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Weekly Trade Spotlight: "Small and Medium-Sized Enterprises: Overview of Participation in U.S. Imports"

On Tuesday, January 19, 2010, the U.S. International Trade Commission (USITC) released the results of a USTR-requested investigation on the exporting activity of America's small- and medium-sized enterprises (SMEs) - U.S. businesses with 500 or fewer employees. USTR requested this investigation, and two subsequent studies, to bolster our ability to make trade policy responsive to American small- and medium-sized businesses that want to export their products around the world, and to grow well-paying American jobs here at home. This week's Trade Spotlight focuses on the wealth of information to be found in this first USITC report, and what USTR can do to help American SMEs create jobs on Main Street, by finding customers around the world.

The first of three USTR-requested reports from the USITC, entitled "Small and Medium-Sized Enterprises: Overview of Participation in U.S. Imports," is the most comprehensive analysis to date of US SME export participation. You can view the full report here. It consolidates data from the Census Bureau, other branches of Commerce, the SBA, the USDA, and other US and international institutions, and provides USTR with a comprehensive picture of US SME export participation, including areas where SMEs are already active exporters.

This is not yet a complete picture; USITC indicates that it has not yet been able to quantify SME exports through intermediaries, such as their supply-chain contribution to large firm exporters (i.e., indirect exporting by SMEs by sourcing the exports of large firms). Moreover, the ITC found the available data on services sector exporters to be inadequate for an authoritative accounting. The third report that USTR expects to receive from the Commission should provide additional insight into the service sector.

What this report does tell us is that a new focus on making U.S. trade policy more responsive to SMEs is the right call when it comes to a jobs-focused export strategy. SMEs play a crucial role in job creation; during the last two decades, SMEs have accounted for almost 65 percent of new jobs created in the US. Overall they account for half of non-farm US employment. Almost 80 percent of SME employment is within the services sector, compared with 85 percent in larger companies. Firms providing professional, scientific, and technical services account for a larger share of services sector employment within SMEs than in larger firms. SMEs are leaders in minority and foreign-born employment and opportunity. Small and medium employer firms are more likely to be minority-owned and to employ a foreign-born person than larger firms. 11.6 percent of all employer SMEs are minority owned.

SMEs in trade are a big plus for good jobs in America. SME exporters increase employment faster and pay higher wages than non-exporting SME firms. SMEs that export are more skill and capital intensive than those that do not. They deliver on these inputs by demonstrating higher productivity that supports better wages and helps competitiveness.

However, SMEs still are not exporting as actively as larger firms. As a share of their overall business, large US firms are getting three times the value from foreign trade that SMEs are. Overall, exports accounted for only 3.8 percent of SME GDP in 2004. The ITC suggests that many SMEs cannot as easily afford the costs of entering foreign markets, including business risks such as those created by government policies. Based on this information, USTR has a clear mission to achieve in concert with our partner agencies across the government: to help reduce risks, increase opportunities, and lower costs for American SMEs who want to sell their goods and services worldwide.

The time is ripe for this initiative. Technological advances (such as the Internet) and government programs are now opening the door to a larger export role for SMEs. In 2008, the National Association of Manufacturers found that 13 percent of its SME manufacturers now derive at least 25% of their sales from exports, more than triple the share of firms in 2001.

SMEs are key drivers of innovation, which will be a key to a sustainable US recovery, and increased trade can help the SMEs to take advantage of their innovations. Studies show that SMEs produce more patents of significance per employee than big firms. So trade can allow these SMEs to recover their innovation costs over a bigger market and speed innovation by learning how to do multiple adaptations to diverse markets

The largest markets for SME merchandise exporters were with NAFTA partners Canada and Mexico (just like their large firm counterparts). These markets accounted for more than 30 percent of SME merchandise exports. USTR has already agreed with Canada and Mexico to increase our work on further facilitating SME trade.

SME merchandise exporters engage more actively with higher-income small markets--including Hong Kong, Switzerland, Australia, and Israel--than they do to emerging markets like China and India, where uncertainty about government policies may serve as barriers. Trade policies aimed at reducing risks in emerging markets can help US SMEs expand.

The principal SME exports were computers and electrical products, machinery, and chemicals; they also have significant apparel and wood exports. There are still significant non-tariff barriers to these products in wealthy countries and substantial tariffs on these products in many developing markets. We can address these obstacles through trade policy as well.

Though manufacturers account for almost three quarters of total US merchandise exports, trade by wholesalers is growing fast. Whereas manufacturer exporters are overwhelmingly large firms, SMEs account for 57 percent of wholesaler and other non-manufacturer merchandise exports. This type of trade more than doubled between 1997 and 2007, and can be encouraged further through the development of smart trade policy.

There's more in the USITC report on services trade by SMEs, and that information will be enhanced by subsequent USTR-requested investigations. For now, this initial report is a great start that bolsters USTR's understanding of small- and medium-sized business exporting today, how those exports contribute to job creation here at home - and how USTR can help both to grow.