How Can We Revitalize America’s Global Competitiveness?

Today I had the honor to speak on a panel “Power Play: How Can We Revitalize America’s Global Competitiveness?” at the Pacific Council’s members’ weekend. It was a terrific debate – below are my opening remarks and some conclusions:

U.S. competitiveness is a big topic, with several possible definitions – each of which may lead one to somewhat different conclusions. To kick our conversation off, I would like to offer three comments:

First, while there might be reasons to worry about our competitiveness, there are many reasons to celebrate. Consider that:

  • Our corporations are the most productive and resilient in the world
  • Our tech companies are global trendsetters that not only have revolutionized industries, but also created entirely new ones
  • We have figured out the technology to tap into new energy sources that reduce our energy costs
  • We are home to 27 of the 30 universities that produce the most-cited scientific research

We also do exceedingly well in indices that can be seen as proxies of our competitiveness:

In other words, there are many parts of America that work.

Second, if we adopt the definition of competitiveness as the extent to which our companies compete successfully in the global economy, we are well-placed for two reasons:

The first reason is that the global economy of the 21st century is a digital economy. It is an economy where goods and services are digital and bought and sold on digital platforms, with transactions concluded with digital payments. It is an economy where companies that leverage technologies riding on the Internet, such as 3D printing, ecommerce, Big Data, and virtual wallets dramatically reduce the costs for companies to make, market, and move products and services.

The United States is set up for this economy: we have the technologies and our companies and consumers are adopting them. We have the capital and market to scale technologies. Contrast this to Europe: Europe has gone from digital leader to laggard, not least because it is not yet a single digital market. While physical goods travel freely across borders in the EU, digital goods and services still do not. For example, in the U.S., Netflix can stream content just as easily in Alabama as in Alaska; in EU, Netflix is blocked from streaming online content in any of the 28 EU nations without country-specific licensing deals.

EU’s being fragmented into different digital markets I would imagine stifles investment in tech companies. It is not accident that Google, Facebook, Twitter, Uber, and many others grew up in the United States, a single digital market, or that Alibaba took off in China, similarly a single digital market. It is also no accident that 54 percent of online services in Europe are provided by American companies.

The next frontier in our digitization is ensuring that our originally “non-digital” companies – companies in manufacturing, food and beverage, financial services, retail, and so on – adopt and use digital technologies.

The second reason why I feel optimistic about our ability to compete is our trade policy is also setting us up to compete. Like many others, I was concerned about the statements of candidate Obama on the campaign trail in 2008, when he talked about the need to renegotiate NAFTA, hit the pause button on trade negotiations, and focus on trade enforcement.

Positively, our trade policy has become very forward-looking and strategic. TPP was just concluded, opening vaster access to the Japanese market, and once TTIP gets done, we have carved new market access in countries making over half of world trade. We will also have set the de facto multilateral trade rules for the 21st century. The Trade in Services Agreement (TiSA) talks that we are leading and that encompass 50 nations will bolster these gains further in services, the high-growth sector of our economy. Our trade policy has also been very strategic, forcing BRICs to choose between market access in the liberalizing coalition of willing we lead, or the status quo.

In a tennis analogy, in our trade policy, we are taking ball on the rise, and playing smarter than any other nation.

Of course, trade deals we lead like TPP and TiSA are also helping other member economies succeed and gain competitiveness. Just like we do, Japan, Vietnam, and Australia will all gain from TPP, as will 8 other members (and so in fact do other trading partners due to the growth gains in the TPP countries, which boost their overall demand). This is good news: when one stops looking at the world economy as a mercantilist zero-sum game and sees the connections between our and other nations’ prosperity, our trading partners’ growth and prosperity is hugely positive to us.

The third comment is the “however”. What, then, worries me?

First, I worry about creeping regulations and taxes – that one day, after many reactionary moves as in financial regulations after the financial crisis, we wake up and find ourselves having sapped the vigor of our innovation economy and the quintessential American opportunity to make it big here. The debate here must be about smart regulation, not black-and white no regulation vs. lots of regulation.

