With $21 trillion in debt, Washington policy makers have little appetite in aggressively meeting government subsidized competition from overseas even while America continues to lose economic market share (i.e., U.S. is becoming an ever-smaller percentage of world GDP). Defensively, President Trump appears willing to rethink “free trade” with an early modest success in a reciprocal trade treatment in South Korea; although the true outcome of his efforts won’t be seen for years to come, if at all. (Many of our trading partners, particularly in Asia, have decades of tinkering on the margins to appease Washington’s periodic temper tantrums regarding persistent and growing trade deficits without truly changing their ingrained behavior and demonstrable success in adhering to mercantilist policies.)
Given the current realities of Washington, D.C., however, here are some modest proposals that could help us compete more effectively against much better funded government rivals:
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1. A “War Chest” Is Need To Counter Subsidized Competition.
In the 1980’s a reluctant President Reagan recognized that a carrot and stick approach was needed to discipline other governments, which were unfairly subsidizing their businesses by providing cheap loans (i.e., Tied Aid Credit) for their exporters. As a result the U.S. created a “war chest” of funding (hundreds of millions not billions of dollars) that allowed it to target situations where overseas competition was clearly unfairly subsidized at the expense of U.S. businesses. This showed we were serious about leveling the playing field. At the same time we cajoled other governments to more faithfully honor existing treaties and international conventions, which had previously been designed to do away with subsidized financing altogether.
With unquestioning faith in international agreements, unfortunately once the negotiations were completed we no longer felt the need for the stick and unilaterally dismantled the war chest. China, and to a lesser extent most of the industrial nations of the world, have once again grown used to providing soft credits (i.e., subsidized financing) to win business and they know the U.S. won’t do anything about it. Indeed, the message we send to our competition by continuing to hamstring the U.S. Export-Import Bank (ExIm Bank) is we are not serious in supporting American-based exporters.
2. In War There Are Casualties; In Business There Are Losses.
Allowing our government to take appropriate risks to help American exporters compete with other governments must be tolerated. U.S. government programs that provide funding to businesses competing abroad have two sometimes opposing directives: 1) Provide financial support where the private sector won’t; and 2) Don’t lose taxpayer money. Nobody wants taxpayer funds squandered but lending money has risks. Since the private sector won’t often lend and/or invest money into many emerging markets (e.g., American banks are essentially prohibited by regulation) and these markets now represent more than half the world’s GDP, the U.S. government like all other major industrial powers needs to provide risk mitigation and funding to facilitate exports and investment. Today even when these programs can be used they frequently have much more onerous requirements and criteria making them less effective than their counterparts in other countries. Frequently small to medium sized enterprises (SME’s) that try to use this support liken it to a vault in the bank where they can see the money but the obstacles make it impossible to obtain for all but the most resourceful. Politicians have to recognize there is a cost of doing business for American exporters to effectively compete against their subsidized competition, particularly in emerging markets. Then government bureaucrats need to take appropriate risks to ensure SME’s can compete effectively against their foreign competition.
3. Going It Alone Isn’t Always Preferred.
Since most of our allies provide far more funding support to their exporters, we should seek to work when appropriate within multilateral solutions. We should also aggressively engage the private sector where there is appetite. Risk sharing and smaller subsidies, which can benefit American companies, can be far more efficient and cheaper in cooperation with other governments than going it alone. For example, in traditional project finance structures for large multi-billion dollar projects overseas where multiple countries are involved U.S. government lenders generally refuse to rely on due diligence and legal documentation from other sources. This drives up costs, creates significant delays and often forces the scope of the supply from America to other more user-friendly countries.
