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January 1, 2012

Blocking the Flow

Why just doubling exports by 2015 is not the problem.

IN HIS JANUARY 2010 State of the Union address, President Obama declared a national goal: “We will double our exports over the next five years, an increase that will support 2 million jobs in America. To help meet this goal, we're launching a National Export Initiative that will help farmers and small businesses increase their exports and reform export controls consistent with national security.”

The goal was to have our growing export strength be a significant factor in freeing the country from the grip of recession. The American Iron and Steel Institute (AISI), among others, hailed the new offensive, pointing out that 70% of U.S. exports are manufactured goods and 75% of manufactured goods contain steel. Even skeptics praised the goal while calling it overly ambitious and perhaps beyond the reach of the administration and a gridlocked government.

It turns out that even before new trade agreements with Colombia, Panama and South Korea, the United States was well on its way to meeting and even surpassing the president's goal. And this in the midst of a stubborn recession. This encouraging performance has, however, given manufacturers a more powerful opportunity to push for reform of their most nagging problems, the mess of regulations that slow the pace of their growth.

To be sure, the White House and federal bureaucracy responded rapidly to the Obama initiative. The President's Export Council kicked into high gear, led by James McNerney, chief executive of Boeing Co. More than a dozen federal agencies with jurisdiction over trade recast their existing agendas to fit under the new program.

And U.S. exports expanded. In the first 10 months of 2011, the latest data available, goods exports have climbed 42.3%, compared with the first 10 months of the base year, 2009. Service-related exports increased 20.3% in the same period. And in a stunning development, in 2011 the United States became a net exporter of oil-based fuels for the first time since 1949. Industry experts say this trend, powered by increasing demand from developing nations, should continue for at least the next decade.

Looking at a sample of industries, exports by primary metal manufacturers climbed 32% between 2009 and 2010; exports of fabricated metal products climbed 18%; transportation equipment exports rose 15%.

Given the recent pace of export growth, the president's five-year goal for doubling U.S. exports, which requires an annual growth rate of 15%, isn't all that ambitious, unless the troubled European economy implodes.

For one thing, the 2009 base year witnessed the final stage of a severe global economic downturn. U.S. exports in that year dropped 14% from 2008. Exports rose nearly 17% in the first 10 months of 2010. Through September 2011, exports were almost 16% greater than the first eight months of 2010. The outlook for the rest of the year and beyond is clouded by Europe's financial crisis.

 

A MORE BASIC PROBLEM: REGULATION

 

Obama's focus on exports, coupled with a positive export growth trend in recent years, is offering U.S. manufacturers an opportunity not only to reinforce their economic leadership, but also, and more importantly, ease long-standing bureaucratic impediments to export sales. Making a case for regulatory relief gets easier when the regulators are already in the spotlight and encouraging results are already apparent.

“2011 will be quite a successful year in trade,” Gene Sperling, director of Obama's National Economic Council, said in November. While it's hard to convince Americans that imports are good for the economy, the case for job-generating exports is easier to make, he said.

For example, the National Association of Manufacturers, in welcoming the White House proposal, says, “The disincentives to manufacturing in America and to American competitiveness must be eliminated, and the global playing field must be leveled in terms of market access and support for America's exporters.”

Much of the public debate about global trade concerns currency manipulation, primarily by the Chinese, and import barriers here and in other nations designed to protect local industries. For example, the United States enforces firm rules limiting imports of sugar. By contrast, the nuts and bolts of export regulations rarely make headlines. But the tangle of overlapping federal export rules frustrates U.S. export growth as much as or more than the higher profile controversies surrounding import barriers and currency manipulation.

Export regulations imposed by federal agencies comprise one of the three principal elements of U.S. trade policy, says attorney Larry Friedman, a partner in the trade law firm Barnes, Richardson & Colburn.

The other elements—reducing foreign barriers to U.S. exports and enforcing existing international trade agreements—require diplomacy and even litigation involving U.S. trade partners and international trade agencies, such as the World Trade Organization. But rationalizing U.S. export regulations is “a thing we can get our hands around and do domestically,” Friedman says.

Indeed, trade experts say the White House has the authority to take several strides in export regulation reform without congressional action, largely because no budget or treaty issues arise. In that spirit, the White House has promised a review of export regulations and has taken preliminary action in certain areas. This do-it-yourself strategy has generally been cheered by business organizations.

