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Este informe no está disponible en español. CARIBBEAN BUSINESS Trade Growth Increases Despite a slow economy, Puerto Rico exported $55.2 billion in FY 2003, up a whopping 17% from the year before. But was this meaningful to our economy? By MARIALBA MARTINEZ December 4, 2003 Restarting the engines: While general inflation and higher costs of intangibles in pharmaceutical production may have inflated Puerto Rico’s handsome export growth last year, the engines of the island’s manufacturing industry started to turn again to supply severely depleted stateside inventories. Despite the economic slowdown that is still affecting most sectors of the island’s economy, Puerto Rico’s exports increased 17% from $47.2 billion in fiscal year (FY) 2002 to $55.2 billion in FY 2003 (ended June 30, 2003). Meanwhile, imports during the period grew 16.2% from $29 billion to $33.7 billion, for a positive trade balance (i.e., exports in excess of imports) of $21.5 billion. It was a significant turnaround from the drab trade performance the year before, which had given local manufacturers cause to be concerned about their ability to compete in the global trade market. In FY 2002, Puerto Rico’s exports and imports grew a measly 0.6% and 0.3%, respectively, which means that in real terms–i.e., when you adjust for inflation–the island’s trade actually shrunk last year. But in retrospect, FY 2002 appears to have been a fluke. In the past five years (from FY 1999 to FY 2003), and despite the economic slowdown that started to affect the U.S. mainland economy in late 2000, Puerto Rico saw an average annual 12.9% growth in exports and an average annual 9.4% growth in imports. It is not clear, however, what has been the effect of growth in the value of exports on real economic development, i.e. job creation. While the value of exports grows every year, manufacturing jobs have remained fairly constant–between 130,000 and 150,000 in the last 25 years–and have even declined in recent years. Further, the 17% growth in exports last year (several times over the 0.6% growth in the overall economy) begs the question: Did the island truly have more interstate trade with the U.S. mainland–which for Puerto Rico trade statistics purposes are counted as exports and imports, although not foreign trade–than with foreign countries in FY 2003? Or are the numbers instead a reflection of inflation and higher prices while production remained stagnant? The answer is probably a little bit of both. "The 17% overall increase in the value of exports is respectable but not necessarily strong," said Juan Lara, an economist with Estudios Tecnicos. "FY 2003 trade statistics show that the manufacturing industry seems to be rising from the economic recession of 2001 and 2002, but this effect is reflected primarily in the island’s pharmaceutical industry. "The problem [with determining real growth] is that there isn’t a local Producers Price Index that can be applied to Puerto Rico’s exports to determine the island’s inflation rate on manufactured production," added Lara. "We do know that most exports are from pharmaceutical drug manufacturers, but the value of those exports includes the costs of intangibles such as royalties and patent outlays, which are reflected in the final price of the product." To analyze real growth in any sector, such as exports, as well as in the overall economy, economists make a distinction between present values measured in current dollars and values adjusted for inflation, referred to as constant dollars because they are measured against the value of the dollar in a particular year, say, 1972. Current dollars are present-day values that haven’t factored out the effects of inflation; constant dollars are used to adjust for the effects of inflation, which is the generally upward price movement of goods and services in an economy. The effect of inflation on consumers is usually measured by the Consumer Price Index, an indicator that calculates the change in the cost of a fixed basket of consumer products and services over time. The Producer Price Index, used by the U.S. Bureau of Labor Statistics to evaluate wholesale price levels in the economy, measures the effect of inflation on manufactured production. In Puerto Rico, the Planning Board produces a CPI but not a PPI, so it is difficult to calculate the impact of inflation on manufacturing costs over time. One economist has calculated that inflation on the island could be three to five points higher than the U.S. mainland’s average of 1.3%. This could mean that the real exports growth in FY 2003 may have ranged from a low of 11.9% to a high of 15.9%. Meanwhile, imports may have actually shrunk as much as -4.4%. Regardless of the effect of inflation on the real value of Puerto Rico’s exports in FY 2003, every indication is that there was real expansion in the amount of manufactured production sent overseas, both to the U.S. mainland and foreign countries. According to one local economist, the surge in exports corresponds largely to stateside companies’ need to replenish inventories that had been depleted during the worst period of the recession from 2001-2002. During that period, U.S. firms slowed down production significantly and supplied their customers from existing