For SME’s trying to expand overseas it is problematic working with large international banks, particularly where the amount of funding required may be less than a few million dollars. Since making sure payment is received for goods shipped abroad or obtaining financing are often the most critical obstacle to exporting many would be exporters are discouraged from even trying. At the same time, most U.S. government agencies actively involved in promoting international trade don’t have the resources or expertise to provide a complete financing solution. By partnering with the private sector, where possible, to deliver effective small business tailored services the government can drive down costs, reduce processing time and shift some of the risk in a climate where belt tightening will surely be expected. To that end, Secretary of Commerce Wilbur Ross recently pointed out in a speech to his Trade Finance Advisory Council the need for the government finance programs to embrace Fintech (i.e., the use of Internet-based automated lending platforms) as a way to reach potential small exporters.
4. Adopting Efficiencies Learned From Japanese Automobile Manufacturers.
A major improvement to Henry Ford’s revolutionary assembly line was Japanese automobile companies pioneering the use of teams to do various tasks instead of the previous monotonous and mind-numbing repetition of one task per worker as the car rolled down the line. U.S. government agencies involved in helping American companies expand overseas are Balkanized so they often aren’t able to clearly see the overall needs and goals. There have been attempts to consolidate and streamline these various bureaucracies but politics have always gotten in the way. Taking a page out of the financial services industry and not costing the U.S. government a thing, why not create a relationship manager for SME’s that can then pull in the various government services? In order to truly make this effective government employees would likely need to be seconded and teamed together in the same way a bank’s relationship manager works side by side with the loan officer, letter of credit specialist, treasury operations person, country risk officer, etc. If teams of government workers could truly be effectively harnessed to assist SME’s in solving their international issues more of them would export.
5. Educating Americans To the Economic Battlefield Beyond Our Shores.
Yale Professor Nobel Laureate Robert Shiller has lamented that Trump may cause a trade war with his current bombast and threatened tariffs. He, like most Americans, doesn’t realize we are already in a trade war! We just don’t want to acknowledge it. Look at the trade imbalance with China for 2017: $507 billion of imports and one quarter of that ($129 billion) in exports from the U.S. (Similar lopsided trade imbalances exist for many of our largest so called trading “partners.”) Currently in the Washington, D.C. media market agricultural interests are running T.V. ads to influence decision makers that there will be dire consequences if Trump imposes restrictions on imports. To put it in perspective, America shipped $21 billion of agricultural products to China last year, or four percent of all their products poring into the U.S. While some want to blame the bombed out manufacturing base in most American urban centers to automation, even the most ardent free trader admits that decades of massive trade deficits are at least as much to blame. Our increasingly irrelevant ExIm Bank stumbles along while China is aggressively outspending the U.S. promoting its industry and exports throughout the world – it is estimated that the U.S. government is spending one percent of what China is to win overseas business, almost a rounding error in the hundreds of billions of dollars being spent!
In World War II we tried to ignore the massive military build up in Germany and Japan until Poland was invaded and Japan dropped bombs on Pearl Harbor. Nobody wanted to confront the uncomfortable, but there were obvious signs that a war was inevitable. Today American consumers enjoy their cheap products as well as the export of dirty manufacturing overseas (who cares about climate change?) while ignoring the fact the current economic policies are unsustainable. A skeptical press, which is not completely indoctrinated by 20thcentury trade orthodoxy, and a public relations initiative to educate Americans about the existing trade war is essential. If the Chamber of Commerce wasn’t entirely co-opted by multinational corporate interests, which no longer have a vested interest in an American industrial base, it could provide the required public relations, not unlike the American Petroleum Institute that for years has highlighted in ad campaigns the benefits of oil (e.g., jobs) for their industry as a counter to the environmentalists. Americans need to wake up to the economic battle we are surely facing. Recently, a high level Chinese official smugly pointed out that in any trade war China will win because the Chinese tolerance for pain is much higher than Americans. Let’s hope it doesn’t come to that, but Americans, including the farmers, need to understand there will be some serious sacrifice required if we are to restore America to a more secure economic future.
Alan Beard is Managing Director of Interlink Capital Strategies a Washington, D.C. based financial advisory firm and fund manager focused on exporting and foreign direct investment in emerging markets. He has written several books and articles on international finance, been an adjunct professor at Georgetown University and advised various government agencies on international finance issues.