Veteran exporters among small and medium-sized manufacturers are watching the current reform effort carefully. “As time goes on, there are more and more things you have to do to comply with all the export regulations,” says Jim Hirsch, president of Air Tractor, Inc. in Olney, Texas, a maker of specialized airplanes for crop dusting and forest fire suppression. Air Tractor, with annual sales of $70 million, has been exporting its planes for at least four decades, Hirsch says.

Air Tractor, which exported to 14 nations in 2010 and generated more than half its revenues from exports, has a strong reason to be vigilant about export regulations. Small airplanes can be used by terrorists and criminals as well as legitimate farmers. The company does not use regular means of shipping but flies its planes from Olney to customers as far off as Australia.

Despite its unusual product, Air Tractor's problems are similar to those of hundreds of independent American manufacturers that over many years have established export relationships. From 2002 through 2007, exports by U.S.-based small and medium enterprises (SMEs) grew 97% to $307 billion, with the biggest gains in sales to China and India, according to a study by the U.S. International Trade Commission.

SMEs account for 30% of U.S. exports. The share of U.S. exports represented by SMEs has risen gradually in recent years. SMEs that export generate jobs at a faster clip than those that don't, just like large companies, the commission found.

This growth reflects not only expanded international sales by veteran exporters, such as Air Tractor, but also an influx of new exporters. Many of the new entrants are suppliers to large multinational equipment makers or independent entrepreneurial manufacturers using the Internet to reach global markets.

“Decreasing the convolution of the export control system will allow more suppliers, domestic and global, to enter into the supply chain,” said analysts at PricewaterhouseCoopers in a review of Obama's National Export Initiative.

 

 

STRICT CONTROLS AND ACTIVE ENFORCEMENT

 

Small manufacturers selling abroad through the Internet or other means must comply with the same export regulations as Caterpillar, Inc. or General Motors Corp., notes attorney Friedman. “While other countries have export controls, it's fair to say that the U.S. has strict controls and an active enforcement environment,” he says.

Five long-simmering issues affecting exports are among those currently under review by the White House and business leaders: export controls related to national security; the availability of business visas for those seeking exposure to U.S. exporters; impediments to export financing for buyers; and shipping hassles.

Of course, additional federal dollars for export promotion might help U.S. exporters in global competition. But U.S. Department of Commerce programs to help would-be exporters study potential markets, network with prospective customers and facilitate shipment and payment for goods sold depend on congressional budget authorization. That said, eliminating several notable bureaucratic barriers would create little demand on federal spending and, in fact, could save taxpayer money and foster U.S. economic growth through greater regulatory efficiency.

The first export controls by the U.S. government were imposed in 1775 by the Continental Congress against sales to Britain. Since then controls have expanded in the name of national security as the complexity of technology and security threats to the United States evolved. Reforming export controls “consistent with national security” was the only goal Obama specifically mentioned in announcing his export initiative and is the biggest accomplishment so far.

Three White House cabinet departments—State, Commerce and Treasury—exercise export controls in the name of national security and crime fighting. State and Commerce keep their own lists of goods that are banned or require licenses to be exported to certain destinations. (The Treasury Department has a separate list of individuals and locations barred from receiving U.S. goods.)

Over time, risk-averse regulators at State and Commerce have expanded their lists to the point that legitimate commerce has been jeopardized. “For too long we've had two different control lists, with agencies fighting over who has jurisdiction,” Obama said at an export controls conference in August 2010. An executive order now requires the lists to be merged to “allow us to build higher walls around the export of our most sensitive items while allowing the export of less critical ones under less restrictive conditions.”

After all, discouraging U.S. manufacturers from establishing global markets for “less critical” materials can have a decidedly negative economic impact. If domestic manufacturers can't produce enough of these goods to maintain their profitability, they could become less available from domestic industry.

“It is no longer 1960, when the U.S. was largely self-sufficient and almost the sole source of key items and technologies,” Ellen Tauscher, undersecretary of state for arms control and international security, said in May. “U.S. companies can no longer go it alone in the marketplace. In many cases, they need to collaborate with companies in allied countries to develop, produce and sustain leading edge military hardware and technology for U.S. and allied forces.”

The State and Commerce departments are reviewing export restrictions on tens of thousands of dual-use products—products that have military use as well as non-military commercial use. In November, State and Commerce posted new regulations to combine their lists of regulated aircraft parts and to exclude items that do not pose a security threat.

