Evaluating the Impact of Small Business Trade Policy on Job Creation and Economic Growth

Testimony before the US House of Representatives Committee on Small Business hearing on "Evaluating the Impact of Small Business Trade Policy on Job Creation and Economic Growth"

April 28, 2010

Chairwoman Velázquez and members of the committee, thank you for inviting me to testify on an important national problem: how to promote more exports by small business firms. President Obama has committed his administration to the goal of doubling US exports in five years. This worthy initiative envisages a substantial boost in exports from small business firms. Toward this end, the administration has promised an additional $2 billion of lending authority to the Export-Import Bank, and the Commerce Department has embarked on an outreach program.

These are useful steps, but they are small steps. As you know, the fixed costs for a firm to engage seriously in exporting goods and services are formidable. The firm must acquaint itself with the special needs of foreign markets and adjust its product line accordingly. It must learn to navigate trade barriers of all kinds. Often it must set up a system abroad to ensure quality maintenance after the initial sale. All these requirements are costly.

The very high fixed costs of exporting go a long way to explain why an exceptionally high share of US merchandise exports are shipped by large firms that can spread the necessary costs over a large volume of foreign sales. Professor J. Bradford Jensen of Georgetown University has assembled relevant statistics. In 1993 the top 1 percent of exporting firms (about 1,300 firms or 0.03 percent of all firms) accounted for 78 percent of US exports. In 2000 the top 1 percent of exporting firms (about 1,600 firms or 0.03 percent of all firms) accounted for 80 percent of exports. There is no reason to think that the picture is much different in 2010. These giant firms accounted for 11 percent of US employment and, as the numbers show, they are an overwhelmingly important channel for US exports.

Small business firms are conspicuously underrepresented in the US export picture, largely because of the obstacles I have mentioned. Bearing these obstacles in mind let me offer three suggestions that are targeted at the small business dimension of the administration's export goal. Before turning to these suggestions, I should mention that an accepted coefficient indicates that each $1 billion of exports now supports, on average, 6,100 jobs in the US economy. The coefficient could be larger for small business firms, since they tend to employ more workers per billion dollars of sales than giant firms. Export growth not only supports jobs, it also enhances US productivity that enables our country to maintain a high standard of living.

My first suggestion is that the Congress should require the administration to provide a quantitative annual report of past performance and future expectations (over a 5-year horizon) of small business exports. Among other features, the report should specifically identify the expected contribution of each of the administration's promotion measures to future export sales. The report should be specific as to product categories and destination markets. My guess is that the measures so far announced will not go far toward the implied goal of at least doubling small business exports over the next five years.

My second suggestion is to boost very dramatically the availability of export finance to small business firms. This cannot be done through the Export-Import (Ex-Im) Bank, both because Ex-Im financing is limited by an array of Congressional mandates, and because the Ex-Im lending process is quite complex. A better approach is to create significant tax incentive for private banks to support the export financing needs of small business, both on a preshipment basis and once the goods or services are sold.

The main fear of private banks (especially in the wake of the Great Crisis) is that they will be stuck with losses when they lend to small business-especially for an activity as risky as export sales. On the whole, I think banks exaggerate the risk, but that's the reality of today's financial environment. It is often said that fewer than a dozen banks are seriously engaged in export finance, and their lending is targeted at medium and large firms.

To offset these fears, I suggest that private banks be allowed to establish very large loan loss reserves for new export-related loans extended to small business firms. For example, private banks might be permitted to establish loan loss reserves-deductible from current income for federal and state tax purposes-equal to 50 percent of new export-related loans. To the extent these reserves are not, in fact, absorbed in actual losses, they would be taken back into taxable income after, say, five years. This would give private banks an incentive to expand their loan book: otherwise, the reflow of unused reserves to taxable income would equal the new loan loss reserves after a fairly short period. Of course, any program along these lines would need to be carefully monitored, both to avoid abuse and to assess its effectiveness.

My third suggestion is to bolster the information and technical assistance programs offered to small business exporters by the Small Business Administration (SBA) and Department of Commerce. In 2008, I was a guest of the Hong Kong government, and among the agencies I visited was a terrific library-both hard copy and electronic-of relevant guides and sources for small business firms. The library was backed up by technical experts ready to assist small Hong Kong firms in exploring foreign markets. I don't know how US government efforts compare with Hong Kong in this respect, but a comparative evaluation might be useful.

SBA and Commerce Department programs have been around for many decades. They are staffed by dedicated and knowledgeable officers. However, an external evaluation by experienced consultants-such as McKinsey or Monitor-might point to useful improvements. Improvements will, however, cost money. A serious push for small business exports could well require a serious boost in SBA and Commerce Department budgets. In export promotion, as in most business endeavors, there is rarely a free lunch. Small business exports cannot be doubled on the back of a public relations campaign.

Thank you, Chairwoman Velázquez. I will try to answer any questions that you or members of the committee may have.