New world, New policy: Overcoming the Burden of Foreignness

burden of foreignnessWhy should we worry about misaligned participations in trade? According to the U.S. Department of Commerce, less than 1 percent of U.S. firms export. Tens of thousands of small-business manufacturers and service sector firms could export their goods and services, but do not. These companies often fear the challenges of going overseas. But all firms entering new markets face shortcomings and disadvantages when compared to local competitors. Due to a lack of local knowledge, unfamiliarity with market conditions, insufficient insights into consumer behavior, and newness to political decision making, all new entrants encounter a “burden of foreignness.” Policymakers need to help prospective exporters overcome this burden and successfully access new opportunities overseas.

Trade has a great impact on the U.S. economy. Virginia created more than 90,000 jobs with exports in 2014.  Larger growth in imports than in exports has resulted in long-term trade deficits. In 1983, annual imports of products into the United States exceeded exports by more than $70 billion. The U.S. trade deficit in goods and services had risen above $502 billion by 2016. Annual trade deficits in this range tend to be eventually unsupportable, since these deficits add to the U.S. international debt, which must be serviced and, perhaps, eventually repaid.

 

Exporting is a key factor in increasing employment. The US Department of Commerce has estimated that $1 billion in exports supported the creation, on average, of 5,800 jobs in 2014. Due to productivity increase, this number has declined during the past years. Advanced technology reduces the input of labor and therefore the employment effects of trade. Overall, goods exports supported 7.1 million jobs in 2014. Services exports supported a record 4.6 million jobs in 2014.

 

Imports, in turn, bring a wider variety of products and services into a country. Foreign goods often exert competitive pressure for domestic firms to improve their quality, service and price. Imports, therefore, expand the choices of consumers and improve their standard of living. Exports, in turn, are the crucial factor that makes imports possible and sustainable in the long run. Not all nations participate to the same degree, some of them over export, others under export.

 

Not all nations participate to the same degree, some of them over export, others under export. For example, Australia exports over $1000 more per capita than it imports, thanks to its vast natural resources and modest population. The United States, on the other hand, exports a little less than two thirds as much as it imports. Countries that under-export are not reaching their potential on the world market and are leaving more on the table.

 

Participation in international business can help firms achieve economies of scale that that go beyond success achieved in domestic markets. Addressing a global market greatly adds to the number of potential customers. Increasing production lets firms ride the learning curve more quickly and therefore makes goods available more cheaply at home. Finally, and perhaps most important, international business permits firms to hone their competitive skills abroad by meeting the challenge of foreign markets and products. By going abroad, firms can learn from their foreign competitors, challenge them on their ground, and translate the absorbed knowledge into productivity improvements back home. Firms that operate only in the domestic market are at risk of being surprised by the onslaught of foreign competition and seeing their domestic market share threatened.

 

The “burden of foreignness” is daunting, and we should commend and support those who take on this challenge to drive beneficial US exports. In many ways, we all depend on it.

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