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Renewed Action on Trade: A Boost to Companies of All Sizes

After something of a lull during President Obama’s first term, liberalization of international trade and investment is back at the top of the global economic agenda.

I strongly feel this has the potential to give a shot in the arm to companies of all sizes, including the emerging class of “SME multinationals” – the growing roster of small firms that have gone global and are actively participating in dynamic worldwide production and value chains.

Over the past few months we have seen:

• The launch of talks on a Transatlantic Trade and Investment Partnership between the United States and the European Union

• Action in the World Trade Organization to harvest some of the low-hanging fruit from the stalled Doha Round

• Continued progress on the Trans-Pacific Partnership talks

• And most importantly, strong bipartisan support for a renewed US Trade Promotion Authority

There are many reasons for this trade renaissance. One is continued slow growth in the United States and many other highly developed markets. Another is strong business advocacy – both in the US and elsewhere – in support of opening up trade as a cost-free stimulus. In particular, business luminaries such as Terry McGraw – the CEO of McGraw Hill Financial who recently took on the chairmanship of the International Chamber of Commerce – have pushed for an ambitious trade policy at home and abroad. He’s been championing the ICC World Trade Agenda, which seeks to mobilize support for a variety of liberalizing measures in and around the WTO.

But I think a critical factor in this newfound trade activity is the realization among policy makers that they are shooting themselves in the foot if they don’t act to remove barriers to imports (and exports in some cases). We are now in a world of increasingly sophisticated value chains. Countries that hinder investment or fail to streamline their regulatory procedures to make it easier for foreign companies to set up shop really need to up their game.

The changing face of trade

The OECD has been an important catalyst in opening policy makers’ eyes, serving as a central “brain trust” for research on what is being called “trade in value added,” or TiVA. Data from the OECD gives us a lot to think about. For example:

• When services embedded in manufactured goods are counted in US trade data, the overall services component of US trade rises from about 20 percent to 40 percent

• The import share of US export value has tripled in the last 30 years from 7 to 22 percent, while the global import content of exports is approaching a staggering 40 percent

I think it is clear that the traditional “arm’s length” model of trade is increasingly a thing of the past. And I’m joined by many like-minded experts. Outgoing WTO director-general Pascal Lamy has observed that when intermediate goods cross borders multiple times before becoming final products, protectionism “is even more stupid than we thought it was.” That’s because import barriers essentially become an ever-increasing tax on ones own exports.

My colleagues and I at the United States Council for International Business have recently aimed to augment the OECD’s excellent work. We joined with the Business Roundtable to publish new research from Matthew Slaughter of Dartmouth College. The work examines how American companies participate in global supply networks and documents the significant economic and employment gains this participation brings to the United States (download the report at www.globalsupplynetworks.org).

In his study, Slaughter sifted through the most recent data on US company operations around the world and unearthed some fascinating facts. For example, did you know that more than 90 percent of what American companies produce abroad is sold to foreign customers and not imported back to the United States? Or that these globally active American companies carry out 84 percent of their worldwide R&D within the United States? And how about this fact: 26 percent of US-based global companies are actually SMEs, with 500 or fewer total employees?

The path forward

A recent study by the Peterson Institute for International Economics examined the potential payoff from the ICC World Trade Agenda, which puts forward seven concrete, multilateral goals that could be achieved by 2015. Among them is the conclusion of a WTO trade facilitation agreement, negotiation of a new plurilateral agreement to free up trade in services, and expansion of trade in information technology.

Peterson experts Gary Huffbauer and Jeffrey Schott concluded that by simplifying customs procedures alone – through trade facilitation measures – WTO member countries would deliver global job gains of 21 million. Developing countries would gain more than 18 million jobs and developed countries would increase their workforce by three million – pushing global GDP up by almost US$1 trillion. A services agreement would generate some 8 million new jobs worldwide, including 1.4 million in the US.

I believe it is critical that countries take the right approach, crafting the right policies to accommodate emerging global value chains and generate new jobs connected to burgeoning global markets. In particular, it’s important to address new and emerging issues like forced localization requirements, restrictions on the cross-border flow of data, unfair competition from state-owned enterprises, and customs impediments or barriers at the border.

On the latter point, one quick fix to modernize customs is to raise the so-called de minimis level at which customs duties are imposed. In the United States, the business community has pushed for an increase in de minimis from the current US$200 to US$800. It may seem like an awfully small step, but it would go a long way toward ensuring goods get off the dock – or out of the airport – a lot quicker.

All the new trade initiatives we are witnessing provide ample opportunity to generate the jobs we need to meet the challenges of tomorrow. But I feel they can only succeed if business leaders and policy makers continue to demonstrate the leadership and wisdom to choose the right course and tear down the barriers to growth and opportunity.

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