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Why Our Businesses Need NAFTA
By: Michael Woody , CAS, promoOrder.com
Issue: 2000sep
The following article is excerpted from testimony Woody gave before the Sub Committee on Western Hemisphere, Peace Corps, Narcotics and Terrorism hearing on April 27 while he was employed as vice president, international sales and marketing, for The Quill Company, Inc. In Woody’s introduction, which is edited here, he stated that 82 percent of sales was domestic and 18 percent was international with Europe and Canada being the company’s two major non-domestic markets. Further, one of the company’s goals was to increase its export business to 33 percent of total sales. His testimony illustrated how the livelihood of Quill’s employees depends on access to international markets.
My point of view on international trade in general, and the North American Free Trade Agreement (NAFTA) in particular, was shaped by listening to my American competitors complain that overseas manufacturers were aggressively pursuing market share here in the States. Their typical reaction to this threat was to wring their hands and complain that government was not doing enough to prevent it. It seemed to me a feeble response to a competitive situation. I came to the conclusion that if our company was to effectively compete against foreign manufacturers we needed to both defend our own market and pursue market share outside the U.S.
The global pen market is fiercely competitive, and writing instruments are, to say the least, in the mature stage of the product life cycle. We face competition from countries all over the world, including China, Spain, Japan, Italy and Germany. But we have unique product and service advantages that we believe are exportable, so we joined the global fray, targeting Europe, Canada and Mexico as our first priorities.
Canada
In NAFTA’s first year our sales into Canada increased 20 percent. This was largely due to the five-percent price decrease we were able to pass on to our customers. A change in distribution strategy led to a temporary decrease in sales in 1995. By 1997, we had surpassed our 1995 sales and were on our way to our goal of Canadian sales representing 10 percent of total domestic sales. Unfortunately, the relative strength of the U.S. dollar has contributed greatly to flattening our sales in Canada, but that situation will not be a permanent one. Indeed, one of the reasons we export is to diversify risk as currencies fluctuate.
Our major problem with NAFTA vis-a-vis the Canadian market is that it has not gone far enough. In the promotional products business most orders are time-sensitive, requiring that our product be in a specific place at a specific time for a particular event. However, documentation complications routinely delay our shipments into Canada. Our export documentation specialist tells me that shipping to any major European city is actually easier and often quicker than shipping to Toronto.
She targets the NAFTA certificate of origin as the main problem. Great pains are taken at the border to insure that the form is completed thoroughly and accurately. If not, the shipment will likely be delayed. Thus, a two-day delivery to Frankfurt, London or Madrid proceeds smoothly and painlessly, whereas promising a two-day shipping time to a Canadian customer is risky.
Another reason, aside from the strong dollar, that our Canadian business has become more challenging is the increase in competition from some of our U.S.-based competitors. In 1996, The Counselor, one of our industry trade publications, surveyed 113 U.S. supplier companies doing business internationally. Eighty-seven percent said that they were doing business in Canada. When I first focused on Canada in 1988, almost none of them had a presence in Canada. Of those suppliers polled, 38 percent increased their export sales in 1996. Canada and Mexico were mentioned as the two places where international sales were most frequently made. The second most-attended trade show by these same U.S. suppliers, after our own flagship The PPAI Exposm in Dallas, was the show sponsored by the Promotional Products Association of Canada.
Although more recent evidence is anecdotal, my experience tells me that U.S. companies are competing more aggressively with Quill in Canada, and that U.S. firms in our industry are doing significantly more business in Canada, since the inception of NAFTA.
Mexico
The Mexican market for our product has always been highly price sensitive, and although NAFTA lowered our prices into Mexico, that decrease was easily overshadowed by the 1994 peso devaluation. My Mexican partner tells me that immediately preceding the devaluation, the peso was 3.6 to the dollar. It plunged to 7.0 and even now, six years later, it stands at 9.25. As a result, our business into Mexico evaporated.
However, last year we identified a Mexican partner dedicated to overcoming our marketing challenges, and 1999 was the first year since the 1994 devaluation that we have done significant business in Mexico. We expect to double that figure in 2000.
We also experience occasional red tape with documentation on shipments into Mexico. But, in general, the exchange rate is a more daunting issue. Given a slightly stronger peso and a continuing commitment to our partner’s success, the Mexican market could eventually approach three percent of our domestic business, or 10 percent of our total export sales.
I am keenly aware of the human rights issue surrounding NAFTA and Mexican labor, and I sympathize with those concerns. However, the condition of the worker in Mexico will improve with improving economic conditions and a tighter labor market. To bolster that argument, I could cite an article that appeared in the April 14 issue of the Wall Street Journal, illustrating that job growth in Mexico is expected to surpass labor force growth by 2006. I am, however, more convinced by our partner in Guadalajara, Alexis Bellon of Cklass Industries. When I asked him his opinion on NAFTA and its effect on Mexican workers and companies, he simply said, “Competition—at first it makes you sick, then it makes you stronger.”
Future Trends
The international business landscape has changed dramatically since the inception of NAFTA. Two key factors that increasingly influence virtually every business today are technology and globalization. The synergy between these two forces creates a vortex that spins faster each year.
Technology facilitates globalization, leading global companies to seek better and faster technology, which leads to increasing globalization. From century to century, decade to decade, and year to year, this vortex spins faster: from the printing press to radio to television, from telegraph to telephone to fax to e-mail, from carriages to railroads to automobiles to airplanes. Technological innovation spurs economic globalization, then global companies demand still better, faster technology to compete.
In a recent interview with the Wall Street Journal, the musician Quincy Jones noted that “it took 40 years to build a 50-million consumer base for radio. It took 13 years to build a 50-million consumer base for television. For the Internet, it took four years.” The growth of communication technology facilitated the growth of international marketing. The development of faster, cheaper transportation spurred the globalization of distribution channels. Technology and globalization are spurring each other to the next level—and that next level is developed with ever increasing speed.
My business reality is increasingly global. That process is inexorable. If our company, and our industry, is to be successful long-term, it will undoubtedly be in a global marketplace. If we pull back from NAFTA, if we pull back from trade agreements generally, the target governments will retaliate and my overseas competitors will gain the advantage. This will damage our ability to grow the business, to compete globally, to be the engine for job growth that small to medium size businesses have traditionally been. We’re not looking to export jobs; we’re looking to export our products.
I urge you to stay the course on NAFTA, and continue your efforts to open markets worldwide. PPB
Michael Woody, CAS, is a 19-year industry veteran who is now executive vice president of promoOrder.com. Previously, he was vice president, international sales and marketing, for The Quill Company, Inc. and is immediate past chairman of the PPAI Board of Directors
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