF that the arming of merchantmen would place crews at greater peril, while insurance companies and even regional governments fretted over the imagined illegalities of arming crews. Yet it was plain to see that all the industry's attempts to resolve the issue "seemed doomed to failure", as I reported in my September 2010 blog, "Somali piracy may cripple global logistics." Putting a World War 2 fleet in the Indian Ocean, said Admiral Mark Fitzgerald, commander of NATO Allied Joint Task Force Command, Naples, would still not be enough to cover the whole ocean, and the pirate mother ships were attacking vessels over 1,100 miles from Somali shores.

Insurance companies do not emerge bathed in glory over this procrastination, which would shame earlier generations for their supine, spineless role. Although having to pay out on the pirate ransoms, the insurance companies jacked up their premiums so much that they earned far more than before the piracy began. When this writer interviewed captain Bjorn Haave, vice president of IFSMA, the captain naturally put the seafarers' safety interests first and said the whole area should be declared a no-go region except for escorted vessels bound for Somali ports. If insurers refused to cover vessels plying the infested areas many ships would have felt forced to use the Cape of Good Hope route, a logistically costly scenario that would have been very much more had it not been for the rock bottom freight rates spawned by the recession and a glut of new shipping tonnage entering the market. There would also have been the problem of West African piracy to contend with.

Ship owners themselves were also guilty in their namby-pamby response to this crisis because they chose the 'calculated risk' approach which they thought would be cheaper than a final solution. Events have glaringly proved otherwise. As a result, all parties involved have spawned a result that has left many hapless seafarers feeling abandoned if not also betrayed. It may well go down as one of the most shameful episodes in the annals of maritime history.

"War and courage have done more than charity,
Not your pity but your courage hath hitherto saved the unfortunate"
Friedrich Nietzsche
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Unfair trade practices invite de-globalisation perils

Global supply chains are becoming more dynamic as the balance between off shoring, near shoring and re-shoring of production changes continuously but there is one threat to globalisation that few companies have catered for ---human frailties epitomised by unfair and illegal trade practices, which could lead to creeping de-globalisation and worsening social tensions, if not war.

Globalisation may not have done much for environmental progress but it has lifted many millions in developing nations out of poverty. And nor should it be forgotten that rich, developed countries, America in particular, have benefited hugely from China's rapid economic growth by suppressing inflation and buying up of US government IOUs. Any trade developments that reverse or trammel that trend would be a tragedy for the whole world.

As I warned in my last report, "Supply chain shifts threaten Asia," global businesses are reassessing their supply chains "which if not handled sensibly by the likely losers in the Far East... will lead to destabilising repercussions that could leave the whole world in turmoil." But if such reassessments lead to a flood of re-shoring back to or near to main markets it is in the interests of developing countries to do everything in their power to eradicate unfair trade practices that would accelerate such re-shoring. Nowhere is this more pressing than in China.

Re-shoring , it should be said, is not without risks to their promoters, which can often be as great as the risks of off shoring. One of the re-shoring risks is that costs will generally be higher than for those who remain offshore, but that is not necessarily so, especially as labour cost rises in China, for example, are galloping ahead of those in the West. Western-based companies also often ignore certain costs when making decisions on where to make products. When such costs are factored in, American costs may average only 12% higher than China's and in some cases undercut China by 22%, while at the same time remaining free of all the potentially disruptive forces acting on the supply chain. Far East suppliers also have a less than admirable quality record. The biggest potential risk not factored in, however, is the fall-out from long-standing unfair and illegal trade practices which are already leading to tariff skirmishes.

A long-festering sore between China and the West is China's unashamed, wholesale theft of intellectual property rights, in which Chinese intelligence agencies are allegedly involved. Described as the great brain robbery and "the greatest transfer of wealth in history", by the US National Security Agency's director, the costs of such theft to even single companies can be staggering. One US metallurgical company lost technology to China's hackers that cost US$1 billion and 20 years to develop.

China did not invent intellectual property theft but it is doing it on an unprecedented scale and there are already signs that their behaviour is backfiring in their face. To propel its economy, China must export more high end technology but if that technology possesses stolen software code, for example, then foreign buyers could be dissuaded from buying such Chinese goods by legal actions brought by the legitimate owner of the code. An example of this has already happened with Sinovel, a Chinese wind turbine producer, whose first major export deal, a contract in Ireland, has stalled because the turbines reportedly contain stolen code from America Super Conductor Corp.

China's law-breaking insouciance and unfair trade practices are beginning to invite retaliatory actions from countries other than America. Such ploys and behaviour like China's currency manipulation, restrictions on rare earth exports based on feeble grounds and the ordering of bureaucrats to stop buying foreign cars, mostly German, are enraging countries like Germany and Brazil, the latter of which has raised taxes on foreign cars and imposed other unfair practices. China's heavily subsidised manufacture of solar panels has also undermined Germany's solar panel industry.

Anti foreign trade measures have even taken a bizarre twist in India, which proposes a tax on some international mergers retroactive to 1962! This would mean that Vodafone, for example, is liable to pay US$2.2 billion in taxes on its purchase of Indian wireless operations. The result of all these unfair trade practices is that the US, the EU and Japan have filed a formal complaint against China to the World Trade Organisation.

The fears over intellectual property theft cannot be overestimated. Countries like Taiwan, considered a risky source for leaking patented technology to China, are also beginning to lose manufacturing business back to Britain. Even so, these fears will be tolerated by those companies wishing to maintain a manufacturing presence in emerging Far East markets, in particular, as those markets become more important in the long term. Yet this, too, is not without risk, especially in China. Western companies planning joint ventures in China involving technology transfers should remember that others who have gone before them have subsequently been dumped or otherwise sidelined.

