SERIES: The Eight Factors of American Competitiveness - Chapter Two: Open Markets
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This article is the second in a ten-part series from the National Chamber Foundation titled “American Competitiveness—A National Assessment through the Eyes of Job Creators.” The series explores how well America is positioned to excel in today’s tightly contested global economy through eight questions that job creators ask when determining where to locate, invest, grow, and hire among a world of alternatives. Find part one by clicking here.
We examine the first and most fundamental of these questions: “Will we have access to open, growing markets at home and abroad?” It’s a simple proposition. Enterprises must have an ample supply of customers to survive; and they gravitate to where they can best serve them.
For decades America has set the standard for market size and strength. High private-sector employment, rising incomes, and solid faith in the future has fostered pace-setting consumer demand that, in turn, has nurtured vibrant free enterprise; producing a self-reinforcing cycle of American employment, business growth, and prosperity. Today, however, adverse domestic conditions and a continued failure to respond adequately to titanic, opportunity- filled shifts in the world’s economic landscape are weakening the cycle.
The nation’s debilitating macro-economic and public policy dysfunctions—headlined by runaway national debt—are devastating consumer and business confidence. Our skyrocketing ratio of debt to GDP rivals the world’s most troubled economies and has crossed the threshold of economic harm. These dynamics are flashing a yellow light to job creators warning of still higher taxes, rising interest rates, excessive inflation, and prolonged national austerity – conditions that lower income, boost costs, and decimate demand. Furthermore, continued troubles in the housing market are taking a heavy toll. For many American consumers, their homes are their single most important asset. Yet home values continue to stagnate and millions of mortgages remain underwater.
As these conditions intensify, job creators are becoming increasingly apprehensive about the U.S. business environment. This rebuff coincides with the flourishing appeal of international investment and business operations abroad to access populations growing in size and purchasing power generated by greater levels of freedom. Four-fifths of the global economy lies outside U.S. borders and foreign markets will account for about 80 percent of world economic growth over the next 40 years. According to the Stanford University press, the developed countries are on a path to drop from having 80% of the world’s income to 35%. As Jim Wolfensohn, former head of the World Bank, notes, “There will be a monumental shift of economic power. It’s not just a moderation trend, but a fundamental change in the world balance.’”
Over the next 10 years, middle classes in India and China are expected to swell to 800 million people with a collective purchasing power of $3 trillion. These realities will powerfully influence global investment patterns and corporate decision-making. Indeed, according to a UN survey of executives, “local market size and growth…(and) access to international/ regional markets” are the factors that will most heavily influence business location decisions in years ahead.
These trends are unalterable, and they are opportune not catastrophic. However, it means that the bridge to American prosperity in the 21st century is market access and trade; but the span is broken and upgrades well-behind schedule. Restrictive tariffs and assorted obstacles continue to stymie the sale of U.S. goods and services abroad—impediments that persist thanks to an anemic U.S. trade agenda. Among the 214 trade agreements in effect worldwide, the United States is party to only 11. There are 297 agreements under negotiation globally, many involving the EU and China, while the United States is party to only one, causing us to lose an increasing number of customers and fall back in the race for new markets.
Our trade reluctance belies our experience. The small percentage of countries with which the United States has a market access agreement accounts for nearly 40 percent of U.S. exports. The United States enjoys a trade surplus with its free trade agreement (FTA) partners in manufactured goods (on top of our global trade surpluses in services and agricultural products) and more than 17.7 million American jobs depend on trade with the 14 countries with which we have an agreement. Of this total, 5.4 million U.S. jobs are supported by the increase in trade generated by the FTAs.
Yet, America’s international trade rankings continue to deteriorate. The World Economic Forum rates the United States 19th out of 125 nations in “trade preparedness.” We place 20th out of 183 national economies according to the World Bank’s 2012 “trading across borders,” which evaluates documentation burden along with time and cost to export and import.
A report by Ernst & Young summed it up nicely: “With emerging markets likely to dominate growth, succeeding in these markets has become a strategic imperative.” Doing so makes it vital that we act more strategically to remedy our fiscal, budgetary, and policy dysfunction; to reenergize the private sector with policies that encourage investment, productivity and hiring; to expand access to overseas markets via a modern trade agenda; and to provide world class infrastructure that smoothly connects job creators to the global marketplace. Nevertheless, we face formidable obstacles in maximizing the benefits of trade and win job creators to our shores.
Public skepticism: Polls show that a majority of Americans are skeptical about trade benefits, even though (1) trade accounts for more than 28 percent of GDP and 38 million jobs; (2) the United States enjoys an international trade surplus in services, as well as in goods with countries with which we have a trade agreement; (3) affiliates established overseas by U.S.-owned companies to serve markets abroad create jobs in the United States; (4) increased exports have offered a rare bit of good news in the otherwise sluggish recovery following the recession that began in 2007; and (5) our brand reputation leads the world.
To be sure, international trade and competition have resulted in the loss of some American jobs in particular sectors and locations. The human consequences of these losses matter and demand our vigorous response. Claims, however, that international trade—specifically, the sale of foreign goods in the United States and offshoring—has contributed to a net loss of U.S. jobs are not supported by the facts. Setting aside the job creation side of the trade ledger, less than 3 percent of layoffs of 50 or more people are attributable to import competition or overseas relocation, according to survey data from the U.S. Bureau of Labor Statistics.
The need of global companies for proximity to the new centers of demand will often require them to invest and create jobs outside U.S. borders. Properly balanced, these actions can strengthen our global firms, enhance their productivity, and expand their employment in the United States. At the same time, facilitating access to global markets via advantageous trade policies coupled with superior end-to-end supply chain logistics mitigates many of the advantages of proximity and enables home production to supply foreign markets.
