The Large Stake of U.S. Small Business in an Expanding Global Economy


Chairwoman Velázquez, Ranking Member Chabot, and othermembers of the House Small Business Committee, thank you forallowing the Cato Institute to testify today on the importantsubject of the foreign and domestic market access issues faced byAmerica's small companies.

America's growing engagement in the global economy is not just astory of the Fortune 500. Increasingly, small and medium sized U.S.companies are entering global markets not only to sell but also tobuy and invest. In response, Congress and the administration canand should do more to open new opportunities for U.S. smallbusinesses to remain competitive in a globalized economy.

Members of Congress should start from the premise that expandingtrade and globalization are not a threat to American companies butan opportunity. We should reject the protectionist and defeatistarguments that portray the U.S. economy in general and Americanmanufacturing companies in particular as victims of globalcompetition. Nothing could be further from the truth.

How Expanding Trade Benefits Small Business

First, globalization is a reality for American companies of allsizes. Americans have never earned or spent a higher share of ourincome in the global economy than we do today. In 2006, as you cansee in Figure 1, what we earned through the export of goods andservices and income from foreign investments abroad reached arecord 15.6 percent of gross domestic product. What we spent forimported goods and services and payments on investments in theUnited States reached a record 22.2 percent of GDP. Smallbusinesses that shun global markets are missing the growthopportunity of our time.

Second, U.S. small businesses have benefited as exporters into agrowing global market, including China. Last year, U.S. exports ofgoods to the rest of the world topped $1 trillion for the firsttime ever. U.S. exports of services also reached a record $422billion. The Internet, global telecommunications, and anincreasingly complex global supply chain have opened opportunitiesfor smaller U.S. firms to supply goods and services to globalmarkets or to larger U.S. companies that sell to those markets.

China is no exception, despite misguided complaints aboutChina's currency and trade practices. Between 2000 and 2006, U.S.exports of goods to China increased from $16.2 billion to $55.2billion-an annual growth rate of 22.7 percent. U.S. exports toChina grew more than five times faster than U.S. exports to therest of the world during that same period.1 America's leading exports to China are soybeans,cotton, and other agricultural products; plastics, chemicals, woodpulp, and other industrial materials; civilian aircraft; andsemiconductors, computer accessories, industrial machines and othermachinery.2

China's market has also created expanding opportunities for U.S.investors and service providers. In 2003, according to the mostrecent figures, U.S. companies sold $48.8 billion in goods andservices in China through majority owned affiliates located inChina.3 In addition, U.S.companies exported $9.1 billion in private services to people inChina in 2005, making China our third largest service customer inAsia.4 Given China'sspectacular, double-digit growth, those opportunities will continueto grow.

Large multinational companies have not been the onlybeneficiaries of expanding exports to China. According to the U.S.Department of Commerce, more than one-third of U.S. exports toChina are produced by small and medium-sized enterprises (SMEs) inthe United States. In 2003, the most recent year for figures, atotal 16,874 U.S. SMEs exported to China, more than five times thenumber of SMEs that were exporting to China in 1992. China is nowthe fourth largest export market for American SMEs and thefastest-growing major market.5 An "undervalued" yuan does not appear to havedampened the ability of U.S. companies, large, small or in between,to sell in China's rapidly growing market.

Third, U.S. small businesses benefit from import competition.Granted, some U.S. companies find it difficult to compete in morecompetitive global markets, but many have also benefited fromaccess to more affordable raw materials, intermediate inputs, andcapital machinery. In fact, more than half of what we import eachyear are not consumer goods but goods U.S. companies use to maketheir final products. Imported petroleum, lumber, iron ore, steel,rubber, computer chips, bearings and other parts are used by smalland large U.S. firms alike to produce their final products at moreglobally competitive prices. Imports allow smaller U.S. firms toacquire the capital equipment they need, including computers andindustrial machinery, to meet their competition. Import competitionthus promotes innovation, efficiencies and ultimately theproductivity gains that lead to both higher profits forshareholders and higher real wages for workers.