Second, education is and is not a source of concern. Education is investment in human capital, a driver of total factor productivity and growth, and typically also of incomes of individuals. In other words, quality K-12 education fuels our upward mobility. At the same time, we want to be mindful of keeping investing in our higher education and the best and the brightest, the captains of industry. It is also always useful to talk about STEM – but we should not lose sight of the bigger picture that tech and math are not everything. Even if we get STEM right, we still need 21st century workers – and they are not only statisticians or engineers, but also savvy negotiators, strategic thinkers, great designers, and good collaborators with sound judgement and poise and flair to persuade.

Steve Jobs stressed that Apple products had not only technology but also humanities and liberal arts in them. The best tech companies do not turn on tech alone. Computers  meanwhile, handle many things we do need to get right in the 21st century – math, logic, and shifting through massive amounts of data – I only wish I could scan thousands of journal articles within seconds! But computers are and will be pre-schoolers in the softer tasks that winning in the emerging economy requires. We need STEM, but we need a lot more: measuring the ROI of our K-12, fueling our higher ed to ensure the best ones can truly soar, and educating for the manifold types of roles workers play in the 21st century knowledge economy.

Third source of worry for me is our leadership in the world economy. In the aftermath of the financial crisis, there was a great deal of talk about “American decline” and about the idea that BRICs and other emerging economies would be the locomotives of the global economy. I was so frustrated that I wrote an entire book called Peerless and Periled: The Paradox of America’s Leadership in the World Economic Order (Stanford University Press, 2012), where I argued that emerging markets had structural and institutional defects that would make them run out of steam at some point – and that they were not able to exercise the kind of global, benevolent leadership we have exercised all these years.

Rather, I argued, it is our economy that must power the world economy, and it is out leadership in global trade, finance, and macroeconomic issues – and certainly in other areas as well – that is critical in years to come, in order for us and the world economy to prosper and grow.  I worry that at some point we stop seeing the critical role of American leadership in the world, how peerless it is, and without which how periled our futures can be.

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New thought leadership on digital trade: reforming trade policies, customs regulations, and development solutions for the global digital economy

Disruptive digital technologies — the cloud and digitization, ecommerce, 3D printing, big data, holograms, Internet of Everything, peer-to-peer lending, virtual currencies, and so on — are revolutionizing the economics of global trade and production. They are empowering corporations to dramatically cut costs and encouraging even the smallest of businesses to engage in trade. Digitization opens tremendous opportunities for countries around the world to drive exports, entrepreneurship, and inclusive economic growth. Many of my company Nextrade Group clients too are now gaining interest in ways to drive the digital revolution, and many of my other company TradeUp‘s clients ride on the digital economy.

Yet, there are several barriers to the expansion of digital trade and ecommerce, such as digital protectionism – barriers to the movement of goods, designs, services, investments, and data in the digital economy – and the fact that most people and businesses around the world do not have regular access to the Internet or use the web to engage in exports or create new value.

I have over the past several months been active in several global dialogues to tackle digital protectionism and advance the access to and use of the Internet for trade and development around the world. Recent efforts and outputs include:

  • On November 17-18, 2014, I presented a working paper “Aid for e-Trade: Accelerating the Global e-Commerce Revolution” at the Center for International and Strategic Studies (CSIS), the third largest U.S. think-tank where she is Adjunct Fellow, and at the World Bank’s Trade & Competitiveness Global Practice and the Development Research Group in Washington. Sponsored by eBay Inc., the paper shows that ecommerce holds extraordinary potential for expanding global trade, promoting small business exports and entrepreneurship in the United States and around the world, and boosting export diversification and international development. Yet much of the world and most businesses are still not connected to the web. In addition, several of the countries that have relatively good information and communications technology (ICT) capabilities and Internet usage rates struggle to translate their connectedness into exports and economic gains. The paper proposes a concerted global public-private initiative, “Aid for eTrade,” a close cousin of the global Aid for Trade initiative, which has over the past decade channeled more than $200 billion in bilateral and multilateral trade-related assistance to developing nations. See more in video here, and OpEd on the idea here.