inventories. Late last year, inventory levels in certain industries reached an all-time low. A lot of the manufactured-production shipments from Puerto Rico last fiscal year corresponded to that process of replenishing inventories as the U.S. economy wiggled its way out of the recessionary period. "From FY 2000 to FY 2001, and again from FY 2002 to FY 2003, the value of exports increased significantly during what was considered an economic recession, demonstrating the strength of Puerto Rico’s economy," said Gustavo Velez, an economist with House Vice Speaker Ferdinand Perez’s legislative office. "Within the manufacturing industry, the pharmaceutical area in particular has made great strides. "But it is by looking at trade statistics over the past 10 years that we see the value of the island’s exports has doubled and manufacturing has increased to approximately 60% [of the island’s gross domestic product]," added Velez. "This shows how much weight the manufacturing industry carries in Puerto Rico. Still, while Puerto Rico’s trade-balance index averages between 1.1 and 1.3 [comparable to Singapore’s], most of Puerto Rico’s trade takes place with the U.S. mainland. By comparison, Singapore’s index reflects that it largely trades with foreign countries." The pharmaceutical industry remains strong "In the manufacturing industry, we consider the inflationary effect in our operations budget, but the export value is our price and includes the inflationary effect," said Carlos Del Rio, Pfizer’s vice president for global manufacturing in Puerto Rico. "Industry trade publications let us know how much raw material is selling for, which adds between 3% and 4% to our costs. But there are other elements, such as technology, that can’t be analyzed." One of the few centers of pharmaceutical manufacturing in the world, Puerto Rico is home to 14 of the top 20 pharmaceutical companies. Sixteen of the 20 best-selling products in the world are produced locally, and nine pharmaceutical drugs are manufactured in their totality on the island. The 30-year-old pharmaceutical sector generates 25%, or $17.8 billion, of the island’s $71.1 billion gross domestic product (GDP). It represents more than 25% of the island’s manufacturing industry and is responsible for more than 30,000 direct jobs and 90,000 indirect jobs. "Puerto Rico’s economy is one of the world’s most open economies, although it depends highly on its trade interaction globally," said economist Gustavo Velez. "The government has discussed and provided a number of alternatives to encourage trade. But even during the recession, it was the private sector that kept exporting goods and services. And it will be up to the private sector to keep the economic development going strong." What’s in the pie? Puerto Rico’s ability to sustain growth in exports comes primarily from selected sectors within the manufacturing and service industries. For starters, 93% to 95% of Puerto Rico’s total export activity consists of goods manufactured by nonlocal companies. Of these, the leading sectors are pharmaceutical & chemical products, petroleum & carbon products, and plastics & rubber products. The remaining 5% to 7% comes from local manufacturers trying to make inroads into the U.S. mainland and foreign markets. These, however, must contend with many nontrade barriers, such as government permitting, export finance limitations, and requirements of scale–i.e. producing in sufficient quantity and with enough reliability to supply huge mainland markets–that keep them from becoming successful exporters. What was Puerto Rico’s trade activity in FY 2003? Although the overall value, in current dollars, of exports from Puerto Rico grew 17% in FY 2003, growth in some sectors was healthier than in others. Such was the case with petroleum & coal products, which saw an exceptional 406.5% growth; plastics & rubber products (up 32.4%); computer & electronic products (up 29.5%); electrical equipment (up 22%); and machinery (up 21%). Chemical products, which include pharmaceutical production, still made up the lion’s share of Puerto Rico’s trade activity in FY 2003, representing 71.7% of all exports ($39.6 billion) and 44.8% of all imports ($15.1 billion), up 18.9% and 22.8% from FY 2002. Interestingly, most of these imports came from the island’s strongest competitors within the pharmaceutical drug-manufacturing arena: Singapore and Ireland. Chemical imports from Singapore to the island multiplied thousands of times from $31,000 in FY 2002 to $684.1 million in FY 2003 while Ireland’s grew more than 10% to some $7 billion. According to the Puerto Rico Planning Board, these imports relate mostly to raw materials used for pharmaceutical production in Puerto Rico. Puerto Rico’s imports growth has been steady for the past five fiscal years. FY 2003 registered the highest growth during this period, at 16.2%. Among the items showing the biggest gains that year were chemicals & pharmaceutical drugs ($15.1 billion), computer & electronic products ($2.7 billion), petroleum & coal products ($1.9 billion), mining materials such as soil and gravel ($800 million), plastics & rubber products ($638 million), and metal products ($500 million). Overall, imports grew 15.3% from $27.4 billion in FY 2002 to $31.6 billion. Puerto Rico’s top-10 exporters / importers in