To replace the popped consumption bubble, we need new buyers overseas. What stands in our way?
Chinese President Hu Jintao's summit with President Obama this week cast in stark contrast the difference between the world's largest economies. China is an export powerhouse with weak domestic consumption. The U.S. is a consumer powerhouse with relatively weak exports. We need to be more like China, and China needs to be more like us.
To replace the consumption bubble that popped, we'll need to find an audience for our goods and services overseas. For that reason, the White House has announced a goal to double our overseas sales in five years, a feat that has only been accomplished once in the last half century. What stands in our way?
Here are the top challenges to U.S. trade:
Imagine you're an American company trying to sell in China. First, you'll face logistical hurdles. Establishing a relationship with Chinese buyers requires many (expensive!) long distance flights and further trips around the country to find buyers. Second, you'll face cultural hurdles, like managing the language barrier, adhering to local customs, and overcoming the trust issues inherent to international business.
Third, you'll find that China has unique product standards that make life particularly hard for you. Let's say you're a bulldozer manufacturer. International rules say the length of the drivers' step for the driver has to be between 28 and 30 inches. In China? The standard is between 30 and 36 inches. (Why? Because!) That means you have to modify the production line, making the bulldozer more expensive.
That's just the tip of the iceberg when it comes to trade barriers. Punishing taxes and tariffs can make American products so expensive that nobody in China wants to buy them. But the biggest problem is government procurement rules, says Frank Vargo, vice president at the National Association of Manufacturers. Let's explain that phrase quickly: The Chinese government is a $100 billion market, but it insists on buying only "domestic" goods, which shuts out major U.S. companies from that $100 billion pie. For Chinese companies, that means a cozy environment to practice technologies until they're world class. For U.S. companies, especially in the high tech industry, it means a lot of closed doors in China and stiff competition with heavily subsidized Chinese companies abroad. (Trade barriers are a problem with many countries, but in China they cast the longest shadow.)
The United States runs a trade surplus in services like licensing technology. But if China steals what we're selling, then ... well, we can't sell it. Technology companies say they notice the Chinese downloading software updates for software programs they've never bought. David Leonhardt points out that China has become the world's second-largest market for computer hardware sales, but only the eighth-largest for software sales. That's the IP theft gap in a stat. Sometimes, the Chinese steal from right under our noses. When a crane manufacturer named Manitowoc designed restaurant equipment for local Chinese restaurants, Chinese competitors stole the designs. Who wants to do business somewhere their ideas won't be protected?
The significance of our exchange rate can be exaggerated [read more on that here], but it's still key to our competitiveness. In a sentence: When the dollar is overvalued, our exports become too expensive, and overseas clients buy less stuff. Here's the story in two graphs:
When the dollar rises against a broad basket of currencies, our export growth rate plummets. It's happened twice in the last 40 years, in the mid-1980s and in the mid-2000s. If the dollar starts to climb that mountain again, expect our export growth to slide into another valley.
CHALLENGES AT HOME
The most important constraint to U.S. trade might be the way we tax companies. We have what will soon be the highest corporate tax rate in the developed world now that Japan, the current leader, is slowly bringing down its rate. One reason why multinational companies prefer to set up subsidiaries abroad is to escape U.S. taxes. Even Google, despite its unofficial pledge to not "be evil," famously funnels its revenue abroad to avoid being hit by our 35 percent tax rate on stateside income. The United States can't compete with the labor rates in smaller economies, but a lower tax rate could bring U.S. business back to the U.S.
The second biggest domestic challenge is the lack of trade agreements to give us market access to growing consumers abroad. While Europe negotiates with Canada, Cafta, Brazil, and Argentina, some members of the U.S. Congress claim trade agreements have cost us 5 million jobs. It's not so. Vargo responds that we have a trade surplus in manufactured goods with our FTA partners. But due to this wrong deep-seeded belief, Congress has been sitting on free trade agreements with Panama, Korea and Columbia. "I can't tell you how many companies have said to me, 'We need free trade agreement with Brazil, their taxes and tariffs are too high,'" Vargo says. And yet, Brazil has one of the fastest growing consumer markets in the world.
The third factor is export controls: that is, Uncle Sam telling companies that they can't sell certain "protected" products abroad, especially if they fall under the category of defense-related technologies. These controls cost U.S. companies an estimated $60 billion in exports every year, even though some of the protected technologies are widely available overseas. For example, you could look at two identical sophisticated machine tools, one made in the U.S. and one made in Germany. A U.S. company can't sell that machine to China because of export controls. But Germany can sell it tomorrow. Even Defense Secretary Robert Gates has said export controls hurt our national security and our economy by giving business to our competitors.
Fourth, we need more export financing. That sounds complicated, but I can explain it easily enough. The U.S. Export-Import Bank helps smooth export deals by making loans to U.S. companies and guaranteeing that foreign buyers pay up. The bank is like sugar to medicine: it helps the deals go down. But it doesn't do enough. Last year, Ex-Im Bank (as it's called) financed $24 billion in exports. Meanwhile, the Canadian export bank did $80 billion. The Japanese did $150 billion. Ex-Im needs to do more financing, and faster, to help U.S. companies compete with aggressive banks in Japan, Canada and China.
Finally, we need more export promotion and education. Some companies don't export because, quite frankly, they have no clue where to start! Finding overseas clients and winning bids against, say, German engineers is a tall task no matter what. But it doesn't have to be so tall. The United States needs more organizations to both educate companies who could be successful exporters and market their products overseas. That means more programs like ExporTech, a seminar run by the Commerce Department's Export Assistance Center, that teaches small and medium sized countries how to put together a business plan and brochure that will capture international audiences.
Non-Wikimedia Commons images from Alan Cleaver and Beverly & Cleary via Flickr
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