The Export Imperative

The Export Imperative: Why American Businesses Urgently Need to Internationalize
By Philip Guarino
May 28, 2010

Although some encouraging signs have started to emerge in 2010, the US economy still faces significant challenges on the road to recovery. Most indicators tend to point to a tepid rebound and a protracted period of slower economic growth. For decades, the US economy has relied on domestic consumption as the major engine for growth; a large and growing domestic economy masked the immediate need for companies to look abroad for customers. Today only a minimal fraction of US businesses actually conduct business overseas–and an even smaller percentage in more than one country. With slow growth on the horizon, exporting is no longer a luxury but a necessity if American businesses aim to grow.

Not much domestic bliss

Our most recent economic downturn was a particularly pernicious and harsh one. The housing crisis and an ensuing derivatives crisis led to a banking-and confidence-crisis of the first degree. Sensing the potential for collapse, the US government assumed massive private sector debts in order to shore up a teetering banking industry and restore some semblance of market confidence. And to a degree, the government’s plan has restored stability to financial markets.

In the past, as US slowdowns have come to an end, the American consumer has risen to the rescue. It is unlikely to happen this time. Stubbornly high unemployment, high rates of indebtedness, weak consumer confidence and limited access to credit have dampened hopes for a consumer-led recovery. Business investment across most sectors is improving but remains weak, reflecting hesitation about the health of the domestic economy. Consumers have retrenched and will likely be deleveraging for some time.

Figure 1 illustrates the sharp reversal in consumption as a percentage of GDP, albeit within a tight range. Macroeconomic conditions are most likely to temper the appetite for consumption in the near to medium term.  As aggregate consumer spending falls, businesses will need to recalibrate from a dependence on domestic markets and seek growth elsewhere.

Big and underwhelming

The vast size of the US economy and relatively strong economic growth have largely shielded most American companies from the need to export that virtually all other industrialized economies have faced. Smaller countries by default must look abroad as domestic markets are often too small. Or is it that their outlook, business planning and resource allocation is geared to acquiring customers abroad from the outset?  Startlingly only 4% of US companies actually export at all, and less than 0.5% of US companies export to more than one country- yes- Canada included.[1]

Figure 2 illustrates the total value of exports as a percentage of GDP for several nations. As a percentage of GDP, the US exports a mere 12% of its gross domestic production. Although this percentage has been slowly rising, it is far below the 24% average OECD figure for high-income countries. This leaves vast room for improvement.

Source: World Bank

Other indicators also point to an overdependence of US business on domestic markets. Although major US cities rank high in the Brookings Institution’s “Global Cities Index”, an indicator that measures international economic interdependence and connectedness, they still lack global punch. Coastal cities, the most integrated of US cities, still remain far more linked to other domestic than international markets. And even the most integrated of the US cities rank lower than the vast majority of European or Asian counterparts. [2] This weak level of internationalization could potentially have pernicious and long-term effects on the competitiveness of US industry if companies continue to be slow to react to increased globalization, particularly if competition moves more swiftly.

Why economic imbalances might actually be a boon for exporters

Many factors contribute to export growth, but it is commonly agreed that the single most important driver is the relative value of a country’s exchange rate.  Despite the very recent uptick, the US dollar has been on a more consistent longer term path of depreciation. The fall in the dollar has tended to take brief respites during recent episodes of financial crisis, but the overall trend continues to be downward. (see Figure 3).

In the early 2000s, a sharp increase in the US trade deficit alarmed investors as to the sustainability of the US current account and subsequently led to a significant devaluation of the dollar vis-à-vis other major currencies. The devaluation has led to some positive correction in the trade deficit, and although still large, far below the critical levels seen several years ago.

Although the US has not outwardly adopted a weak dollar policy, it has in effect been creating the foundations for a weak currency by vastly increasing public debt and maintaining low interest rates.  While the latter will likely change as the economy regains strength, there is little convincing evidence that the US dollar will make a significant comeback in the coming years. With government debt likely to remain unusually high for years to come, markets are likely to price the dollar at depreciated levels.

Hence the silver lining for American companies: a devalued dollar should spur the attractiveness of American products and should offer a competitive advantage for US exporters. So while weak domestic macroeconomic fundamentals will force US companies to look abroad, a weak dollar will make it more compelling to do so.

Government policy and business strategy challenges remain

The US has yet to execute a concerted and coordinated approach to export development. Although President Obama’s recent signing of a National Export Initiative does address some of the shortfalls in government policy by creating an export promotion cabinet and special financing for firms seeking opportunities abroad, its approach doesn’t go far enough. A national trade policy should be articulated and trade barriers diminished. Only then will the US be able to effectively–and coherently–negotiate as a bona fide free-trading partner. Greater investment and modernization of ports, airports and road networks supporting international trade will also begin to address a rickety international infrastructure in need of repair.  The application of insights offered by successful export promotion models (e.g. Germany, Netherlands) where government, financial institutions and industry offer practical assistance to firms would provide a concrete benefit to companies. Public policy should reflect the importance of export growth for jobs and wealth creation.

A shift in US business strategy also is also a key requisite. US businesses must adopt a more global vision and proactively seek more of their business abroad. They must not see international growth as “foreign” adjunct but as an integral part of their overall development strategy. Success in international markets brings added sales revenue but it can also provide long-term competitive advantages and expertise, which is transferable both in foreign markets and at home.  Exposure to different market dynamics also strengthens brand-building and provides valuable insight to corporations. And as competition increases, business can only be dormant for so long.

The time is now and the opportunities great. Government needs to act swiftly to implement viable and practical export promotion assistance to a larger number of firms. To continue to rely on domestic consumption to revive an ailing economy is folly.  The persistent model of consumption outstripping production is simply unsustainable; domestic policy urgently is in urgent need of realignment.   Businesses can effectively prepare for a changing environment by realigning internal resources and creating effective strategies that prioritize investment for international growth.

[1] US Department of Commerce, 2009

[2] The Brookings Institution “US Cities in the World Index”, February 2005 Taylor, Lang