  • On 3 December 2014, I published an Oped in BRINK, Marsh & McLennan-sponsored forum on global risks, called “How Digital Protectionism Threatens to Derail 21st Century Businesses.” The article argues that the emerging global digital economy is at risk: It lacks the liberalizing policies that powered the 1990s wave of globalization.  Rather, digital protectionism is on the rise. Just like tariffs that splintered the world in the 19th century, digital protectionism risks balkanizing the global digital economy before it even starts, squashing the potential of hundreds of millions to prosper in the global economy, and derailing relations between nations. I propose a new effort, the Seoul Consensus, a set of principles for countries around the world to nurture the global digital economy and battle digital protectionism. The Seoul Consensus, named to celebrate Korea’s rapid ascent to a leading digital economy), would be modeled after the Washington Consensus of the early 1990s, which set off a wave of deep trade and investment liberalization across the developing and post-communist world, paving the way for the Flat World wave of globalization. Read more here.

  • On 23 April 2015, I presented the “Aid for eTrade” concept to a team from the Economic Growth, Education and Environment Bureau (E3) from the U.S. Agency for International Development. The office offers technical leadership, research, and field support for worldwide activities in the areas of Economic Growth and Trade, Infrastructure and Engineering, Education, Environment and Global Climate Change, Water, and Gender Equality and Women’s Empowerment. E3 represents the Agency on relevant technical matters in the Inter-agency and with Congress, outside partners, other donors and multilateral institutions. The event was organized by Carana Corporation, a great partner and leading designer and director of economic growth strategies for countries, businesses and donors.

  • On 24 April 2015, I presented a policy paper “Fueling the Online Trade Revolution: A New Customs Security Framework for Secure and Facilitate Small Business eCommerce” at the Center for International and Strategic Studies (CSIS) in Washington. Sponsored by eBay Inc and also featured in a BRINK article, the report shows how across America, individuals and small businesses are increasingly buying and selling goods and services online. The total online transactions in the U.S. grew from $3 trillion in 2006 to $5.4 trillion in 2012, to about a third of U.S. GDP. Yet the rise of ecommerce creates new risk scenarios and considerations for customs agencies—in particular, what security frameworks ought to look like in a world where millions of businesses and individuals around the world increasingly engage in billions of micro-transactions, often resulting in shipments of small parcels from small businesses to other small businesses or individual consumers. The paper proposes an 18-month pilot program “eTrade Track,” a comprehensive initiative run by U.S. Customs and Border Protection (CBP) to secure and fuel small business and online trade. The event also featured a keynote by Devin Wenig, President of eBay Global Marketplaces, and panel discussion with Alan Bersin, Assistant Secretary and Chief Diplomatic Officer for the U.S. Department of Homeland Security (DHS) Office of Policy. See video here.

  • On 13 May, I joined in New York the E15 Expert Group on The Digital Economy, convened by the World Economic Forum and the International Center for Trade and Sustainable Development (ICTSD). The meeting was led by Theme Leader Merit E. Janow, Dean of the School of International and Public Affairs (SIPA) at Columbia University. Discussions focused on the challenges and opportunities that the growth of the digital economy creates for trade and development. Suominen discussed in particular ways in which ecommerce and digitization can advance trade and development around the world, and called for a new global effort, Aid for eTrade, to undo barriers for businesses and entrepreneurs around the world to access and use of ecommerce. I also discussed ideas on ways to advance ecommerce through the implementation of the Trade Facilitation Agreement, and my concept Seoul Consensus, a set of principles for countries around the world to nurture the global digital economy and battle digital protectionism. Here I explain the aims of the E15 event: 

  • On 19 May, I joined a World Bank conference “Harnessing Digital Trade for Competitiveness and Development” as moderator of a panel on policies and investments conducive to digital trade. Though an increasing number of producers in developing countries are selling their wares on the Internet, either through their own websites or through web portals such as eBay and Alibaba, they also face significant impediments to fully exploiting the Internet for exporting – from infrastructure weaknesses to unreliable online payments and complicated customs regulations. The conference brought together entrepreneurs, policy experts, and development practitioners to brainstorm ways that the World Bank Group and other stakeholders can work together to break down these barriers.

