At the start of his administration, President Obama set a goal to double exports from U.S. companies. The hope was that increasing exports would dramatically benefit the U.S. economy in a number of ways. Chiefly among these would be to significantly improve the U.S. balance of payments, and also to measurably decrease unemployment as more workers were needed to produce U.S. exports.
Tremendous opportunities do exist for U.S. companies to expand exports (and international business in general). However, an underlying shortcoming exists that prevents U.S. companies from globalizing—U.S. companies and the managers and executives who run them are spoiled. In this article, I assert that because U.S. companies have achieved relatively easy success in serving their domestic markets compared to their counterparts in other countries that have had a lengthy history of serving multi-country markets, it will be difficult to achieve the Obama administration’s goals until U.S. companies overcome their “domestic complacency.”
Do the Numbers Make Sense?
Is the assumption that doubling U.S. exports will benefit the U.S. economy true? In 2009, the U.S. trade balance suffered an estimated deficit of approximately $450 billion (exports of $1 trillion, imports of $1.45 trillion). Assuming no reduction in imports, simple math tells us that doubling exports would produce a swing from a $450 billion deficit to a $550 billion surplus ($2 trillion less a constant level of imports of $1.45 trillion). So, we can conclude that achievement of the administration’s goal of simply doubling exports would certainly resolve the problem of a negative trade balance.
The implications for employment could be just as strikingly positive. Assuming that the economy has increased by the $1 trillion in exports (or approximately an additional 7 percent in 2009 GDP of over $14 trillion), we must also assume an equivalent increase in the number of jobs needed, thus unemployment would decrease from approximately 15 million (about 10 percent) to 5.34 million, or a 3.5 percent unemployment rate. In other words, a 7 percent increase in the GDP would result in an increase of 7 percent in the number of employed. While this model may be oversimplified, for our purposes, I believe that we could agree that such dramatic increases in exports would doubtlessly result in very attractive positives for the U.S. economy.
Potential for More Exports?
The real question is, is the doubling of exports a realistic goal? Is there room in the market for more exporters? How maxed out are companies in the U.S. in their export capabilities? How many U.S. companies could export more and to more countries? Or do more U.S. companies who do little or no exporting need to be convinced to begin exporting (and then presumably assisted in doing so)? Implicit in the Obama initiative is the desire to get companies who already export to expand their reach to more countries under the assumption that it’s a lot easier to convince the “converted” than to convert non-exporting U.S. companies to think globally for the first time.
In terms of how many U.S. companies are currently involved in exporting, the short answer is not many:
- U.S. exports in 2009 accounted for approximately $1 trillion U.S. in goods, representing only 7 percent of the U.S. economy and involved a much smaller portion of total companies (discussed below).[1]
- The Department of Commerce reports that only 1 percent of all U.S. companies export to another country. Of the approximately 17,000 large U.S. companies (with over 500 employees) who are presumably better positioned to export, only an estimated 5,000 (29 percent) are exporting to at least one country.[1]
- The total number of U.S. exporters decline to 0.5 percent when the contiguous NAFTA countries (Canada and Mexico) are stripped out of these figures. The number of U.S. large companies decline to 12 percent.[1]
The takeaway from these facts is that the U.S. economy is much more dependent on internal demand as the driver of its success, and when this suffers a downturn as it has in recent years, the U.S. economy doesn’t have the advantage of appealing to a global marketplace. Thus, very significant opportunities exist to increase exports through: (1) encouraging the companies that are already exporting, primarily to Canada and Mexico, to expand their export activities to other countries, and (2) stimulating the 99 percent of companies (and over 70 percent of large companies) to begin exporting for the first time. Emerging markets may still be relatively booming during the current downturn, but the U.S. doesn’t benefit from this as it is not really serving these markets as much as it could and should. In fact, the one major emerging market to which we do export a lot, China, enjoys an approximate $225 billion goods trade surplus with the U.S., (over three times the amount that the U.S. exports to China). On the other hand, both developed and emerging markets such as Germany and China are, in order of magnitude, much larger exporters than the U.S., and enjoy major trade surpluses, as is well known.
One might argue that the U.S. economy doesn’t really need to export: we are already very global. A significant number of U.S. companies have set up operations in other countries and are therefore manufacturing and providing services in these countries so we don’t need to export from the U.S. It would stand to reason then that our export numbers are so low because our foreign direct investment (FDI), which measures the extent of our activities in other countries, is so high.
However, this argument doesn’t really hold water. According to research conducted by A.T. Kearney, the U.S. continues to rank near the bottom of the top 60 countries in terms of FDI.[2] Furthermore, to the extent that a company has investments in other countries, it is most likely already exporting to that country as part of its global sourcing strategy, so the export numbers presumably already reflect the influence of FDI to some extent.
So why do so few companies export and why this tremendous shortfall in the globalization of the U.S economy when such an orientation and effort is sorely needed? How did we get so far behind most other economies? And are we likely to stay there?
I believe that the shortfall exists and will continue to exist for the two major inter-related reasons stated above: (1) U.S. companies are spoiled; and (2) American managers and executives themselves are also spoiled.