 

THE BUSINESS TRAVEL VISA DILEMMA

 

Kin Baker, international sales manager at PAI Industries in Suwanee, Georgia, a maker of aftermarket parts for major U.S.-brand trucks, expects to spend more than $100,000 in September to attend the Automechanika international automotive aftermarket trade fair in Frankfurt, Germany. In addition to the pricey Frankfurt hotels, he'll probably have to endure less-than-ideal placement of his display at a show dominated by his European competitors.

He's planning the trip because it's easier for his dealers and potential customers from the Middle East and Africa to obtain business travel visas to Germany than to the United States.

“I have distributor networks all over the world,” he says. “It's important for me to have my overseas customers come and visit me, to see our manufacturing plants, to get to know the company owners. But getting them visas to come to the United States has been a tremendous hassle.”

Baker has complained to the Commerce Department, which he says has interceded on his behalf to the State Department, which issues visas.

“Everybody recognizes the problem, but no one wants to make the mistake that lets in a terrorist,” he says.

In the wake of the 9/11 terrorist attacks, entry into the United States has become more difficult. By 2003, business leaders saw perverse consequences.

“U.S. companies are losing export opportunities to other nations because of the visa restrictions; tourism and trade shows that promote U.S. exports are losing to other destinations that have easier visa policies,” Randel Johnson, an immigration specialist at the U.S. Chamber of Commerce, said in 2003. “This will ultimately impact our economic growth, and our global war on terrorism can only be funded through a sound economy.”

The President's Export Council also noted the potential impact on SMEs. It said that many small U.S. businesses can't afford to participate in the U.S. Chamber's programs to facilitate business travel visas through its affiliated American Chambers of Commerce in foreign countries.

Moreover, the council reported that “few lasting improvements have occurred. Our experience has been that each time a problem appears to be solved, a new one pops up to take its place.”

In terms of more liberal travel regulations, in November, Obama signed legislation authorizing eligible U.S. citizens to obtain a new travel card that will allow them to travel more freely throughout 21 Asia-Pacific countries comprising the organization for Asia-Pacific Economic Cooperation (APEC). No such agreement has been reached for non-U.S. travelers from the APEC region to travel to the United States.

Indeed, Ursula Burns, CEO of Xerox Corp. and vice chair of the President's Export Council, reported in November that little progress had been made toward reforming business travel visas. “Much more needs to be done,” she said.

Moreover, in late 2010, the U.S. Citizenship and Immigration Services agency in the Department of Homeland Security threw up a new roadblock to short-term business travel by non-U.S. residents to the United States. Under the new rule, employers seeking to employ non-U.S. citizens temporarily in the United States for training or other short-term purposes must certify that the visitor will not carry the knowledge of “controlled technology or technical data” back home without a rigorous licensing procedure.

The Homeland Security regulation overlaps similar regulations regarding access of alien employees to sensitive material already enforced by the State Department. “A whole new process has to be implemented,” says attorney Friedman. “This is a new hurdle.”

 

AN EXPORT FINANCING HANG-UP

 

Vital to the government's effort to promote exports by small and medium-sized businesses are programs that help assure exporters they will be paid. The Export-Import Bank, an independent federal finance agency established in 1945, assists exporters and their commercial banks in making sales to non-U.S. customers.

One program offers credit insurance to exporters against the risk that non-U.S. customers won't pay. Air Tractor, for example, paid $300,000 in fees in 2010 to the Ex-Im Bank but made no claims to recover lost payments. In the government's 2011 fiscal year, ending on Sept. 30, Ex-Im financing programs were involved in $40.6 billion of the more than $2.5 trillion of U.S. exports.

Yet legislation to reauthorize the bank until 2016 is still pending in Congress. The previous reauthorization bill, passed in 2006, added new language to the bank's charter requiring a greater focus on small business exporters.

But, like many government programs, problems and opportunities for reform lie in the weeds of the agency's regulations. Ex-Im rules, like many federal programs offering to aid business, limit benefits to the domestic content of products being exported. In the name of U.S. jobs, local content rules earmark government assistance only to locally produced content.

But in the increasing global market of manufactured goods, a U.S.-made product frequently includes parts imported from overseas, just as overseas products frequently include parts imported from America. So a U.S. export item with 30% non-domestic content would be eligible for financing assistance on just 70% of its value.

“As complexity increases in manufacturing processes and sourcing of components, it is increasingly difficult to track levels and sources of non-U.S. content,” says Donna Alexander, chief executive of the Bankers Association for Finance and Trade/International Finance Services Association. “This is particularly true for small businesses that do not have the resources to devote to tracking such data.”