  • On 28 May, I presented with Alisa DiCaprio from the Asian Development Bank a draft report I have been authoring on the opportunities and challenges of digital trade in the Asia-Pacific to Asian ambassadors to the World Trade Organization in Geneva. The report shows how digitization is opening entirely new opportunities for Asia-Pacific economies to export and create jobs, and advocates pro-active policy reforms and investments to improve the region’s Internet connectivity, logistics, e-payments, and firms’ capacity to use ecommerce. Gaining positive reception among the ambassadors, the report will be highlighted at the Fifth Global Review on Aid for Trade at the end of June, featuring ADB’s president.

  • Also on 28 May, I joined the World Summit on the Information Society Forum 2015 in Geneva. My panel International e-Commerce for Developing Countries: Practical Case Studies in Overcoming Barriers to Trade through Digital Channels reviewed the challenges for enterprises from developing and least developed countries to engage in international trade through ecommerce, and discussed initiatives to reduce the barriers and cases in the field. I presented my idea on Aid for eTrade; presentation is available here. The panel was organized by the United Nations Conference for Trade and Development (UNCTAD), the International Trade Center, and the United Postal Union.

    Stay tuned for more on digital trade – a new report with the Asian Development Bank, idea generation with the World Bank, a new platform for global digital policies, and a book. Coming up!

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What Is the 2015 State of SME Finance in the U.S.? Read Our New White Paper

Small and medium-sized enterprises (SMEs), firms with fewer than 500 employees, are the backbone of U.S. economy. They make up 99 percent of all firms, employ over 50 percent of private sector employees, and generate 65 percent of net new private sector jobs. SMEs account for over half of U.S. non-farm GDP, and represent 98 percent of all U.S. exporters and 34 percent of U.S. export revenue.

To thrive, SMEs need access to credit and cash flow. Credit conditions for SMEs deteriorated drastically in the wake of the financial crisis. However, even if not matching pre-crisis levels, SMEs’ loan availability improved notably in 2014. Small business owners are also more optimistic than a year ago about their economic prospects and the availability of credit. Venture capital investments also recovered significantly in 2014, and were particularly robust for companies seeking expansion capital.

This TradeUp Capital Fund / Nextrade Group White Paper deepens on the state of SME finance in the United States in 2015. We review trends in lending and equity financing to SMEs, discuss emerging financing sources for SMEs, and assess the future of SME finance in light of the rise of alternative, online lenders and crowdfunding platforms. We also analyze the specific financing issues faced by SMEs that seek growth through exports.

The summary highlights are as follows:

  • Bank lending to SMEs has improved, but has yet to return to pre-crisis levels. In December 2014, the latest date for which data is available, the loan balances for commercial and industrial (C&I) loans of $1 million or less stood at $302.6 billion, $34 billion below the levels of June 2008 preceding the Great Recession.
  • Business owners appear more upbeat about their funding prospects than a year ago. In the January 2015 Wells Fargo/Gallup quarterly survey of 600 small business owners, 34% of respondents stated that it was somewhat or very easy to obtain credit over the past 12 months, up from 28 percent in January 2014.
  • Federal government sources have played a complementary and to an extent countercyclical role during the past few years in SME lending. In FY 2014, the Small Business Administration (SBA) supported $29.6 billion in lending to small businesses, with its 7(a) loans topping the levels of the prior two years. The Export-Import Bank supported export credit insurances and export working capital for SMEs at $5.1 billion in 2014, somewhat below authorizations in 2011-13. SBA-backed Small Business Investment Company (SBIC) financings increased to $3.4 billion in 2013, the latest year for which data are available and a five-year high.
  • Several online lending platforms have sprung up in the wake of the recession to offer small businesses relatively quickly disbursing credit, typically for loans of less than $250,000. According to estimates, online lending platforms loaned record $8.6 billion in 2014. One element of uncertainty in the sector is potential future government regulation.
  • In terms of venture capital investments, 4,356 deals received $48.3 billion in 2014, highest since the dot com boom of 2000, according to the MoneyTree™ Report by PricewaterhouseCoopers LLP (PwC) and the National Venture Capital Association (NVCA). Internet and software deals dominated. Expansion-stage deals received the greatest amounts of investment, while early-stage deals dominated the number of deals.
  • Angel investment has become a strong complement to venture capital. In the first two quarters of 2014 for which data are available, angels invested a total of $10.1 billion, an increase of 4.1 percent over the first half of 2013.
  • Crowdfunding, which enables companies to raise donations, debt, and equity from individual and institutional investors, gained steam in 2014. According to recent estimates, the global crowdfunding industry has grown explosively to nearly $10 billion in 2014 from $1 billion in 2010. Some estimates put crowdfunding at $500 billion in 2020.

