The Next Export Superpower?

The recent dip in U.S. exports comes at the heels of American export renaissance. US exports have surged by over 50 percent to both China and Latin America since 2008, and even by 20 percent to the sluggish OECD nations. The export boom makes the Obama administration’s 2010 pledge to double US exports by 2015 seem to be on target, even if much is due to the rebound from the massive 2009 fall in trade and weaker dollar. But sustained export-led growth takes more – especially to arm America’s next generation of exporters, thousands of small and mid-size enterprises (SMEs).

For decades lulled by the vast and fast-growing US market, America’s SMEs are changing course. The number of SME exporters has soared by 20 percent to nearly 300,000 in the past five years, and SMEs now make up over a third of US exports. Unfazed by ongoing global turmoil – Europe’s downturns, China’s cooling, Brazil’s listlessness – three quarters of US SME exporters plan to increase their international sales, up from 49 percent in 2008, as do a quarter of non-exporters. Their bet? The trillions in new discretionary spending in large emerging economies that will birth 1.5 billion new middle class consumers by 2020.

Granted, large companies like GE and Caterpillar still dominate US exports. But what SMEs lack in scale they make up in agility, speed, and creativity – keys to thriving in the 21st century global marketplace of consumer fads, niche markets, and out-of the-woods competitors. In such globally high-growth sectors as IT, energy, and biotech, America is a hotbed of “born global” companies, start-ups that find markets abroad before selling in America at all.

America’s mental shift from local to global promotes growth and jobs. Making up half of GDP growth in recent years, exports have staved off a double dip recession. Exporters get more bang for the buck. In 2005-09, the revenues of exporting US manufacturing SMEs US manufacturing SMEs grew by 37 percent, while their non-exporting counterparts contracted by 7 percent. SME exporters’ labor productivity is up to twice as high as that of non-exporters. Export premiums trickle up: SMEs support over 4 million export jobs, and each 10 percent rise in exports produces twice as many jobs as similar rise in domestic sales.

America’s export revolution may be just starting. A recent BCG report shows that by 2020, declining energy costs and increasingly competitive wages will give America up to 25 percent export cost advantage over Japan, UK, Italy, and even Germany, an export might. The effect? Inshoring of manufacturing plants, up to $90 billion in additional annual exports, and 5 million new jobs.

Unlike large multinationals that can grow the export pie only at the margins, SMEs could be game-changers. For now, they are army exporters-in-waiting: barely five percent of SMEs export. US trade policy must be nuanced in three ways to catalyze this latent SME potential.

The first is exchange rate, the driver of US trade balance. Currency wars beckon as East Asian nations seek export-led growth against the backdrop of US quantitative easing. Strong dollar hits SME exporters especially hard: unlike large companies selling in multiple markets, SMEs can seldom offset exchange rate losses in one market with gains in another. Yet retaliatory tariffs against currency manipulators only hurt SME exporters, the best of which are also voracious importers of low-cost inputs. A far better fix: end US fiscal deficit, a key driver of strong dollar and trade deficits.

Second, global services trade must be freed. The Obama administration’s only market access feat has been passage of three trade deals with Colombia, Panama, and South Korea. As the leaderless multilateral Doha trade round withers, emerging market protectionism and half-hearted IP protections shackle the hugely competitive US services SMEs. It is also the emerging markets that will add $3 trillion annually to global infrastructure spending – save for trade barriers, a boon for US business services, construction, and engineering firms. Mind you, engineering firms alone support more jobs than the auto industry.

Third, SME exporters lack capital to scale internationally. Banks, hit by regulations, are risk-averse and curtailing trade finance. In a US International Trade Commission survey, manufacturing SMEs rank lack of financing as the number one out of 19 hurdles to trade, services SMEs as the third hurdle. Meanwhile, China, Brazil, and India, unbound by OECD conventions regulating export credit, are spending lavishly on their export champions, making US Export-Import Bank pale in comparison. Yet this spring’s bruising ExIm Bank reauthorization is telling: government is not the answer; creative private financing solutions are required.

Will 22nd century historians marvel at a continental economy’s turn into an export superpower? They may – if America reaps the full promise of the thousands of world-class companies it spawned.

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