A more open U.S. market also feeds back into more exportopportunities in foreign markets. Foreign producers who can sellmore freely in the U.S. market thus earn more dollars in which tospend on U.S. products and services for export. More efficient U.S.producers are better able to gain and expand market share abroad.Foreign governments are also more likely to negotiate greateraccess to their own domestic markets if the U.S. government offersmore access to our market. As research by my Cato colleague DanielIkenson has shown, U.S. companies have enjoyed the fastest exportgrowth to the very same countries that have also seen the fastestgrowth of their imports to the United States.6

For all those reasons, exports, imports and output tend to growtogether, all to the benefit of U.S. small businesses. Furtherresearch at the Cato Institute has shown a strong positivecorrelation between the amount of manufactured goods we import andthe amount we produce domestically. Figure 2 shows the change fromthe previous year in real (inflation-adjusted) manufacturingimports7 and manufacturingoutput8 in the United Statesfor each year since 1989. The percentage change in realmanufacturing imports from the previous year is plotted on thehorizontal axis, and the percentage change in manufacturing outputfrom the previous year is plotted on the vertical axis. As thechart shows, U.S. manufacturing output grows most rapidly in thevery years in which imports of manufactured goods also increase themost rapidly. For small, medium and large U.S. companies alike,trade and prosperity are a package deal: The more we prosper, themore we trade; the more we trade, the more we prosper.

Fourth, U.S. small firms benefit from access to global capital.Foreign producers who sell in the U.S. market can also use theirearnings to invest in our domestic economy. In fact, the largesurplus of foreign capital flowing into the U.S. economy each yearis the mirror image of the U.S. trade deficit. The net inflow offoreign capital can be invested directly in U.S. factories andother facilities, creating direct employment for more than 5million Americans and creating customers for domestic U.S.suppliers. Foreign capital also puts upward pressure on bond pricesand thus downward pressure on long-term U.S. interest rates.According to a recent study from the National Bureau of EconomicResearch, foreign investment in the U.S. economy has loweredlong-term interest rates by almost a full percentagepoint.9 Lower rates, in turn,mean lower mortgage payments for American families and lowerborrowing costs for U.S. small businesses, allowing them to expandtheir productive capacity. Lower borrowing costs have also stokeddemand for durable goods such as cars and appliances, benefitingU.S.-based manufacturers.

Fifth, U.S. industry, including small and medium sizedmanufacturing firms, can thrive in a globalized market. It is amyth that America is "de-industrializing" or that our manufacturingbase is shrinking. Tens of thousands of U.S. manufacturingcompanies are producing a higher volume of goods today than everbefore. As Figure 3 illustrates, the total volume of output of U.S.manufacturers has reached record territory. Since 1994, when boththe North American Free Trade Agreement and the World TradeOrganization came into being, manufacturing output has grown bymore than 50 percent. Thousands of small U.S. manufacturers haveparticipated in the expansion fueled in part by our nation'sgrowing globalization.

A Trade Agenda for U.S. Small Business

America's small companies need a trade policy that expands theirfreedom to sell, invest and buy in a growing global economy. Ingeneral, U.S. small businesses can grow and compete mosteffectively in a domestic economy that avoids uncompetitive taxrates and burdensome paperwork and regulations. Small businessesalso need flexible labor markets that allow them to hire theworkers they need to meet the needs of their customers.Comprehensive immigration reform and an increase in visas forhighly skilled workers would enhance the ability of U.S. companiesto meet global competition.

On the trade front, U.S. small businesses benefit when theUnited States signs bilateral, regional, and multilateral tradeagreements that reduce trade barriers with our major tradingpartners. Those agreements not only reduce barriers to trade butthey also establish predictable and enforceable rules that increasetransparency when smaller U.S. companies venture abroad. Free tradeagreements with the countries of Central America, Chile, and othertrading partners have already stimulated an increase in U.S.exports and have opened up new opportunities for U.S. companies toreach new customers, just as the North American Free TradeAgreement has expanded opportunities in Canada and Mexico. Absenttrade agreements, Congress should reduce remaining U.S. tradebarriers unilaterally.