FY 2003 Although their relative positions may have changed, Puerto Rico’s main trade partners in FY 2003 are pretty much the same countries as in FY 2002. By far, Puerto Rico’s top export market, for obvious reasons, continues to be the U.S. mainland. It accounted for $47.7 billion, or 86.4%, of all exports from the island in FY 2003. The other nine countries on the top-10 list accounted for $5.9 billion, or 10.1%, of Puerto Rico’s exports: the Netherlands ($1.6 billion), Belgium ($1.1 billion), France ($694 million), the Dominican Republic ($651 million), Germany ($519 million), Italy ($435 million), Singapore ($327 million), Japan ($299 million), and the United Kingdom ($271 million). The United Kingdom (U.K.) dropped from No. 2 on the list to No. 10, with a 62.9% reduction in the value of its imports from Puerto Rico. Among the exports to the U.K. that showed significant declines were chemicals, plastics & rubber, nonmetallic minerals, metal products, primary metals, and textiles. Japan went from No. 6 to No. 9; the value of its imports from the island declined 6.6%, mostly in apparel, petroleum / carbon, nonmetallic minerals, and transportation equipment. France managed to climb to fourth place, with a 141% increase in the value of its purchases of Puerto Rico products, from $288 million in FY 2002 to $694 million in FY 2003. There were considerable changes to the list of the top 10 import markets in FY 2003. U.S. mainland imports increased 13% to reach $16.5 billion. Of particular note was the 161.2% increase in petroleum & carbon products, which went from $67 million in FY 2002 to $175 million in FY 2003. Puerto Rico’s imports from Singapore increased some 4,000% to $698 million during FY 2003, compared with $17.2 million a year earlier. Italy, France, and Mexico didn’t make the top 10 list of import markets, giving way to Colombia ($535 million), Brazil ($26 million), and Singapore ($698 million). What does the future hold? "Puerto Rico’s economy could grow 3.5% during 2004, but it will probably be closer to 3%," said Estudios Tecnicos’ Lara. "Trade will increase a lot, but much of it will depend on how manufacturing develops on the U.S. mainland. If the Free Trade Area of the Americas is finally signed, trade could intensify. It will be interesting to see what kind of trade Puerto Rico will have with Central America and Mexico, which have more diversified markets, not just pharmaceuticals." CARIBBEAN BUSINESS Editor Francisco J. Cimadevilla contributed to this story. ********** Recovering from fiscal year 2003 Fiscal year (FY) 2003 was the year for Puerto Rico to recover from a stagnant economy; it overcame trade growth of less than 1% in FY 2002 to average 17% growth in the following year. As predictions for the economy in 2004 become more optimistic, business owners are looking forward to expanding not only through local sales but also through increased trade with the U.S. mainland and other countries. Despite the economic recession, one sector of the island’s economy that has continued to fare well is the pharmaceutical industry. Chemicals and pharmaceutical drugs make up 90% to 95% of Puerto Rico’s exports. While the companies that make these products are multinational and foreign corporations, they employ up to 25% of the island’s 120,000 manufacturing workers. "The pharmaceutical industry continues marching firmly ahead in Puerto Rico," said Wyeth Vice President & General Manager Hector Cabrera. "Companies still regard the island as a good option for bringing in new products. New products aren’t coming at the same rate as before, and some have been lost to Singapore and Ireland, but they are still coming, particularly those that are manufactured for U.S. distribution." For most local companies looking to export, caution is still the key word. As Pan Pepin and Baguette Inc. President Rafael Rovira said, "Before selling to a secondary market, the company must have a stable primary market. Even though we export some of our products to the U.S. Virgin Islands, we have to make sure this is managed correctly, given the early expiration date of our merchandise. So as the company grows, we are analyzing opportunities outside Puerto Rico to increase our profit margins." Competitor Holsum is already exporting products such as cookies to the U.S. mainland. "We export several brands such as Sabrositas and Caribe Bakers Kay’s cookies," said Marketing Director Consuelo Abriles. "There are plans to export other products in the cookies area. Items such as bread and cakes are much more difficult due to their high perishable rate." Rovira and most exporters agree that once a company identifies a market outside Puerto Rico, it should consider establishing part of the production in that market. In 1993, Advanced Instruments President Carlos Rodriguez began exploring opportunities outside of Puerto Rico to supply pharmaceutical-industry quality-control equipment and services. To that end, his wife, Coral, together with a general manager-in-training, kept operating Advanced Instruments in Puerto Rico, making sure the company thrived during his absence. Today, Advanced Instruments has offices in Mexico and the Dominican Republic and provides services to Central American countries. One of Rodriguez’s biggest problems was obtaining capital. "If you are