Global Logistics-April 2008

Given Belgium’s proximity to mainland European markets; well-developed, multimodal transportation infrastructure; and highly skilled labor force, its potential as an offshore manufacturing, research and development (R&D), and distribution location far exceeds its geographical size.

The Port of Antwerp, together with Liege and Brussels airports, places Belgium squarely among Europe’s top-tier cargo crossroads, incenting U.S. businesses such as 3M, Tenneco, Donaldson Filtration Systems, and Pfizer to set up operations there. In 2007 alone, more than 1,200 U.S. companies contributed $52 billion in foreign direct investment within the country.

Despite its trade advantages, Belgium’s economy has been somewhat constrained by its exclusive dependence on the services sector and limited local market growth.

As a result of the country’s relatively small area, and lack of readily available natural resources, it has historically relied on regional trade to drive its refinished goods export market. Nearly 75 percent of Belgium’s import and export volume is with European partners such as the Netherlands, Germany, France, and the United Kingdom, making it highly susceptible to global market shifts and economic fluctuations.

To counter these concerns, Belgium’s government has been strategically angling to expand foreign trade partnerships beyond the continent and leverage transportation infrastructure and capabilities to diversify and drive its economic engine. Thus far, efforts appear to be gaining traction.

The U.S.-Belgian Double Taxation Treaty, which went into effect Dec. 28, 2007, reduces double taxation of income, eliminates barriers to trade and investment, and facilitates cross-border capital movement—incentives that will go a long way toward stratifying Belgium’s economy, while similarly giving U.S. companies greater reason to locate operations there.

Taken in the context of Belgium’s evolving economic strategy, the new tax treaty is one more step in a series of measures the government has taken recently to increase the country’s attractiveness to foreign investors.

Since 2006, Belgium has allowed a deemed interest deduction for equity invested in a Belgian company or branch, which ultimately alleviates some tax burdens.

A recently enacted “Patent Income Deduction” similarly reduces tax rates for patent income to a maximum 6.8 percent, a rate substantially lower than those available in most other European countries.

This break significantly improves prospects for patent development and holding companies that locate in Belgium or license patents to U.S. affiliates. In turn, this will likely draw interest from U.S. pharmaceutical, chemical, and automotive businesses looking to site R&D facilities.

Additionally, a new tax regime for pension funds went into effect last year, making Belgium the first European country to offer multinationals a complete and comprehensive framework for both pan-European and international pension funds—a measure that provides additional impetus for stateside companies looking to locate operations and employees abroad.

The U.S.-Belgian Double Taxation Treaty also contains five features that specifically target U.S. companies with business interests in Europe:

1. It introduces a 0 percent withholding tax on dividend payments from a U.S. company in Belgium to its U.S. parent company, provided the U.S. entity in Belgium owns 10 percent or more of the Belgian company. This 10-percent ownership threshold is significantly lower than the threshold in other treaties recently concluded by the United States.

2. It introduces a 0 percent withholding tax on interest. Together with the Notional Interest Deduction, this makes direct loans between the United States and Belgian-affiliated companies more attractive, and increases possibilities for companies in Belgium to finance U.S. affiliates.

3. It is the first income tax treaty concluded by the United States to contain a binding arbitration procedure with a foreign country. The United States and Belgium have two years to resolve a tax dispute before arbitration starts, unless the two countries decide that the provision is not suitable for arbitration. An arbitration panel will decide one of two final offers by both governments. It gives taxpayers the prospect of finality to a tax dispute within a specific timeframe.

4. Anti-abuse provisions designed to deny inappropriate use of the treaty were strengthened to bring them into closer conformity with current U.S. treaty policy. On the other hand, new categories of taxpayers, such as qualified charities or pension trusts, will now be able to claim benefits.

5. It extends the benefits of the treaty to companies owned by so-called “equivalent beneficiaries,” which may provide opportunities for multinational groups that are based in the EU, Switzerland, or NAFTA.

Businesses considering China as a possible offshore location are better served by thinking “big” than pursuing narrower objectives, reports China Manufacturing Competitiveness 2007-2008, a joint study by McLean, Va.-based management consulting firm Booz Allen Hamilton and the American Chamber of Commerce (AmCham), Shanghai.

The country’s advantage solely as a low-cost, manufacturing-for-export market is diminishing. Companies that integrate China into their global supply chains as a source of competitive advantage are far more successful.