As the U.S. economy recovers, 2015 can be a year of further recovery in bank lending to SMEs. However, due to regulatory constraints, bank lending especially to small businesses will unlikely rise above pre-crisis levels. Alternative sources, such as online lenders and equity crowdfunding, are well-placed to secure wider acceptance in the market, contingent on developments in the regulatory landscape. While there are concerns about a new tech bubble that would undercut VC investments, evidence so far indicates these concerns may be overblown.

Download full report here

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How U.S. State Governments Can Help Small and Mid-sized Firms Become Exporters

This is co-authored with Jessica Lee, Senior Fellow at the Brookings Institution, and highlights our new report.

Out of all the companies in the United States, only 4 percent are exporters.

This statistic is surprising given the outsized role that exports played in helping the United States recover from the Great Recession. During the initial recovery period, nearly 40 percent of U.S. GDP growth came from exports.

Today, almost 80 percent of global purchasing power resides outside the United States. Rising global demand—especially in emerging markets, with their expanding middle-class consumer bases—has heightened U.S. firms’ interest in exporting.

Becoming an exporter requires investments of time and money. International marketing and sales, order fulfillment and distribution, and trade compliance all add up. Harder still can be securing longer-term loans and equity finance to fuel a company’s international growth. For small and medium-sized enterprises (SMEs)—those employing fewer than 500 workers—the cost of entering new markets poses a sizable challenge. Without access to capital, many of these smaller firms forego lucrative export opportunities that would enable them to grow and create jobs in the United States.

SMEs typically have a harder time securing export financing than large firms do. Their smaller size and limited assets, along with elevated loan processing costs, make banks less interested in working with them. Meanwhile, most SMEs are unaware of the export financing programs offered by the Export-Import Bank, the Small Business Administration, and other institutions.

There is an opportunity for state governments to take steps to improve SMEs’ access to export financing. By incorporating export support into their broader economic development strategies, states can increase the number of exporters, which in turn will boost job creation and strengthen their metropolitan areas’ economies.

Our new brief—“Bridging Trade Finance Gaps: State-Led Innovations to Bolster Exports by Small and Medium-Sized Firms”—offers three complementary approaches that states can adopt in their efforts to address the SME export financing shortfall.

First, states can work to raise awareness among SMEs and financial institutions about existing federal and private instruments and sources of export financing. This action will encourage greater numbers of firms and banks to take advantage of proven solutions to the export finance challenge.

Second, states can offer additional financial instruments to help reduce SMEs’ barriers to exporting. Direct loans and loan guarantees, royalty-based financing, and accounts receivable financing, among other interventions, make it easier for potential SME exporters to expand into new markets. And in addition to compared to banks, Sstates can work with a broader set of actors—such as with factoring companies and equity funds—to meet theSME’s diverse export finance needs.

Third, states can set up new finance entities that provide direct export finance support exclusively targeted to SMEs. A state-level export-import bank—perhaps akin to the California Export Finance Office (CEFO), which offered a variety of guarantees for smaller export-related loans from its inception in 1985 until 2003, when state budget problems forced its closure— could be able to offer flexible, tailored solutions to the needs challenges facing these smaller firms.

State-level efforts are no replacement for federal programs like the Export-Import Bank, which plays a critical role in helping U.S. companies compete in the global marketplace. But state strategies can provide a much needed supplement to federal export finance programs by bridging the gaps in the current system. By implementing innovation solutions to the challenges facing potential and current SME exporters, states can help SMEs expand into new markets and bolster economic growth in the process.