What U.S. small businesses do not need are higher trade barriersto our domestic market or more federal subsidies to supposedlypromote exports or foreign investment. Punitive tariffs against acountry such as China would threaten to drive up costs for U.S.small businesses that import intermediate products from thatcountry. A trade war would also jeopardize export opportunities ingrowing markets abroad. Antidumping orders and other tariffsagainst such imports as steel or agricultural commodities drive upcosts for domestic producers, many of them small businesses, whouse those imports in their final products.10 For the same reasons, a dramatically weaker U.S.dollar, while benefiting certain U.S. exporters, would drive up thecosts U.S. small businesses pay for imported energy, parts andcapital machinery.

Nor do U.S. small businesses need a larger share of federalsubsidies for international trade. While small and medium sizedcompanies do qualify for such programs as the Export-Import Bankand the Market Access Program, they account for a small dollarshare of total federal support. U.S. companies do not need federalsubsidies to compete effectively in global markets. Our research atCato has shown that U.S. exporters have outperformed theircounterparts in Great Britain, Germany, France, Canada and Japaneven though the share of U.S. exports receiving government supportis much lower than exports from those countries. Most U.S. exportsubsidies go to firms that do not experience subsidized competitionabroad.11 U.S. and globalmarkets are currently awash in private capital ready to finance newtrade and investment opportunities. Federal export subsidies do notpromote more exports but only reshuffle the export pie in favor oflarger U.S. companies, crowding out smaller exporters.

If Congress and the administration want to increaseopportunities for U.S. small businesses to compete and thrive in aglobal economy, they should work together to reduce barriers tointernational trade and investment wherever they exist.

Figure 1.

America's Growing Globalization

Figure 2.

U.S. Manufacturing Imports and Output

Figure 3.

U.S. Manufacturing Output, 1980-2006

1 U.S. Department ofCommerce, "U.S. Trade in Goods (Imports, Exports and Balance) byCountry,"

2 U.S. Department ofCommerce, "U.S. Exports to China from 2001 to 2005 by 5-digitEnd-Use Code,"….

3 U.S. Department ofCommerce, Survey of Current Business, July 2005, p. 25.

4 U.S. Department ofCommerce, Survey of Current Business, October 2006, p. 44.

5 U.S. Department ofCommerce, "The Role of Small and Medium-sized Enterprises inExports to China: A Statistical Profile," December 2005, p.3-4.

6 Daniel Ikenson,"Leadingthe Way: How U.S. Trade Policy Can Overcome Doha's Failings,"Cato Trade Policy Analysis no. 33, June 19, 2006, pp. 11-12.

7 Manufacturing importsare defined as industrial supplies and materials, capital goods,automotive vehicles and parts, and consumer goods. See U.S.Commerce Department, "National Income and Product Accounts," Bureauof Economic Analysis, Table 4.2.6., Real Exports and Imports ofGoods and Services by Type of Product,

8 Manufacturing output ismeasured by the annual average of the Federal Reserve Board'smonthly index of manufacturing output. See U.S. Federal ReserveBoard, "Industrial Production and Capacity Utilization: HistoricalData," Industrial Production, Seasonally Adjusted, Tables 1 and 2,

9 Francis Warnock andVeronica Warnock, "International Capital Flows Alter U.S. InterestRates," National Bureau of Economic Research, NBER Working PaperNo. 12560, October 2006.

10 For the impact ofsteel tariffs, see Daniel Ikenson, "Ready toCompete: Completing the Steel Industriy's Rehabilitation," CatoTrade Briefing Paper no. 20, June 22, 2004, pp. 5-6; for the impactof agricultural trade barriers on U.S. producers, see DanielGriswold, Stephen Slivinski and Christopher Preble, "Ripe for Reform:Six Good Reasons to Lower U.S. Farm Subsidies and TradeBarriers," Cato Trade Policy Analysis no. 30, September 5,2005, pp. 4-6.

11 Aaron Lukas and IanVásquez, "Rethinking the Export-Import Bank," Cato TradeBriefing Paper no. 15, March 15, 2002.

Daniel Griswold

Committee on Small Business
United States House of Representatives