Free Trade Agreements, Exports, and Small Business

By SBE Council at 4 March, 2015, 9:35 am

by Raymond J. Keating-

While President Barack Obama has come around to seeing the benefits of free trade – as has been the case with nearly every president after Herbert Hoover – his various allies on the political Left have not.

The Obama administration is talking up two major trade accords – the Trans-Pacific Partnership (TPP) with 11 Asia-Pacific countries (Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam), and the Transatlantic Trade and Investment Partnership (TTIP) with the European Union. The White House also supports passage of trade promotion authority (TPA), with trade deals going before Congress for an up-or-down vote, without special-interest amendments, allowing trade negotiations to move forward in confidence.

All kinds of wild accusations are being tossed around about the so-called “ills” of free trade – as it supposedly hurts U.S. exports, small businesses, workers, growth, and the list goes on.  Let’s correct the record, and state the facts.

What Trade Agreements Do. Let’s first understand that free trade is all about lowering or removing governmental barriers that raise the costs of, obstruct, discourage and/or prohibit individuals and businesses being able to trade with each other across borders. By knocking down such obstacles, opportunity is expanded and efficiencies are gained. For good measure, keep in mind that U.S. trade barriers already are relatively low compared to other nations, so one of the clear benefits of advancing free trade is to expand opportunities for U.S. businesses and workers. Such agreements do not provide additional incentives for U.S. businesses to, for example, move operations and/or workers to other nations, given that reducing trade barriers imposed by other nations reduces the costs of exporting from the U.S. to those countries.

In this analysis, we’ll consider free trade agreements, U.S. exports, and small business.

Small Business and Trade: Exporting firms overwhelmingly are small and mid-size companies. As noted in a November 2014 study (“U.S. Trading Companies 2012”) from the International Trade Administration, “A record of nearly 305,000 U.S. companies exported goods in 2012, of which the majority (297,995) were small or medium-sized enterprises (SMEs) with fewer than 500 employees.” That is, 97.7 percent of goods exporters were small or medium-sized companies with less than 500 workers.

That study also made two important points about small businesses and free trade agreements:

• “Unlike larger companies, most SMEs do not possess offshore business affiliates that can be used to overcome trade barriers and gain market access. In 2012, 90 percent of all SME exporters sold overseas from a single U.S. location, while only 11 percent of large firms that export are single-location companies.”

• “While NAFTA partners remain the largest markets for U.S. exports, other free trade partners are also important markets for SMEs. In 2012, U.S. SMEs exported $181.2 billion of goods to FTA partners, led by exports to Mexico, Canada, South Korea, Singapore, Australia, and Chile. Among these markets, SMEs accounted for more than half of the total goods export value to Jordan, Nicaragua, and Guatemala, and more than 40 percent of the goods export share to Morocco, El Salvador, Honduras, and the Dominican Republic.”

Consider the growth in U.S. real exports to each of the 20 nations with which we have free trade agreements, from the year before the trade accord was put into effect to 2014. (Note: merchandise trade data from the U.S. Census Bureau.)

In all but one case, growth in U.S. exports to nations that we have free trade agreements with has been solid. That translates into expanded opportunity and growth for the small businesses that overwhelmingly populate the U.S. exporting sector. The bottom line: export growth means small business growth.

By the way, in the case of U.S. exports to South Korea being effectively flat from 2011 to 2014, that’s about a sluggish, under-performing Korean economy.

Looking ahead to the possibility of the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP) becoming realities, such major steps to reducing trade barriers again would be good news for small business exporters. A couple of points from the ITA report drive this home:

• “In 2012, nearly 177,000 U.S. companies exported goods to countries in the proposed TPP agreement, of which more than 171,000 were SMEs. While TPP covers some markets where the U.S. already has a trade agreement, this group also includes Japan, the 4th largest market for SME exports in 2012. In addition, exports from U.S. SMEs account for more than 40 percent of total known U.S. goods exports to both Vietnam and New Zealand.”

• “TTIP would potentially reduce trade barriers between the U.S. and the 28 European Union markets, including several major markets for U.S. exporters. In 2012, nearly 97,000 companies exported goods to the EU, of which nearly 93,000 were SMEs. The European Union also accounted for $71.3 billion in SME goods exports that year.”

Make no mistake, free trade agreements that reduce governmental barriers to trade and expand opportunities to new markets are good for entrepreneurship and small business growth. Indeed, how could they not be? And the export numbers certainly back it up.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

Keating’s latest book published by SBE Council is titled Unleashing Small Business Through IP: Protecting Intellectual Property, Driving Entrepreneurship and it is available free on SBE Council’s website here.