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Will Globalization Be Obama’s Greatest Foreign Policy Legacy?

This article appeared in Zocalo on 29 December 2014:

A President Who Came Into Office a Free Trade Skeptic Is Now on the Brink of Brokering Two Big Deals

Battered by crises and maligned by critics, globalization is regaining momentum. And this is good news for America’s global leadership. Negotiations for an ambitious Trans-Pacific Partnership (TPP) trade deal involving a dozen countries from Asia and the Americas are quietly nearing the finishing line. Another historic agreement, the Trans-Atlantic Trade and Investment Partnership (TTIP) between the United States and the European Union, also shows signs of becoming a reality.

Not long ago, the idea that two landmark U.S.-centered trade deals could be the pillars of President Obama’s foreign policy legacy would have seemed laughable. As a presidential candidate in 2008, Obama was a trade skeptic, painting deals like NAFTA as job-killers, which played well with unions weary of import surges from China. Once in office, however, Obama warmed to trade expansion as presidents tend to do, given the dependence of the American economy and jobs on exports and global supply chains. In 2010, Obama issued a call to double U.S. exports, with trade deals forming part of the package–only now they were described as “partnerships” that would open new markets to American businesses big and small, rather than “free trade agreements” associated, even if falsely, in the public’s mind with offshoring and job losses.

As an economist who has for years worked to advance free trade in both the public and private sector, I could not be more elated by the prospect that these major deals now look achievable. For more than a decade, ambitious global efforts to liberalize cross-border trade and investment had stalled. The promise of the Uruguay Round of negotiations, which in 1994 produced the crown jewel of the global trading system, the World Trade Organization, appeared to have been lost. The Doha Round–the multilateral talks that were supposed to expand on the Uruguay Round’s gains–have been going on for 13 years, with few tangible results because of disagreements between emerging markets such as Brazil and India (who resist opening their markets to foreign manufactured products and services) and the U.S. and Europe, which are reluctant to free their agricultural markets.

With any one of the WTO’s 160 member nations able to scuttle any global agreement, countries have turned to regional trade agreements or country-to-country pacts as alternatives. Since the United States, Canada, and Mexico launched the North American Free Trade Agreement (NAFTA) two decades ago, no fewer than 400 trade deals have been concluded or are under negotiation, coupling such players as Chile and China, Japan and Mexico, and the United States and Singapore, to name a few. Such deals are easier to get done than a universal WTO deal. They also tend to go deeper than WTO efforts, pioneering in the regulation of such matters as e-commerce, intellectual property, and state-owned enterprises. But for globalizing companies, they also create tremendous new complexity–a patchwork of rules and standards that differ from one market to the next.

The two trans-oceanic pacts that would link us to Asia and Europe, though, would resurrect the momentum for a more comprehensive global agreement. They would also deliver considerable economic benefits. The Trans-Pacific deal (TPP) will boost U.S. annual gains by $77 billion, and Japan’s by $104 billion. The TTIP deal, by integrating markets in the U.S. and the EU, would generate $130 billion annually in economic gains for the United States, and $162 billion for Europe. As such, it is estimated that TTIP will boost U.S. household incomes by $865 annually and create 750,000 new U.S. jobs, while TPP would generate about $1,230 per household by 2025–a great boost without a dime of deficit spending, and a strong bonus on top of the $10,000 annual income gains American households havealready scored due to post-war trade opening.

These trade deals, by locking in deeper access for American interests in overseas markets, could give U.S. companies the confidence needed to unlock their considerable cash holdings and invest in the production of more export goods and the hiring of more U.S. workers. While big business spearheads the trade lobby, “Main Street” small businesses stand to gain from greater access to foreign markets and the harmonizing of product standards and regulations across borders.

These new trans-oceanic deals, if achieved, would also make it costlier for nations who have opposed lowering barriers to stay their obstructionist course. The most cantankerous player in the global trading system, India, risks being left out. Ever pragmatic, China has become interested in joining TPP, in part as a means of counteracting the country’s economic slowdown and driving reforms of inefficient state-owned enterprises.