a multinational company with considerable income, you can depend on corporate economic support," he said. "But for a small or midsize business like ours, you have no equity internationally and must depend for a while on the revenue generated by your principal company back home so you can finance the foreign subsidiary." Flexible Packaging Group President Carlos Casellas can be counted on to handle different ideas and products at the same time. The company not only produces packaging materials but is also involved in developing a new kind of construction material made from plastic. "We have been selling our products in the Dominican Republic, Mexico, the southeastern U.S., Costa Rica, and Central America for some time," said Casellas, who calculates at $65 million the company’s total sales in these areas. "The manufacturing plants in Costa Rica and the Dominican Republic have been key to our success. And as any major corporation can tell you, having a local management team is important. We have working partners in each country who resolve all problems locally." According to Casellas, the markets that have grown the most are Central America and the U.S. "Although Central America’s sales are lower than the U.S. market’s, the profit margins vary," he said. "There is more risk involved in Central America but profit is larger; in the U.S., risk is lower but profits are smaller." Some companies have decided that the downside of exporting products, even to the U.S. mainland, isn’t worth it. Northwestern Selecta President Elpidio Nuñez Jr. decided to stop exporting to the U.S. east coast because of problems with his distributor. "You must have someone on the other side watching over your interests or it’s next to impossible to be successful," he said. "We were being overcharged and there was no real marketing being done for our products overseas. Selling products long-distance is very difficult." In a previous CARIBBEAN BUSINESS story (Oct. 4, 2001), Carla’s Sweets President Carla Haeussler Badillo said she was getting ready to export to the U.S. mainland. Then came the recession and everything screeched to a halt. On Nov. 21, Haeussler Badillo announced that her first refrigerated container filled with 368,000 meringues and guava panatelas (a type of biscuit) had departed for 23 Wal-Mart stores in Florida. "The export of these products is part of the expansion plan begun last year," said Haeussler Badillo. "This included doubling the size of the manufacturing plant in Bayamon’s Minillas Industrial Park from 4,000 square feet to 8,000 square feet. Additional equipment, with a value of $300,000, was also purchased to increase production capacity. This is an important step in the expansion of our industry, and it shows Puerto Rico’s businesses have quality products worthy of being exported to other markets." Carla’s Sweets was one of 40 local companies with export capabilities that went in June on a trade mission to Wal-Mart headquarters in Bentonville, Ark. The trip, which was organized by the Puerto Rico Manufacturers Association, hasn’t borne much fruit; in fact, it has netted U.S. mainland contracts for fewer than a half-dozen local companies. More recently, more than 20 sales representatives from California-based Costco held a trade fair in Puerto Rico for more than 60 local companies. Each local company was given a one-on-one interview and preliminary information on what is needed to sell to Costco. Final results should be seen by early next year. One manufacturing sector that saw more than 400% growth in exports and 19% in imports during FY 2003 was the petroleum segment because of the start-up of Shell Chemical’s Yabucoa plant. Acquired from Sunoco in 2001, the Shell refinery underwent modifications before its full-production start in the second half of 2002. "We hope to produce and sell all our production on the island soon and are slowly building up," said Shell Chemical Site Manager Sven Erickson. "Right now, our surplus is sold in the Caribbean to countries such as the Dominican Republic. We will continue importing crude oil to produce gasoline, jet fuel, kerosene, and diesel. Other products include chemical feed stock for crackers, which we export to the U.S. mainland; ethylene; and other plastics components." Promoexport’s role in Puerto Rico’s trade activity Promoexport, also known as the Exports Development Corp. and which recently merged with the Department of Economic Development & Commerce’s Commerce Development Administration (CDA), is tasked with promoting Puerto Rico’s exportable products and services to the U.S. mainland and foreign countries. Created in 1998, Promoexport has been under constant scrutiny by the island’s private sector, which questions how the agency helps companies sell their products and services overseas with limited resources. Now, under the CDA, the agency has five commercial offices in the Dominican Republic, Mexico, Panama, Chile, and Spain. These five offices promote the island’s manufacturing and tourism industries to industrialists looking for supplies, technical services, or investment opportunities. CARIBBEAN BUSINESS recently spoke with the executive directors of the offices in Mexico, Panama, Chile, and the Dominican Republic. Fernando Rivera Vincenti has been managing the Mexico office for three