Thinking Small

The Obama administration’s efforts to grow small-business exporting, and how Congress could derail them.

Small businesses are politicians’ favorite constituencies on the campaign trail; whether wannabe lawmakers skew red or blue, when it comes time to hustle for votes, visiting local stores and factories is right up there with kissing babies. Unfortunately, that show of support doesn’t always translate into meaningful legislation after the election. When the Obama administration put forward a plan to double exports in five years as a way to increase employment and reduce the deficit and the trade imbalance, it specifically targeted small businesses as an intended source of this growth. In the aftermath of the tumultuous midterm elections, though, Washington observers worry that the incoming Congress will slash spending indiscriminately and idle the machine that’s supposed to pull our economy out of the doldrums. “Republicans like to posture themselves as champions of small businesses, but when it comes to making policy, they’re not walking the walk,” says Adam Hersh, an economist at the Center for American Progress.

A small business is defined as one with 500 or fewer employees, but most are much smaller than that. According to Census data, the greatest number of U.S. businesses have four or fewer employees. There are around 6 million small businesses in the United States, compared with roughly 18,000 firms that employ more than 500 people. These 6 million small businesses contribute about half of our nonfarm, private-sector GDP. When it comes to exports, though, their impact isn’t as great. The percentage of small businesses that export slid from roughly 31 percent in 1996 to just under 29 percent in 2006, and this took place during a period in which the dollar value of exports grew by almost $410 billion.

“Exporting is a big-company game,” says Robert Lawrence, a Harvard University professor and senior fellow at the Peterson Institute for International Economics. “If you want to get into a foreign market, there are fixed costs you have to incur, and these aren’t insignificant.” Businesses need to acquaint themselves with foreign regulatory bodies and distribution models and deal with logistical challenges like a language barrier or a 12-hour time difference.

Just finding companies that might be interested in exporting can be a challenge. The International Trade Administration partnered with UPS and FedEx, along with the U.S. Postal Service, to track down small exporters in a program called the New Market Exporter Initiative. The shippers combed through their customer databases to find companies that shipped to one other country. The ITA then approached the companies to gauge their interest in expanding to another overseas market. The ITA says it found 250 prospects in just eight weeks, thanks to the outreach program.

It’s been an all-hands-on-deck effort to try to promote exports, with the Commerce Department (of which the ITA is a part), U.S. Trade Representative—which held a conference dedicated to the topic in January—and Small Business Administration, among others, all involved in the proselytizing. For its part, the Small Business Administration demurred when asked if it was worried that a slash-and-burn attitude to government spending would impede its efforts in 2011 and beyond, but the answer is almost certainly yes.

“Financing is always going to be the No. 1 priority,” says Richard Ginsburg, senior international trade specialist at the SBA. Ginsburg praised the passage of the Small Business Jobs Act signed in September, legislation that boosted small businesses’ borrowing power in a tight credit climate. It’s worth noting, though, that the act was passed by the House back in the summer, but it was stuck in the Senate for three months after Republican senators held it up—and that was before the deficit hawks had solidified their hold on the House. “When it came time to doing something that would help small businesses grow, Republicans were standing in the way,” says CAP’s Adam Hersh.

Once potential exporters have been identified, the biggest hurdles are market access and financing. To a lesser degree, the strength of the dollar plays a role—a weaker greenback makes it easier to sell things abroad—but economists are divided on how much the U.S. government can, or should, intervene in this regard. When it comes to market access, big companies set up sales offices in foreign target markets and attend trade shows overseas to sell their wares or meet local distributors who can do the job for them. This is impossibly expensive for many small companies, although the ITA says it’s encouraging more small businesses to participate in trade shows. As an alternative, the ITA, as well as state and local governments, promotes trade missions, in which a group of U.S. companies will go to a foreign city and meet with prospective buyers. Sometimes, the ITA hosts a delegation of foreign buyers so they can meet U.S. companies here. State governors and other elected officials also travel abroad and meet with industry leaders to try to persuade them to open production facilities in the United States.

These efforts might sound extensive, but in reality, the United States isn’t nearly as aggressive as other countries when it comes to marketing its exporters. “What we keep reminding Congress is we do not spend, compared to our competitor countries, the same amount on trade promotion,” says Courtney Gregoire, director of the National Export Initiative. President Barack Obama has asked for an increase in ITA’s budget to support the export initiative, but it remains to be seen if a GOP-led House will go along with his request. It doesn’t help that trade missions often get characterized as junkets. Solomon Ortiz, a longtime House Democrat from Texas, lost to a Tea Party-backed Republican this year, in part because he couldn’t shake questions about the appropriateness of the trade missions he undertook.

The prospect of a new congressional zeal for budget-cutting is also bad news for the Export-Import Bank, which had requested a 25 percent increase in its budget in order to add a dozen field offices around the United States. (Although the Ex-Im generates its own revenue, its budget is approved by Congress.) The Ex-Im Bank extends credit insurance and guarantees to small exporters, stepping in if an overseas buyer fails to pay for a shipment. A fear of not getting paid was among the top three concerns cited by owners in a survey conducted by the National Small Business Association about exporting. In an economy characterized by widespread risk aversion among businesses, the Ex-Im’s role has grown. Last year, says Fred Hochberg, chairman and president of the Ex-Im, the bank did around $4.4 billion in small-business insurance and guarantees; this year, it’s up to around $5 billion, and the bank is launching a new initiative that’s going to expand the services available to small-business exporters.

Hochberg says a budget overhaul that slashes spending across government programs would be catastrophic in that it would impede small businesses’ ability to export and further cool an already tepid recovery. “I obviously would like a more nuanced approach as Congress deliberates.” Concern about the deficit is prudent, he says, but the focus has to be on growth for the American economy to stop treading water. “The recovery is still gaining steam—you don’t want to choke it off too soon. The deficit will be best handled by putting more people back to work and exporting more.”