In recessionary times, when Western manufacturing jobs are disappearing at a politically inconvenient rate, if any issue is likely to stoke up clarion calls at election times for at least a level playing field it is intellectual property theft. China should recognise this and move from imitation through theft to innovation through its own research establishments. China knows it has more to lose than any western nation in a trade war, but will it behave more honourably before it is too late? As the World Bank president, Robert Zoellick, warned those who would get tough with China, "once you start a trade war there is no telling where it will end."As with people who grow super rich, the wealthier big nations become the more arrogant and reckless they behave. The omens are not reassuring.
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Supply chain shifts threaten Asia

Global businesses are reassessing their supply chains which if not handled sensibly by the likely losers in the Far East, economically, politically and socially, will lead to destabilising repercussions that could leave the world in turmoil.

Trade is the handmaiden of prosperity but like a woman it can be fickle. Over the last 15 years, for example, China has prospered from its innate dynamism unleashed by a change from collectivism to capitalism. It depended heavily on stetched supply chains based on just-in-time (JIT) deliveries but those supply chains are now being seen as problematic owing partly to their inherent inflexibility which leaves them vulnerable to sudden changes in customers' demands. Other major concerns are soaring soaring Chinese costs, the disruptive power of Nature's fury, like the Japanese tsunami and Thailand's floods which hammered manufacturing in both countries, leading to multi-billion pound losses through lost production around the world. If all that were not enough, countries like China have scored an own goal through its blatant disregard for intellectual property rights and wholesale product counterfeiting. And, as always, changes in exchange rates are another threat and European currencies have weakened, giving them an advantage. There are also serious concerns about product quality.

The result of all this is that in Britain, in particular, manufacturers are stepping up their purchases of parts and materials from domestic suppliers, according to one survey of 362 manufacturers organised by General Electric. The research shows that 27% of those questioned said that in the past year they had raised the amount of purchases made from UK-based producers, compared with 13% who were buying less. For some UK manufactures the change in supply sources is stark. One SME, for example, a Yorkshire-based maker of industrial machinery, now sources 90% of its annual needs of iron castings from UK suppliers, as against 40% three years ago. One of its key reasons was reliability of supply. A problem here is that if something goes wrong from a far-flung supplier it can be very difficult to resolve. A UK-based buyer, however, can usually resolve the problem with a local supplier over a 'phone call or a visit to the supplier.

Another company, Sherwood Electronics, which makes cable assemblies for computers and railway equipment, has raised the proportion of cable-related components its obtains from UK producers from 40% to 55% with a matching fall in purchases from Asia. The company found that rising costs of Asian-sourced items had increased by 30% over the last 17 months compared with single digit rises from UK suppliers.

A demand from UK buyers for smaller batch sizes can also play into local suppliers hands. This pushes buyers to selecting suppliers based in Britain rather than in far-flung offshore suppliers like China. It is, as it were, an ironic development in that JIT deliveries are now being turned against the birthplace of JIT -- Japan.

Missed costs mislead

Western manufacturing companies, according to the Reshoring Initiative, of America, often ignore certain costs when making decisions on where to make products. One of these includes factors such as total cost of ownership, which includes aspects like intellectual property risk, the cost and time of travel to visit distant suppliers and the negative impact of dividing manufacturing from engineering staff back at HQ. By ignoring these costs it could be shown that America was, on average, 108% higher than China but when factored in to allow for the total cost of ownership America averaged only 12% higher and in some cases undercut China by 22%.

Some big US manufacturers like Ford, Caterpillar and General Electric are beginning to move some production back to America, though it is small so far. Apart from lower wages that drove companies overseas, another reason was cheap fuel but oil has risen four fold since 2002 so shipping costs have jumped. China's wages have also averaged rises of 15% a year over that time.

The result of these adverse movements against the Far East, according to supply chain analysts, is that by 2014 it is predicted that the production of 20% of goods now made in Asia and destined for US consumers will shift to the Americas. According to one study by Accenture, 61% of 287 manufacturers surveyed reported that they are thinking of moving operations closer to customers.

If this "secret" shift becomes a tidal wave it will yield an environmental dividend through lower fuel emissions, especially from ships which are not governed by environmental strictures like road transport users. But if the shift is not handled well then the disruptive fall out would be significant. Working against that scenario, however, is the likelihood that China's growing wealth will boost its local production to satisfy soaring local demand. In the process, however, China's huge balance of payments surpluses with its trading partners could begin to dwindle unless it husbands its bulging treasury wisely. Like oil rich Middle-East states, China has invested heavily abroad, particularly in Britain, not only to ensure raw materials and energy supplies but also to
ramp up its overseas investment income.

The military stumbling block

One development that could jeopardise all that, however, is China's military caste's desires to don the mantle of a great military power, exemplified by a big build up in naval strength spearheaded by an aircraft carrier with, allegedly, up to four more planned. China has plenty of internal social problems which will inevitably lead to much higher spending on internal security as it struggles to contain a soaring crime rate and civil disturbances with only 150 police officers to 100,000 people. China also needs every Renminbi it can muster to cope with the inevitable natural calamities to come. High military spending, therefore, is unwise, especially as it has a knock on effect with neighbours like India, who feel obliged to spend billions of pounds beefing up its air force while so many of it people subsist in abject poverty. If China followed the teachings and warnings of its ancient, illustrious sages by avoiding such costly, vainglorious, military spending then it would go down in history as the first powerful nation to do so in recent times. That would be true greatness but history suggests that it will be ignored and so the people will be denied their hard-earned dues.
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