Small Businesses Have Big Stake in Free Trade Debate

Trade policies might seem as foreign to most small businesses as bonsai trees or a fire dragon roll. But the current debate in Congress over free-trade agreements, which is spilling over into the presidential election, is critically important -- especially in the current economic downturn.

It might come as a surprise, but companies as diverse as heavy machinery maker Caterpillar and fast food giant McDonald's posted solid financial results in the most recent quarter, despite the slowing economy. They attributed the gains largely to overseas sales. At one time, exporting may well have been the domain of large corporations. But since the early 1990s, the equation has changed dramatically.

More than 230,000 businesses with 500 employees or fewer (the government's definition of a small business) now account for 30 percent of U.S. exports, according to the U.S. Chamber of Commerce. "This growth has been propelled not only by the expansion of global trade generally, but also by technological developments especially favorable to smaller exporters," said Daniel Griswold, a scholar at the Cato Institute, a Washington, D.C., think tank. "On the cutting edge of this development has been the spread of the Internet and e-commerce."

While the economy as a whole has slowed dramatically, exports of goods and services jumped by 12.6 percent last year, and earnings on U.S. investments abroad soared by 20 percent, Griswold told lawmakers during a recent Small Business Committee hearing. That healthy growth rate has continued into the first quarter this year, according to newly released U.S. Commerce Department figures. As a result, businesses involved in exporting, both large and small, are generally weathering the U.S. downturn much better than businesses tied solely to the domestic economy.

Beyond the bottom line, however, there are strategic reasons to encourage exports that make free-trade treaties and federal export assistance programs a priority. The biggest, of course, is the U.S. trade deficit. The nation is deeply in debt to foreign governments, which finance our imports. Next to that is the health of the economy itself. Every $1 billion in exports creates more than 9,000 jobs, said Charles Wetherington, president of BTE Technologies, a Maryland medical equipment company. Wetherington testified at the hearing on behalf of the National Association of Manufacturers.

Peter Morici, a professor at the University of Maryland School of Business and former chief economist at the U.S. International Trade Commission, wrote recently in Forbes magazine that the nation's manufacturing sector would recoup at least 2 million jobs if the trade deficit could be cut in half. The U.S. growth rate would exceed 3.5 percent a year, household savings performance would improve, and borrowing from foreigners and the federal budget deficit would both decline, he added.

Cutting the trade deficit by that much may seem far-fetched, but small businesses could be the catalyst to make that happen. While the number of small exporters has doubled since 1992, only a fraction of the nation's 26.8 million small businesses currently sell goods and services overseas, Wetherington noted.

The Small Business Exporters Association, a trade group, calculates that small companies last year exported more than $450 billion worth of U.S. goods and services. About two-thirds of all small exporters sell to just one country, and two-thirds have fewer than five export sales per year. If those companies alone could expand equivalent sales to a few more countries or increase sales in their current market by a $175 billion a year, it would cut the trade deficit by 25 percent, Wetherington said. Imagine what would happen if more small companies could be encouraged to export.

"We need a national export expansion strategy designed to achieve a large and sustained increase in our exports," Wetherington testified. "This should be a government priority as we look at the projections for continued growth in a number of major international markets."

Given the sorry state of the U.S. economy, Wetherington's call for a national strategy to encourage exports would seem to be a no-brainer. But there is a danger that the Democratic Congress is moving in the opposite direction at the urging of big labor. Presumptive Democratic candidate Barack Obama, at least initially, questioned the value of free-trade agreements, such as NAFTA, which governs trade between the United States, Canada, and Mexico.

The manufactured goods deficit, with all our free-trade partners combined, was $34 billion in 2001 and $27 billion in 2007, a 20 percent improvement, Wetherington noted. But the nation's manufactured goods deficit with the nations that lack free-trade agreements grew by $200 billion, or 70 percent.

President Clinton was a strong advocate of NAFTA, which went into effect during his administration. Presumptive Republican candidate John McCain also supports NAFTA and free trade. The Bush administration has paid lip service to free trade, but has cut or let federal export assistance programs stagnate during much of past eight years.

An example of the administration's benign neglect is the Commerce Department's Market Development Cooperator Program (MDCP). It makes grants to trade associations and other groups to fund programs that encourage exports. Since 2004, for example, an export center in China, funded with a $225,000 MDCP grant, has generated $41 million in sales of U.S.-made machine tools.

Overall, the program has generated $2.65 billion in U.S. exports with an outlay of about $20 million since 1997, according to a Commerce analysis. Yet, 15 years after the program was founded, its $2 million annual budget remains unchanged. "In fact, the program is so starved for funds that it cannot make any new grants in 2008," said Wetherington.

The global economy is real and growing. More than 1.8 billion people worldwide have access to the Internet, which is a portal for small businesses to enter the international marketplace. As the November elections heat up, small businesses need to become part of the debate over free trade. The next administration needs to understand the importance of opening new markets and giving small firms a leg up to sell goods and services overseas. It's not only good for business, but vital to restoring the economy.