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(originally published by Booz & Company)


The Truth about Exports

The numbers may be rosy, but the U.S. export initiative is still hobbled.

For many months now, U.S. exports have seemingly been on a roll, with rapid increases due in large part to the falling dollar. According to data from the U.S. Department of Commerce, sales of U.S. goods to other nations surged 16.6 percent in January 2008 from the comparable period a year ago, a trend that is likely to continue for the foreseeable future. And if you believe the headlines, that impressive uptick may soon reverse many years of huge trade deficits in manufactured goods and save the country from a deep recession or, even worse, a multiyear economic decline.

But these results conceal important factors that must be taken into account. Most important, the lion’s share of export growth appears to be occurring in price-sensitive raw materials such as coal and agricultural goods and in big-ticket items made by major manufacturers such as United Technologies Corporation and Boeing Company. By contrast, most small and midsized manufacturers — the key to any export offensive with real, sustainable value — are participating only at the margins. In fact, it may actually be getting more difficult for these companies to export, says J. David Richardson, an economics professor at Syracuse University and author of Sizing Up U.S. Export Disincentives (Institute for International Economics, 1991).

The problem is that most small and midsized entrepreneurial firms lack sufficient knowledge about what foreign customers want — an intelligence gap that is widening as the number of non-Western countries all U.S. companies do business with increases. In addition, these smaller companies face an export financing challenge that has been heightened by the U.S. banking crisis. Consequently, the goal of capturing more of the gains from a globalized economy by encouraging a slew of non-exporters to reach out into the world for new sales may be proving elusive. “A lot of small companies have given up entirely,” says William Primosch, senior director for international business policy at the National Association of Manufacturers (NAM).

All this is reminiscent of the debate about U.S. exports more than 15 years ago, when Richardson’s book helped point out that the U.S. export infrastructure lagged behind that of competitors, most notably Germany and Japan. Germany’s model was seen as particularly impressive, because its industry associations were adept at supporting exports from small and midsized companies, collectively called the Mittelstandt. In the United States, however, the export promotion activities of both the state and federal governments were criticized as fragmented and ineffective, partly because trade agencies were often the dumping ground for political appointees. At the same time, U.S. banks did little to help provide streamlined tools for financing the flow of exports, instead relying on time-consuming and paperwork-intensive letters of credit. Other barriers included the Foreign Corrupt Practices Act, which barred American companies from paying many types of commissions or fees to middlemen, and a balky federal process for controlling technology exports.

Partly as a result of this criticism, the U.S. made some strides in the 1990s to improve its export capabilities. The rise of the Internet helped smaller companies research sales opportunities and communicate with prospective customers. Under the Bill Clinton administration, the Department of Commerce emphasized its trade promotion role, attempting to serve as a bridge between smaller companies and U.S. embassies abroad. Barriers against exporting technology-based goods eased and financial-services firms introduced new forms of trade finance, such as export insurance.

Although some of those positive initiatives are still in place, the government’s and private sector’s enthusiasm for them has waned. In the post–September 11, 2001, landscape, the U.S. government has focused on security and antiterrorism efforts. As a result, sensitive technologies are under tighter scrutiny and commercial trade support is less of a priority. Moreover, the bursting of the subprime mortgage bubble has made banks and other financial institutions wary of extending finance or insurance to small companies whose creditworthiness is not fully established. The U.S. export effort, Richardson says, “is way below where it should be.”

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  1. Timothy Aeppel and Joanna Slater, “Surging Exports Lighten the Gloom,” The Wall Street Journal, March 24, 2008: An example of prominent media coverage of exports. (Subscription required.)
  2. J. David Richardson, Sizing Up U.S. Export Disincentives (Institute for International Economics, 1991): This groundbreaking book remains relevant in today’s debate about the American export machine.
  3. Web site: The U.S. government’s export portal provides consolidated information to exporters.
  4. National Association of Manufacturers Web site: Learn about the complexities of exporting from the U.S.
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