Positioning U.S. Small Business for the Global Economy
10 Mar, 2015By: Sean Mulvaney
In 2014, the United States exported $2.3 trillion supporting 11.3 million jobs. U.S. small business contributed significantly to this export success. Direct and indirect exports of U.S. small business have accounted for as much as 40 percent of the total value of U.S. exports of goods and services in prior years.
While recognizing those measures of success, context is important. U.S. exports account for nearly 13 percent of our GDP. Germany exports around 45 percent. Many other peer countries of the U.S. in the OECD (Organisation for Economic Co-operation and Development) also export more as a percentage of their GDP. In the words of one trade policy professional, "while the U.S. is a very large exporting nation, we are not a nation of exporters.”
Exporting Can Pay Dividends for U.S. Small Business
Preparing and orienting the U.S. companies for the opportunities in foreign markets is an immediate challenge. This is particularly true for American small and medium-size enterprises (SMEs). U.S. SMEs are largely focused on the U.S. market. Only six percent of the roughly six million SME enterprises export. But exporting can pay dividends. In a 2011 UPS survey of SME exporters, nearly two-thirds saw a return on investment in two years while a third of respondents saw a financial benefit within six months.
For small businesses that choose to engage in international trade, the benefits can be substantial. Firms that export typically are more profitable, more stable and pay as much as 10 to 15 percent more on average to their employees. Exports can help lower overhead costs, achieve economies of scale, diversify market risk and add or maintain jobs. In general, export-oriented firms can be more successful than their domestic counterparts because they benefit from playing offense around the world, not simply defense in the U.S. market. Kati Suominen, CEO of TradeUp Capital Fund, characterizes these exporters as a new asset class for equity investors.
Opportunities to export span the globe for American small business. Eighty percent of the world's purchasing power and 95 percent of the world's consumers are beyond U.S. shores. Notwithstanding recent declines, some studies project world trade flows will double by 2022 and perhaps triple by 2030. Much of this projected growth stems from an expanding global middle class that will increase from approximately 1.8 billion people today to 3.2 billion by the end of the decade.
Trade Promotion Authority & the Export-Import Bank of the United States (Ex-Im): Leveling the Playing Field for U.S. Small Business
Given this growing class of consumers, competition for market share will be fierce. It is critical that U.S. international economic policy and the community of U.S. small businesses focus on leveraging the opportunities presented. Overcoming tariff and non-tariff barriers to effectively access these markets can be difficult. That is why President Obama and the U.S. Trade Representative Michael Froman are negotiating free trade agreements (FTAs) such as the Trans-Pacific Partnership (TPP) and the Transatlantic Trade & Investment Partnership (TTIP). At present, the U.S. currently has trade agreements with 20 countries. When those agreements are combined with TTIP and TPP, U.S. FTAs will cover countries with two thirds of global trade flows. To succeed in this effort, it will be important for the President to secure his requested Trade Promotion Authority from the U.S. Congress with bipartisan support.
Although trade agreements improve market access for U.S. exporters, the playing field is not always level among firms competing for sales in foreign markets. For that reason, it is important for the Congress and the President to agree to reauthorize the Export-Import Bank of the United States (Ex-Im). Ex-Im is the official export credit agency of the U.S. government. Although in operation for over 80 years, its charter is set to expire in June, 2015.
Ex-Im’s purpose is twofold. First, the Bank seeks to ensure a level playing field for U.S. exports in the global market place (attempting to make sure buyer decisions can be based on price and quality, not state-sponsored financing). And second, the Bank aims to provide export financial services to U.S. exporters that the private sector is unable or unwilling to provide.
Economic competition among nation states is not playing out only among large national champions or multi-national firms. Competition is equally fierce in the small business arena. In 2008 and 2009, Germany had over one third more OECD transaction notifications for export sales less than $10 million than the U.S. At $1.5 billion, the aggregate amount of these transactions was more than twice the dollar volume of equivalent notifications by U.S. Ex-Im. Given the fact that the U.S. economy is nearly five times the size of Germany, this disparity in official export finance suggests a German economic system much more in sync with exporter needs than that of the United States.
As policy makers debate reforms to strengthen Ex-Im, Congress should consider taking two steps. First, it could request that the Commerce Department benchmark the availability of U.S. private sector medium and long-term finance (MLT) with countries such as Germany, Japan and South Korea. MLT export finance makes a competitive export sector possible. The absence of it undermines it.
Second, Congress could request that the Treasury and other financial service regulators evaluate and implement regulation that strengthens the ability of the private sector to provide MLT export finance to U.S. exporters. Implementation of Dodd Frank and Basel III is creating uncertainty in the U.S. export finance industry. Ironically, demand for Ex-Im is being driven in part by the absence of a robust private sector fulfilling the needs of U.S. exporters.
What Assistance Can U.S. Small Business Leverage to go International?
Several U.S. government agencies provide services to small businesses that want to export their products. These resources are particularly important as small businesses do not have the scale or resources of large firms.
For purely domestic firms that will be exporting for the first time, the U.S. SBA supports technical assistance through its network of Small Business Development Centers (SBDCs). SBDCs help U.S. small businesses prepare and begin to export. For companies with limited export experience (starting to export but not beyond a few countries), the Commerce Department has U.S. Export Assistance Centers (U.S.EACs) that span the country. Professionals within these centers provide expert advice to identify export markets, licensing and logistical information, and match-making services with overseas foreign buyers.
Working in tandem with the Commerce Department, trade finance professionals from Ex-Im and SBA provide information on pre- and post-export finance products to help U.S. small businesses navigate the liquidity and payment risks associated with exporting. Private lenders often are unwilling to finance the working capital needs of U.S. small businesses if the output is destined for overseas customers due to a perceived foreign payment risk. Private trade credit insurance often can be unavailable to small businesses because their levels of exports are not high enough to generate a sufficient amount of premium income.
Experienced U.S. small business exporters should explore working with the U.S. Trade and Development Agency (TDA). The U.S. Trade and Development Agency helps companies create U.S. jobs through the export of U.S. goods and services for priority development projects in emerging economies. World Trade Centers, District Export Councils and various state international development organizations working for the nation’s governors may also be valuable resources.
As readers of Trade & Industry Development, you are all part of important professional networks in your community and industry. As you interact with your colleagues and take stock of how well your small business community is positioning itself in a global economy, consider utilizing a U.S. Export Assistance Center — or any of the government agencies meant to level the global playing field. Visit http://www.export.gov/ for more information. Collaboration between these agencies and your small business could be a vital part of building a greater export capacity for you and for the U.S. as a whole.
 Testimony of Maurice Kogon before the U.S. House of Representatives Committee on Small Business, July 27, 2011.