State capitalism: We must come to grips with the emerging economies’ practice of state capitalism that seeks to enhance trade, boost the competitiveness of domestic firms and home-based multinational corporations, and attract firms home through the use of extraordinary state interventions. Tactics include production subsidies, targeted tax abatement, free or subsidized land, free living arrangements for employees, special financing, grants, and other benefits. Moreover, countries are devising cleverer means of shutting off access to U.S. goods such as employing regulation to circumvent trade agreements. The Atlantic Council of the United States has found that it’s now more common for barriers to commerce to come not from quotas and tariffs but from regulations and standards. The U.S. must be able to counter these practices, in keeping with our principles and values, if we are to succeed. Still, we have no thoughtful, well-organized approach, just as we have no bona fide national trade agenda or strategy to guide the way.
Anemic Trade Finance: One approach by which the U.S. government, like many of our competitors, promotes trade for home companies is financing assistance. In part because of an agreement among member nations of the Organization for Economic Cooperation and Development that limits subsidized trade finance assistance, the U.S. finances fewer transactions and takes longer to process applications than do many institutions serving foreign competitors. Some OECD member countries are finding ways to circumvent the limits to the America’s detriment, while other nations such as China are simply not bound by OECD rules and provide robust financial support to exporters that far exceed our own.
Excessive Export Controls: In still other cases, U.S. export policies result in self-inflicted wounds. The delays imposed by time-consuming procedures for the sale of goods covered by export control regulations increase their cost and scuttle sales, even when items are approved for transfer. Even reporting requirements imposed by the U.S. government on would-be purchasers of certain items can be enough to dash a U.S. sale in favor of a competitor.
As the Milken Institute (MI) has reported, “…the end-user nation has not been prevented from receiving the technology in question and the U.S. eventually sees its technological competitiveness in the world market diminish.” The same study found that modernizing U.S. export controls could create “160,000 manufacturing jobs, and heighten total employment by 340,000.”
Intellectual Property (IP) Theft: IP theft is a worldwide phenomenon and takes many forms, from state-sanctioned copping of know-how to back-alley trafficking in counterfeit and pirated products, a practice that cost $250 billion in 2007. According to a study on trade abuses prepared by the U.S. International Trade Commission (ITC), Chinese theft cost U.S. IP-intensive firms $48.2 billion in lost sales, royalties, and license fees in 2009, preventing a large number of jobs from being created in the United States. The ITC further estimates that if China’s Intellectual Property Rights standards were aligned with ours, in 2009 U.S. exports of goods and services would have increased by $21.4 billion, sales for U.S. majority–owned affiliates in China would have increased by $87.8 billion, and 2.1 million American jobs would have been created.
Incoherence of International Standards: Disparate national standards greatly complicate America’s ability to sell the advanced, high-value products that are our bread and butter into multiple markets abroad. The United States must lead global efforts to coordinate reasonable and appropriate regulations, standards, anti-corruption practices, and transparency measures that foster trade on a truly competitive playing field. This is why America is and must continue to be an influential leader in the World Bank, International Monetary Fund, World Trade Organization, World Customs Organization, World Intellectual Property Organization, Organization for Economic Cooperation and Development, G-8, G-20, United Nations, and other important global political and economic institutions.
Failing transportation infrastructure: Yet, extensive trade pacts and coherent international rules are irrelevant if job creators are unable to move their goods to far-flung markets fast and affordably. While “we still have one of the best end to end infrastructure systems in the world;” an overburdened, underfunded and inadequate infrastructure threatens our position as an export platform from which job creators can access global markets efficiently to create jobs at home. Our aging ports, highways, railways, and intermodal connections are marred by incapacity and inefficiency, leaving them widely unprepared to accommodate rising freight loads. Many U.S. competitors have more modern and interconnected systems than those in the United States, and they market these assets to investors and job creators who depend on global supply chain efficiency to survive.
Bottom line: Despite the complex challenges our economy faces, America has more going for it than any country on earth. We remain a hotbed of innovation with a long track record of invention and a world-leading capacity for problem solving. We have sophisticated global companies and fertile small businesses. We are the best in the world at logistics and supply chain management. We have plenty of what the world needs and desires: food, energy, innovative products of every kind, and highly sought-after arts, entertainment, and culture. We have a political and economic system the world is imitating. Yet, if we are to remain an example to the world, achieve the greatness to which we aspire; and assure job creators we can deliver the demand they need and keep the cycle of American prosperity churning strong, we also have much work to do.
We must end political gridlock and right the nation’s economic ship to restore consumer and business confidence and demand. This includes fixing our broken budget and instituting competitive tax policies that promote purchasing power, investment, and hiring.
We must embark on an ambitious, job-creating trade promotion program that vanquishes trade barriers, strengthens mechanisms to protect U.S. rights, ensures that trade terms are enforced, and clarifies incoherent international rules and standards that impede the sale of U.S. goods and services overseas.
We must expand programs to mentor and assist U.S. small and medium-sized companies to seize foreign trade and procurement opportunities and to help them navigate foreign customs procedures and regulations.
We must remodel U.S. export controls and procedures to enhance U.S. competitiveness and protect national security; and modernize U.S. transportation infrastructure to keep American commerce humming and our goods on the move.
Through it all we must remain responsive to job creators’ need for access to growing vibrant markets at home and abroad if they are to perform their essential functions in a free and prosperous society.
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