Wednesday, January 6, 2016

Import Export: What Are Related Party Transactions?

The October 15 USA world trade totals are out, and the down trend continues.  This is of course in dollars, and includes toys, sporting goods, clothes, gas, oil, etc.  I've been tracking this for years, and point out what is dropping is the big business share of the totals, which naturally is the lion's share.

Specialty goods, as I have demonstrated, are still growing in every category I've examined.  Another way of considering this question is "related party transactions."  But first the totals:


Down she goes...  now from CFR 19 on to "related party transactions:"

(1) For purposes of this section, the personsspecified in any of the following subparagraphsshall be treated as persons who are related:(A) Members of the same family, includingbrothers and sisters (whether by whole or halfblood), spouse, ancestors, and lineal descendants.(B) Any officer or director of an organizationand such organization.(C) An officer or director of an organizationand an officer or director of another organization,if each such individual is also an officeror director in the other organization.(D) Partners.(E) Employer and employee.(F) Any person directly or indirectly owning,controlling, or holding with power tovote, 5 percent or more of the outstanding votingstock or shares of any organization andsuch organization.Page 129 TITLE 19—CUSTOMS DUTIES § 1401a(G) Two or more persons directly or indirectlycontrolling, controlled by, or undercommon control with, any person.

Pretty direct - is the importer or exporter in any sense of the word related to the overseas counter-party in the deal?  This rule is under the heading of customs valuation. The reason they ask is, if so, the moral hazard is to falsify the valuation of the products with a view to:

1. avoid duties (taxes)

2. launder monies

The actual ways I won't get into, simply because that is of no use to we who do not compete on price.  That is for big business and criminal.

Related parties tend to find a more agreeable valuation amongst themselves, and USCustom's main mission is to "protect the revenue of the USA."  And once upon a time, the only revenue of the USA was supposed to come from customs duties.

So let's look at how much trade goes on between related and non-related parties.
This is a snapshot and the trends over the last decade, and decades, also tell a story, but for today let's look at the snapshot.

Our #1 import AND export in dollars is now transportation equipment, roughly 350 billion in imports and 250 billion in exports.  Now, pause for a second... recall how you hear we go overseas for cheap labor, if so, how can we have such huge exports in labor intensive goods?  It's a side issue, but labor never has been nor ever could be a factor in international trade.  But blaming the victim, labor, is good politics.  But back to the data ...

For imports, 2/3rds is related party and 1/3rd nonrelated party.  This makes sense, all those car companies who took their taxpayer bailout money built factories overseas to avoid taxes and regulations are now importing those cars.  The best selling Ford product is the Transit, made in Turkey, and note to put too fine a point on it, introduced in 2009.  Your tax dollars at work.

For exports, it's the other way around: 1/3rd is related party and 2/3rds nonrelated.  Keep in mind, for exports, it is Boeing, USA's #1 exporter in dollar volume.  Boeing leases jets for a profit overseas, making for export revenue, but most of those jets are sold, with taxpayer money given directly to the customer overseas by means of ExImBank loans.  Otherwise Boeing might find competition in USA and improve as a company.  We cannot have improvement in capitalism, that only happens in free markets.  With capitalism you only get concentration of power and "wealth" and it's a great system if you are the one getting the power and wealth.

As you head down the list, it is remarkable that we tend to import the most of what we also export,  transport equipment, chemicals, petroleum and coal, machinery and computers.  The only exception is oil, which as an export is not in even our top ten.  On the other hand, food is a top ten export, but not even in the top ten as an import.  Exporting food is both top ten and growing in USA, but whereas the big fellows are stalling out, specialty food is growing.

About 13% of our total exports is "re-exports," what is not made here (which in itself is an odd figure begging explanation) but the fact is, of the main lines we export, we import the same things as well.  (Oil the only exception.)  That demonstrates we can make just about anything we import.  How come we don't?

We once did, but over the last 40 years, a result of the new process of lending credit at interest, it was possible to overwhelm the smaller manufacturers in a simple process that goes on to this day:

The Star reported that Zsemba filed for protection and the Bankruptcy & Insolvency Act in May, asserting it suffered losses of C$5.5 million from 2010 to 2013, after Ikea “unilaterally and substantially reduced the prices that it paid for products purchased from its manufacturing suppliers, including ZAU.”
Zsemba’s statement of claim maintains Ikea should have known that this would “cause them to operate at a loss.” It also seeks to negate the original purchase agreements, citing a “power imbalance and the dependent relationship between Ikea and ZAU which was fostered and encouraged by Ikea when it required ZAU to dedicate the majority of its production efforts and resources to Ikea.…

Ho hum.   Sue your customer.  Brilliant. Anyone who has any experience in trade knows never let any one company be more than 5% of your sales.  The newbies who rejoice at a Costco order soon enough come to tears.  But the point is this has been going on for 40 years.  Increase orders, squeeze for volume discounts, beat the competition on price, grow, and as your competitors wither move on to bigger fools to crush.  But the mid 1980s, USA manufacturing had been hollowed out, but happily by then the entire country of China was open for business, especially to lend credit at interest and compete on price game, which now too is ending.  As to the exponential loss by discounting, the folly of price cutting, see in my book here, and as for roll-up, read any biz news the last 40 years.

The fact is, the patterns and practices of capitalism are by definition and unabashedly in the service of concentrating "wealth" in the contemporary sense of property in ever fewer hands.  But that game is over, and the big question is in the chaos about to descend, is the smart thing to do renew manufacturing here at the small business level?  Worth testing.

As another tweak, in the CFR 19, the related party is 5% corp ownership for imports, but 10% for exports.  Hmmmm...  we are tougher on imported goods than we are on exported goods, by 100%.

Studying all this data and drawing conclusions is not being done by anyone systematically, but there is a wealth of information for anyone who wants to mine it.  it would make a fine masters thesis or Phd dissertation topic.

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