years. "Our principal strategy is to promote Puerto Rico’s pharmaceutical service providers to Mexico," he said. "The island has the largest number of experts in areas such as validation, construction, equipment & machinery, and supplies, after the U.S. And while there has been the removal of price controls since 1992, there is still the language barrier, which Puerto Rico does not have." According to Rivera Vincenti, local companies such as Unipro, Special Scientific, Aireko Construction, Global Industries, and Advanced Instruments have done business in Mexico in the past three years, particularly in the pharmaceutical industry. Other companies such as Vernet and Pan American Grain are exploring the market. In July, the office will move to its own headquarters building in El Pedregal, to the south of Mexico City, which will provide office facilities similar to a business incubator. In fiscal year (FY) 2003, the value of exports from Mexico was $115 million, while imports were $314.1 million. Promoexport’s Panama office has been headed by Zamia Marina Baerga since 2001. Panama seems to be one of the most popular countries visited by Puerto Rico businesses. FY 2003 exports from Panama were $42.4 million, while imports reached $13.1 million. In 2002, about 100 companies from Puerto Rico visited Panama and 100 Panamanian companies sought information about the island. Baerga is responsible for Panama and for nearby countries such as Costa Rica, where this office has already opened doors to Avant Technologies, Pan American Grain, and Vassallo Industries. "Of 15 local businesses that visited Panama on a trade mission in March 2003, 13 made successful contacts," said Baerga. "Companies such as Vassallo Industries, Empresas Nido, Angel Guard, ThomTex, Best Car Mats, Anisa, and B&B Manufacturing Corp. are now selling their products to Panamanian companies. In addition, Puerto Rico’s Security & Windows established a manufacturing operation in Panama and exports its finished products to Puerto Rico." Maria Pia Labarca has been executive director of Promoexport’s office in Chile, which covers the Mercosur countries (Argentina, Brazil, Paraguay, and Uruguay), for the past two years. Pia Labarca has taken it upon herself to educate and incentivize the public about manufacturing, business, and tourism in Puerto Rico. "Chile is one of the strongest economies in Latin America," said Pia Labarca, who noted its successful transitions to democracy and its economic development. The value of exports in FY 2003 was $4.9 million, while imports were $30.2 million. "Chile’s free-trade agreement with the U.S. should be of concern to Puerto Rico, as it will be implemented before the Central America Free Trade Agreement (Cafta) is in 2005. This demonstrates the support that the U.S. has given Chile, a small country with 15 million residents, but which for some reason hasn’t been transmitted to Puerto Rico." Pia Labarca expressed concern that Puerto Rico has traditionally exported its goods to the U.S. and nearer countries in regions such as the Caribbean. "But Chile’s solid economy has a strong manufacturing culture that has survived through different economic and historical periods," she said. "So I am concentrating on informing Chilean companies about commercial opportunities in Puerto Rico and vice versa." Armando Del Valle Muñoz has headed the Dominican Republic office since its establishment in 2001. With the value of exports rising to $650.8 million and imports to $685.5 million in FY 2003, the Dominican Republic is one of the island’s top 10 markets for exports and imports. According to Del Valle Muñoz, the Dominican Republic’s industrial needs are mostly in high technology, environmental technology, and solid-waste management. His office has been involved in Puerto Rico’s legislative and executive areas and in bringing about the Dominican Republic’s inclusion in Cafta and the Free Trade Area of the Americas. "In the past two years, we have counseled the minister of Economic Development on what commercial areas they need to improve," said Del Valle Muñoz. "The Dominican Republic has been amply criticized, even by our own businesses, for its patent-law violations and for other issues related to its agricultural exports. Puerto Rico can benefit, as can the Dominican Republic, from improvements made in this area, as we have the knowledge and no language barrier to do business with them." In preparation for its merger with CDA, Promoexport recently formalized an alliance with the Puerto Rico Federal Affairs Administration’s (PRFAA) 12 regions on the U.S. mainland to help promote the island. "The formalization of our agreement with the PRFAA began more than one-and-a-half years ago as we began to work together more and more at various trade fairs on the U.S. mainland," said Promoexport International Promotions Director Roberto Pando. Added PRFAA Regional Offices Director Mairym Ramos, "Our office can use Promoexport’s materials to promote its objectives within each of our 12 regions. The first step is to find out what Promoexport does so we can coordinate its efforts with the various annual events in which its commercial offices can participate." This Caribbean Business article appears courtesy of Casiano Communications.
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