President Obama lost big on a trade deal last week, as House Democrats thwarted his hopes for expanded negotiating authority, putting the White House's ability to fast-track trade deals in jeopardy, and potentially imperiling some landmark trade negotiations that are underway.
Amidst the inside-the-Beltway scorekeeping of who's up and who's down, it's easy to think this was just an embarrassing defeat for a Democratic President and the pro-business Republicans who were backing him.
But, that's not the whole story. If Congress doesn't reverse course when it votes again this week, there's a chance America's small businesses could lose big, too. That's because free trade is a critical lifeline for their business. The data here is compelling:
- Most of America's exporters are small businesses. While we tend to think of free trade as being the domain of big businesses like Apple and General Electric, the reality is that 98 percent of America's 300,000 exporters are businesses with fewer than 500 employees.
- Small businesses which export perform better. Small exporters are 20 percent more productive, grow jobs 20 percent faster, and are 9 percent more likely to remain financially solvent than non-exporters, according to shipping giant UPS.
- Small exporters are more likely to bounce back from tough times. Data from the U.S. International Trade Commission has showed that from 2005 until 2009, small goods exporters grew by 37 percent even amidst the 2008 financial crisis, while non-exporters declined by 7 percent.
This strong growth has spillovers across the economy since firms with fewer than 500 employees generate two-thirds of net new jobs and make up half of the U.S. economy as measured by GDP. But, let's not kid ourselves: America's small exporters haven't reached full their potential -- not even close. Again, the data here is pretty compelling:
- Small exporters contribute less to the total value of U.S. exports than small firms do in some of our biggest trading partners. While just about every exporter may also be a small business, these firms account for just a third of our country's merchandise exports. Contrast that to the mighty Mittelstand, Germany's small businesses, which drive 40 percent of exports.
- Only a small fraction of America's small businesses actually export today. Despite the positive externalities of exporting, only a small fraction -- just 5 percent -- of the 6 million small businesses in the U.S. with employees are actually doing it. Of those which do export, 60 percent do so to just one country.
These statistics are all the more stunning when you consider that 95 percent of the world's customers and two-thirds of the world's purchasing power are outside U.S. borders, according to the U.S. Chamber of Commerce.
So, what stops America's small businesses from exporting?
For starters, small firms often find that it's too costly and cumbersome to export amidst a global playing-field that's often stacked against them. Exports can be hit with foreign tariffs that soar into double digits and non-tariff barriers. For example, obtaining a patent in America costs on average $2,600, but securing EU-wide patent protection can cost $48,000. That would be a nuisance for America's big businesses, but it's a death knell for small businesses trying to export. Let's also not forget: small businesses by definition have fewer employees, meaning they often can't afford staff to keep the company up to date on constantly changing regulations, and that's information essential to penetrating foreign markets.
Trade agreements are negotiated to overcome those barriers, and over the past two decades we've made remarkable progress in opening foreign markets for America's small exporters through landmark trade deals like the North American Free Trade Agreement (NAFTA). Indeed, according to the ITC surveys, small businesses think prior trade deals have helped remove barriers to market access. The result has been that the number of small businesses exporting has nearly tripled since the 1990s.
We should be doing everything we can to seize that momentum. But, by failing to pass Trade Adjustment Assistance last week, which provides help to American workers affected by international trade, Congress is making the road ahead for new trade deals a lot bumpier.
Right now the White House is in the process of wrapping up a trade agreement, known as the Trans-Pacific Partnership or TPP, with 11 other countries around the Pacific rim, including Australia and Vietnam, which would open up more than 40 percent of global trade to America's exporters.
Estimates from the Peterson Institute, a well-regarded centrist think-tank focusing on global economic policy, found that by 2025 TPP could increase U.S. exports by $124 billion and augment U.S. income by about $78 billion. Secretary of State Kerry has added that completing TPP could support another 650,000 U.S. jobs. As The Economist put it in an essay last year called "When Harry Mugged Barry", "that understates the benefits, since the deals would spur competition in the market for services, which make up most of rich countries' output but are seldom traded across borders."
Progress on remaining issues in TPP halted recently as America's trading partners waited for Congress to act on fast-track legislation. Derailing the President's fast track authority could jeopardize that trade deal, and another in the works with the European Union, making it harder for small businesses to get more favorable access to key global markets. But, there's time to reverse course. Lawmakers will vote again this week, and let's hope that when they do they don't forget what's at stake for their small business constituents.
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