The Spoiled American Company
In general, U.S. companies are spoiled because historically they have needed only to operate in the relative simplicity of their very familiar home country market to be successful. This situation is unlike that of companies in other countries, like Germany, which has had to search out markets in several countries.[3] And, unfortunately, it seems that the vast majority of U.S. companies believe either that their home country market will continue to sustain them for the foreseeable future or if it is not currently, it will resume soon once the U.S. returns to its position as the dominant global market.
We can understand easily the reasons for this thinking. For decades the U.S. markets have been the largest globally as well as the fastest growing for most goods, certainly enough so to support even the most ambitious of companies’ business expectations. But this is changing; for example, in 2007 consumer spending in emerging markets was equal to that of the U.S., and has continued to grow. In fact, JPMorgan Chase projects that by the end of 2010, almost 35 percent of the world’s consumer spending total will be in emerging markets, while the United State’s share will have declined to approximately 27 percent.[4]
So do U.S. companies really understand the importance of emerging markets? That doesn’t seem to be the case. A recent McKinsey Global Survey reported that North American companies have made the lowest rate of actions to capture emerging market growth than any other region.[5]
According to the New York Times, Coca-Cola, the premier global brand, reported disappointing quarterly profits earlier this year, primarily due to weak sales in the U.S., their largest single-country market, (although three-quarters of sales come from outside North America). Specifically, sales in the U.S. declined by 2 percent, while volume increases in emerging markets were in double digits, for example, India (+29 percent), Turkey (+18 percent), Brazil (+12 percent), as well as in Russia, Egypt, Vietnam, and the Philippines.[6] Clearly, Coca-Cola shouldn’t need convincing to energetically pursue volume in emerging markets.
There are those who argue that this global imbalance will right itself once things return to normal, but it’s not quite clear how they intend for this to happen. Do they believe that the U.S. will return to growth rates as high as or greater than emerging markets, for example, and/or that the rest of the world’s growth will slow down? Or do they mean that goods in other countries will become more expensive, for example, from a revaluation of their currencies (think China) so that U.S. prices will become more attractive globally? Or do they believe that Congress will be able to restrict imports, which will allow U.S. companies to replace imported goods with locally manufactured goods?
Few economists that I’ve been exposed to honestly believe that any of the above will happen or will have much of a positive effect. In the past when we’ve tried to dampen imports, for example during the Great Depression through import restrictions, the rest of the world did likewise in retaliation, thus severely restricting U.S. exports and pushing the country (and the world) into an even greater Depression. And, recent speeches by Congress blaming China’s unwillingness to revalue their currency for the trade imbalance are only wishful thinking. It is unreasonable to assume that a rise in Chinese prices will automatically persuade consumers to beat a path to the doors of U.S. companies. Very few analysts agree that any reasonable increase in Chinese prices will make much of a dent in the massive U.S. trade deficit with the rest of the world through increased U.S. exports or decreased imports from China, but perhaps it’s easier to blame somebody else for our lack of success.
The Spoiled American Executive
It is my experience that, in a business environment where there has been little or no exposure to international business, American managers have perceived little need to focus their career aspirations on anywhere else but the U.S. And, as discussed, this negatively affects their willingness and ability to seek out international opportunities for their companies. Put another way, if a U.S. manager believes that ample career opportunities are available in the U.S., why would he or she be motivated to promote international business within a company or seek out an international career?
Societal influences may also come into play here. Perhaps our education system does not encourage international thinking. For example, foreign language education, which certainly provides one aspect of international sensitivity, lags far behind other countries. In my own international experience over a 20-year period, I found that a very high percentage of non-American expatriate executives spoke at least a second language, and in many cases, a third or fourth language before they even embarked on their first non-home country assignment. And they always learned their host country language fairly fluently. Unlike the vast majority of American executives working internationally who attempt to survive solely in English, it’s not unusual for an experienced international executive to speak several languages.
Incidentally, as a consequence, when an American executive does take an international assignment, the associated expatriate remuneration, benefits, and perquisites that are required to support him/her far outweigh what the company would pay a local or a non-American expatriate (a so-called third country national).
Conclusion
Because of the relatively very low penetration of exports by U.S. companies, it’s clear that significant opportunities exist for increasing the U.S. economy dramatically through its export activity. But, to capitalize on these opportunities, we need to understand better why more companies are not exporting and then address the related issues. My contention is that the mindset of U.S. companies and their executives, which has been influenced by a long history of success in serving almost exclusively a domestic market, will need to shift attitudinally to one that recognizes the necessity of doing business globally. Only then can the necessary steps be taken to begin expanding U.S. exports.
[1] U.S. Bureau of Economic Analysis 2009, U.S. Census Bureau.
[2] A.T. Kearney/FOREIGN POLICY Globalization Index, 2007 Edition, ForeignPolicy.com; ATKearney.com.
[3] Lemon aid: Germany’s exporting prowess is leaving the rest of the euro area behind,” The Economist, July 8, 2010.
[4] A Special Report on Innovation in Emerging Markets,” The Economist, April 17, 2010 (p 10, exhibit 4) source: JPMorgan Chase.
[5] Five Forces Shaping the Global Economy, McKinsey Global Survey Results, 2010.
[6] Associated Press, “Coke Profit Fails To Meet Expectations,” New York Times, April 21, 2010, at B7.