In our hemisphere, Brazil has not been interested in joining trade agreements, seeking leadership instead of its own dysfunctional Mercosur alternative. Its strategy stands in stark contrast to that of Mexico, which has forged free trade deals with partners covering some 90 percent of its trade, such as North America, the EU, and Japan. As a result, Mexico has emerged as a global manufacturing hub and anchor of Latin America’s Pacific Alliance bloc, which includes the more market-oriented nations of Colombia, Peru, and Chile. Brazil’s industrial lobbies, once champions of protectionist policies, now worry about the effect of high tariffs and about being left out of global supply chains, and have broken with the government to call for a reset of the nation’s trade policy

With the Ukraine crisis, the Israeli-Palestine imbroglio, and our messy departure from Iraq and Afghanistan all stunting Obama’s foreign policy achievements, the once stalemated issue of trade expansion now looks far more doable and desirable on the Obama administration’s menu of possible legacy options. To be sure, the White House is facing complicated talks with Congress over the trade promotion authority (TPA) needed to successfully negotiate a trade deal and get it through Congress. Such a legislative license to jumpstart globalization will likely be opposed, much like the recent budget agreement was in Washington, by both the left wing of the Democratic Party and the Tea Party right within the Republican Party. This may be yet another reason that a trade legacy looks appealing to President Obama: It will take a purple coalition to do the right thing.

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How to Boost U.S. Small Business Lending? Look to the UK

The following piece by me ran today in Ideas Lab:

After a recent public consultation with the business community and financial services industry, the U.K. government has decided to enact a law that requires large lenders to share information with alternative and smaller lenders about small and mid-size enterprises (SMEs) whose credit applications have been rejected. The sharing of such information — which, in addition to loans, would cover factoring, asset-based lending and trade finance — would occur via online referral portals that help match the rejected SMEs to alternative lenders.

The legislation hits a market failure between the eyes: good, credit-worthy companies unable to access capital due to lack of information about best-fit alternative lenders. It matters: the largest four U.K. banks (Lloyds Banking Group, the Royal Bank of Scotland, HSBC and Barclays) account for more 80 percent of U.K. SMEs’ main banking relationships. In the wake of the financial crisis, banks have typically tightened their underwriting criteria — yet most U.K. SMEs only approach their main bank for finance. An estimated 37 percent give up completely if they are turned down, and only 28 percent approached different providers — and 12 percent used an existing form of borrowing, such as credit cards.

Meanwhile, the U.K., just like the United States, has seen the rise of alternative lenders, such as peer-to-peer lending and crowdfunding platforms. The U.K. government reasons that when one door closes, another one opens; SMEs now only need to be handheld from the former to the latter.

The United States needs to follow suit. Pressed by regulatory heat, U.S. banks too are less interested in small business loans, and will be even more reticent as Basel III capital requirements go into effect in 2015. When asked to name the most severe obstacles to growth in a May 2013 survey by the Federal Reserve Board of New York, 49 percent of 670 surveyed SMEs listed access to capital as the leading challenge.

Continue reading

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How Digital Protectionism Threatens to Derail 21st Century Businesses

The below piece appeared in Marsh & MacLennan’s BRINK on 3 December 2014:

A decade ago, Thomas Friedman’s The World is Flat popularized globalization as a process where Apple, Dell, IBM, and other giant corporations offshored manufacturing to low-cost economies, and outsourced parts and components from suppliers around the globe. China became the world’s factory, mass-producing computers, clothes, and gadgets for U.S. consumers. Southeast Asia prospered as China’s parts warehouse.

The flat world lens, however, is no longer prescient.

Disruptive digital technologies—the cloud and digitization, ecommerce, 3D printing, big data, holograms, Internet of Everything, and virtual currencies—are revolutionizing the economics of global trade and production. They are empowering corporations to dramatically cut costs and encouraging even the smallest of businesses to engage in trade. But the emerging global digital economy is at risk: It lacks the liberalizing policies of the Flat World. Rather, digital protectionism is on the rise. How to tackle it? Continue reading

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