Specifically, businesses that pursue China as both a growth market and a market for lower-cost labor and sources, and integrate these operationally, enjoy significantly higher profits than others pursuing only one of these objectives.

Those that employ dual sourcing and sales strategies report an average profitability rate two-thirds higher than those focused on just one of those targets (29.6 percent compared with 17.8 percent). Despite the returns that this approach can generate, only one of four companies is able to combine a strong in-country market growth effort with manufacturing and sourcing operations.

While a stronger Chinese currency and rising wages are putting pressure on manufacturing margins, failure to deploy operational best practices and fully leverage China as both a growth market and source of labor and products is also limiting profits.

“The manufacturing philosophy employed by many foreign multinationals in China in recent decades needs an overhaul,” says Ronald Haddock, vice president, Booz Allen. “China’s changing cost and currency structure have shifted, forcing companies to rethink how they develop their Chinese operations and how they perceive China in their overall global strategy.

“At the same time, China is increasingly a major source of product and business model innovation. We’re seeing globalization at work and China’s role has changed,” he says.

More than half of the surveyed foreign-owned or foreign-invested companies manufacturing products in China believe that the country is losing its competitive edge in manufacturing to other low-cost nations.

As a result, nearly one in five manufacturers surveyed has concrete plans to relocate or expand China operations to other countries, with Vietnam and India seen as top alternatives.

MIT Sizes Up Global SCALE Network

The Massachusetts Institute of Technology’s Center for Transportation and Logistics (MIT-CTL) is taking educational outreach beyond the four walls of the classroom to all corners of the globe.

The center recently debuted the MIT Global SCALE (Supply Chain and Logistics Excellence) Network, an international alliance of research centers dedicated to developing supply chain and logistics excellence through innovation.

The Global SCALE Network spans North America, Latin America, and Europe, with plans to expand into Asia and Africa. Currently it includes: the MIT Center for Transportation and Logistics in Cambridge, Mass.; the Zaragoza Logistics Center in Zaragoza, Spain; and the Center for Latin-American Logistics Innovation in Bogotá, Colombia.

The Network allows faculty, researchers, students, and affiliated companies from all three centers to pool their expertise and collaborate on projects.

“Today’s supply chains stretch around the world and back again, requiring successful organizations to have an on-the-ground understanding of the logistics, supply chain, and general business challenges and opportunities in every region.

The Global SCALE Network will provide that global context through research projects that will literally be taking place around the world,” says MIT-CTL Director Yossi Sheffi, a professor of engineering systems at MIT and director of the Engineering Systems Division.

The Network will also enhance supply chain and logistics education at each center. Graduate students can benefit from the shared knowledge created through this collaboration, as well as take part in educational exchanges and learn alongside other students.

UK Freight Forwarders Shift Into Reverse

The recurring threat of a global economic downturn and increasing trade liberalization within Europe are having a negative impact on the UK freight forwarding sector, according to Dublin, Ireland-based Research and Markets’ Freight Forwarding Market Report 2008.

In 2006, the UK international freight services market totaled US $37 billion, of which US $28 billion was attributed to cargo forwarding activity. The total represented a significant reduction of 7.4 percent in activity compared with the previous year, largely due to a 9.2 percent decrease in turnover in the freight forwarding sector.

One factor contributing to this weakening is the accession of several Central and Eastern European countries (CEE) into the European Union, which took place in 2004 and 2007. As these nations are now part of the Single European Market (SEM), customs regulations that formerly governed the movement of goods between outside countries and existing EU member states no longer apply.

Consequently, exporters and importers trading between the United Kingdom and these new CEE EU members no longer require the expertise that freight forwarders provide.

Another important development was the decision by EU government ministers late in 2006 to repeal the block exemption from restrictive trading practices enjoyed by container shipping lines. This decision emerged as governments sought to bring carriers in line with rules that apply to the majority of the EU transport industry.

Of continuing concern for many smaller firms in the UK freight forwarding sector is the burden of regulation, particularly in the field of employment and health and safety legislation, covering matters such as unfair dismissal, equal opportunities, flexible work hours, the hiring of illegal immigrant workers, and illegal mobile telephone use by drivers.

Despite some signs of a slowdown in the global economy, and the risk that developments such as further trade liberalization and the removal of certain trade barriers might reduce the need for forwarding expertise, the macro-economic environment is generally favorable for the continued growth of UK international freight services.