Chairwoman Velázquez, Ranking Member Chabot, and othermembers of the House Small Business Committee, thank you forinviting a scholar from the Cato Institute to testify a today'shearing on "Small Business Exports in the Current EconomicClimate."
Expanding Exports a Bright Spot for Economy
Globalization is a fact of life in 21st century America, andAmerica's small businesses should be allowed to take full advantageof its opportunities. Since 1990, the share of U.S. GDP thatAmericans have earned abroad though exports of goods and servicesand earnings on foreign investment has jumped from 12 percent to17.4 percent. That is the highest ratio of exports to GDP in ourhistory. Americans have never earned or spent a higher share of ourincome in the global economy than we do today. Three quarters ofthe world's spending power and 96 percent of its people liveoutside the United States. This represents a huge potential marketfor U.S. producers in general and hundreds of thousands of Americansmall businesses in particular.
Our growing engagement in global markets is one of the brightspots in the U.S. economy today. As the housing and financialsectors have tanked, exports and earnings on foreign investment arebooming. While the economy as a whole has slowed dramatically,exports of goods and services jumped by 12.6 percent last year, andearnings on U.S. investments abroad soared by 20 percent. Thehealthy growth in exports has continued into the first quarter ofthis year, according Commerce Department data released just thisweek. That expanding opportunity to serve foreign markets hasallowed U.S. companies, including small businesses, to betterweather the current slowdown.
Driving this increase in demand for U.S. exports has been stronggrowth abroad, especially in emerging markets. The global povertyrate has been cut by more than half since 1981, with much of thecredit is due to market-reforms in developing countries, includingunilateral trade liberalization. Hundreds of millions of peoplehave joined the rising middle class in China, India and the morereform-minded countries elsewhere in Asia, Latin America, Africa,and the Middle East. American companies and workers are reaping thebenefits of expanding global trade and development.
Small Businesses Reaching Global Customers
Opponents of free trade dismiss it as a policy that only favorsFortune 500 companies. That claim is becoming more false every day.A quarter of a million U.S. companies export to foreign markets,the large majority of them small and medium-sized enterprises(SMEs) that employ 500 or fewer workers. According to the U.S.Chamber of Commerce, more than 230,000 SMEs now account for nearly30 percent of U.S. merchandise exports. The number of suchcompanies exporting has more than doubled since 1992.
This growth has been propelled not only by the expansion ofglobal trade generally but also by technological developmentsespecially favorable to smaller exporters. On the cutting edge ofthis development has been the spread of the Internet ande-commerce. There are now more than 1.3 billion Internet users inthe world today, and the number is growing rapidly. Of those, 85percent shop online. With the assistance of delivery services suchas FedEx and UPS, small businesses are able to reach global marketswithout the daunting expense of establishing sales teams anddistribution networks in foreign countries. The Internet has alsofacilitated the slicing up of global supply chains, creating moreopportunities for smaller U.S. companies to find profitable nichesas suppliers for larger multinationals.
One of the most important and fastest growing markets forAmerica's small-business exporters is China. Last year, Americansexported $65 billion worth of goods to China, making it our thirdlargest customer for U.S. goods in the world, behind only our NAFTApartners Canada and Mexico. Since China's entry into the WTO in2001, U.S. goods exports to China have grown at an annual compoundrate of 22.6 percent. That is triple the growth rate of U.S.exports to the rest of the world. China is now a major market notonly for U.S. agricultural products, but also for plasticmaterials, chemicals, industrial machines, semiconductors,telecommunications equipment, and computer accessories.
Small and medium-sized U.S. companies are basking in this exportsuccess. In 2004 (according to the most recent figures we have),19,210 SMEs in the United States were exporting to China. That ismore than six times the number that were exporting in 1992. Theshare of U.S. companies exporting to China that are small ormedium-sized enterprises has grown during that time from aboutthree-quarters to more than 90 percent. SMEs accounted for 35percent of U.S. merchandise exports to China in 2004, a highershare than their 29 percent share of exports overall. Board anyflight from the United States bound for China and you will probablybe sitting near somebody representing a small-sized U.S. companyheading off to buy and sell in the world's fastest growing majormarket.
Despite loud complaints from certain U.S. producers, theundervalued yuan does not appear to have dampened the ability ofU.S. companies-large, small or in between-to sell in China'sexpanding market. If Congress enacts legislation that ignites atrade war with China, small U.S. exporters will be among thefront-line casualties.
An Agenda to Promote Small BusinessExporters
What can Congress do to help promote the ability of small U.S.companies to compete successfully in global markets? Congressshould seek to lower trade barriers to our own market so that U.Scompanies can access raw materials, industrial supplies, andcapital machinery at the lowest possible global prices. A more openU.S. market also feeds back into more export opportunities inforeign markets. Foreign producers who can sell more freely in theU.S. market thus earn more dollars in which to spend on U.S.products and services for export. U.S. producers made moreefficient by facing global competition are better able to gain andexpand market share abroad. And reducing our own trade barrierssets a good example for other countries and helps to set the stagefor trade agreements that also lower trade barriers abroad.