As part of its export initiative, the White House is examining the purpose and value of local content restrictions imposed by U.S. agencies. The President's Export Council called for simplifying rules and easing penalties, which can include a loss of export rights and criminal charges, with the goal of making U.S. rules compatible with other nations'.

In Canada, the United States' largest trading partner, the Export Development Canada, the counterpart to the Ex-Im Bank, considers a wide variety of factors in determining which export transactions to support. Among the factors are the effect of the transaction on opening foreign markets to additional Canadian goods, environmental impacts and whether the transaction supports small and medium-size companies in Canada. Local content rules are not mentioned as a specific factor.

“The competitiveness equation for a typical Canadian company has moved from one of local efficiency and productivity to one that also encompasses foreign suppliers, logistics providers and financial intermediaries,” says Stephen Poloz, a president and CEO at Export Development Canada. “Manufacturing-sector exports have an average Canadian content that is around 50%, and for many goods the figure is much lower. We have built a more comprehensive scoring system for Canadian benefits to reflect this more complex world.”

 

SHIPPING HEADACHES

 

When megabucks investor Warren Buffet's Berkshire Hathaway, Inc., paid $34 billion to acquire railroad Burlington Northern Santa Fe in 2009, he declared, “Our country's future depends on having an efficient and well maintained rail system. … It's an all-in wager on the economic future of the United States. I love these bets.”

Since then, the political and business cry for upgrading America's transportation infrastructure has grown louder. A manufacturer reaching export customers not only needs to get paid. He or she also needs to get the goods to the customer.

Putting the problem in perspective, Scott Davis, CEO of shipping giant UPS, Inc. said in November, “If our trucks are delayed five minutes a day, it costs us $100 million a year” in lost time and fuel.

Improving the capacity and efficiency of truck, rail, ship and air transportation requires sizeable, ongoing investments by government and business. Without them, America will fall behind in the global competition for international, just-in-time delivery. Yet eliminating a major obstacle to this goal requires little investment and would lower business costs.

“The hassle of shipping has gotten to be so bad,” says PAI's Baker. “The shipments have to be tendered [for shipment] much earlier than they used to be. If it's going on a vessel, you have to tender it 48 hours before the vessel gets loaded, with all of your paperwork, or your container doesn't load.”

Even without additional federal funding, the White House is looking at redirecting and focusing available infrastructure funds on export-related needs. The President's Export Council recommends that “the federal government should take into account their positive impact on exports when evaluating, prioritizing and scheduling transportation infrastructure projects.”

The political fallout from such a policy could be heavy. Members of Congress from states like California, Michigan, Mississippi and New York, which are homes to major ports, “would find themselves well-placed on such a list,” the council predicted. Without new funding, politicians from other states would lose, if they couldn't make a case for being critical to the nation's export goal.

In November, Ray LaHood, U.S. secretary of transportation, said infrastructure spending under his department already is targeted to upgrading 13 of the nation's ports. “Ports are a real economic engine,” he said.

Scott of UPS backed a less politically sensitive reform. Computer technology now being used to more efficiently monitor imports to American ports has not been made available for processing exports and should be adapted, he said.

“The focus generally for most countries is on imports,” he said. “You collect duties and tax, so you want to make sure you have the best software. But a lot of that same software could be used on exports.” He recommends a “single window” system, with a single information technology system, for reviewing exports that would coordinate the duties of the multiple government agencies that currently oversee some aspect of exports.

 

LOOKING FORWARD

 

Expanding U.S. exports by manufacturing companies requires companies to reach a level of comfort with the process, says David Ickert, vice president for finance at Air Tractor. “Small businesses in the United States historically have had a big enough market,” he says. “They have a comfort zone. They know the rules, they know the markets; they know how to get paid.”

But growth lies outside the United States. “Small businesses need a nudge,” Ickert says. As an officer and export activist for the National Small Business Association, he's been pleased lately to see officials of diverse federal agencies collaborating in meetings about export regulations. “There's been better coordination,” he says.

Now that the president's goal has turned out to be well within reach, the economic recovery remains stubbornly slow. Expanding exports will certainly help, but without rapid regulatory reform as well, with or without congressional involvement, this expansion is unlikely to reach its potential as a driver of recovery.

To counter or at least supplement the “Buy America” campaigns aimed at Americans by many businesses and populist politicians, national business and political leaders need to mount a “Sell America” campaign for job-producing export growth.