Far from calling a trade "time out," Congress should work withthis administration and the next to approve comprehensive tradeagreements to abolish trade barriers and promote two-way foreigninvestment. Agreements to reduce trade barriers and facilitateinvestment certainly do benefit big U.S. multinationals-and noapology is necessary for that-but they benefit smaller U.S.companies just as much if not more. Those agreements benefitsmaller U.S. exporters in three important ways.
First, trade agreements help to reduce red tape and increasetransparency. Small businesses lack the resources and foreignbusiness partners available to large companies to navigate throughopaque customs and legal systems to reach their customers. Numerousfees and other non-tariff barriers that can be no more than anuisance to large multinationals can be deal-breaker for smallcompanies. Trade agreements streamline rules, reduce non-tariffbarriers and provide arbitration procedures so that even small U.S.exporters can successfully participate in foreign markets. As a newstudy by my Cato colleague Daniel Ikenson found, improving "tradefacilitation" can do more to bolster U.S. trade than actual tariffcuts.1
Second, trade agreements open up opportunities for small U.S.exporters to compete for foreign government contracts. Previous andproposed trade agreements guarantee U.S. companies a fair shake atthe important government procurement market. Such agreements canhelp to lower the threshold at which contracts must be put out forcompetitive bid, ensuring that even small U.S. companies can bepart of the process. Some of those contracts-for roads, schools,clinics, distance learning, and medical equipment, for example-canbe ideally suited to smaller U.S. companies.
Third, trade agreements lower tariffs and other barriers totrade that are more difficult for small exporters to work around.Many large multinationals have the option of relocating productionfacilities to foreign affiliates, circumventing border barriers.Most SMEs, in contrast, export from a single domestic location. Thereduction and elimination of tariffs allows them to export fromtheir domestic facilities without facing barriers that can often bediscriminatory and prohibitive.
Opportunities in South Korea, Panama, andColombia
The 110th Congress has the opportunity right now to enact threeimportant trade agreements-with Colombia, South Korea, andPanama-that will help small U.S. companies boost their exports. Allthree of these agreements would reduce and eliminate tariffs onU.S. exports to each of those markets while guaranteeing fairtreatment for U.S. companies that investment abroad. They wouldstreamline customs procedures, enhance transparency, and open upgovernment procurement markets for bid by U.S. companies of allsizes. These agreements would allow thousands of small business inthe U.S. to export to these markets for the first time.
U.S. small businesses are already exporting to all three ofthose markets, although they currently face trade barriers that aresignificantly higher than those imposed by the United States.
- In South Korea, nearly 17,000 small and medium-sized U.S.companies already export to what is America's seventh-largestmarket abroad. SMEs account for almost a third of U.S. exports toKorea. The agreement would be especially helpful for U.S. exportersof electronics, 94 percent of them SMEs.
- In Panama, 5,600 U.S. companies are already exporting there,with 80 percent of them small and medium-sized enterprises. Since2002, U.S. exports to Panama have been growing more than twice asfast as exports to the rest of the world.
- In Colombia, 7,705 small and medium-sized U.S. companies arealready exporting, accounting for 35 percent of American goods soldin that country. Almost all Colombian goods already enter theUnited States duty free because of the Andean Trade PreferencesAct. The U.S.-Colombia trade agreement would eliminate Colombiantariffs that currently range as high as 35 percent, delivering the"level playing field" so many members of Congress say they want.According to the U.S. International Trade Commission, the agreementwould boost U.S. exports to Colombia by $1.1 billion a year.American small businesses are ready to claim a big slice of thatexpanding pie.
Say 'No' to Trade Barriers and ExportSubsidies
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. Escalating trade tensions would also jeopardize exportopportunities in growing markets abroad. Antidumping orders andother tariffs against such imports as steel or agriculturalcommodities drive up costs for domestic producers, many of themsmall businesses, who use those imports in their finalproducts.2 For the same reasons, a weak U.S. dollar,while benefiting certain U.S. exporters, has driven up productioncosts that 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 federal subsidies to competeeffectively in global markets. Our research at Cato has shown thatU.S. exporters have outperformed their counterparts in GreatBritain, Germany, France, Canada and Japan even though the share ofU.S. exports receiving government support is much lower thanexports from those countries. Most U.S. export subsidies go tofirms that do not experience subsidized competitionabroad.3 U.S. and global markets are currently awash inprivate capital ready to finance new trade and investmentopportunities. Federal export subsidies do not promote more exportsbut only reshuffle the export pie in favor of larger U.S.companies, crowding out smaller exporters.
If Congress and the administration want to increaseopportunities for U.S. small businesses to compete and thriveduring the current, challenging economic climate, they should worktogether to reduce barriers to international trade and investmentwhether in the United States or in other countries.
1Daniel Ikenson, "While Doha Sleeps: Securing Economic Growth through TradeFacilitation," Cato Trade Policy Analysis no. 37, June 17,2008, available at www.freetrade.org.
2For the impact of steel tariffs, see Daniel Ikenson,"Readyto Compete: Completing the Steel Industry's Rehabilitation,"Cato Trade Briefing Paper no. 20, June 22, 2004, pp. 5-6; for theimpact of 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.
3Aaron Lukas and Ian Vásquez, "Rethinking theExport-Import Bank," Cato Trade Briefing Paper no. 15, March15, 2002.