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Why Focusing on Exports Doesn't Make Economic Sense

Promoting exports as a means to rebuild America’s middle class is a lovely vision, but the U.S. needs to do more than that to improve business.
Alabama's automobile plant is exporting two-thirds of the vehicles they build—but the name on the plant itself is foreign.

Alabama's automobile plant is exporting two-thirds of the vehicles they build—but the name on the plant itself is foreign.

In January 2010, a year after taking office, President Barack Obama unveiled a singularly ambitious idea for boosting the economy. “Tonight, we set a new goal,” he said in his State of the Union address. “We will double our exports over the next five years, an increase that will support two million jobs in America.” Under the banner of a National Export Initiative, the president pledged to support new trade missions overseas, offer export assistance to small and medium-size businesses, and step up enforcement of trade agreements. “Because the more products we make and sell to other countries,” he said, “the more jobs we support right here in America.”

In response, governors from Washington State to Kentucky started launching their own export initiatives. California, which had unceremoniously shut down its ineptly managed trade-and-commerce agency in 2003, was scheduled to open a commercial office in Shanghai this spring. In February, Tennessee Governor Bill Haslam announced the opening of offices in Mexico, the United Kingdom, Germany, and China.

In this year’s State of the Union, Obama renewed his call for boosting exports, arguing that fair trade “supports millions of good-paying American jobs.”

Implicit in all this soaring talk of export promotion is a vision: that shipping higher volumes of made-in-America goods abroad will reverse the decline of the nation’s middle class. With more exports, we’ll create hundreds of thousands, if not millions, of new factory jobs, replenish our public treasuries, and enjoy the sort of dignity and standard of living our parents did. And to get the exports flowing again, we just need to massage a few foreign relationships and better enforce our trade agreements.

In dollar terms, diamonds are one of California's biggest exports—three times bigger than wine. Job impact: employment for a handful of trusted couriers.

It’s a lovely vision. It just doesn’t make much sense. In any number of ways, promoting exports as a means to rebuild American manufacturing is like pushing on a string. In fact, even relying on export statistics as a means to gauge the health of America’s economy is, for mundane but powerful reasons, a terrible idea.

Export promotion has long been a staple of economic policy at the federal level. In the 1980s, when America’s economy seemed to be under siege from Japanese and European imports, states leapt into the game as well, opening trade offices overseas and sending representatives around the globe. It’s hard to say whether such efforts had any meaningful effect on the nation’s merchandise export trade, which grew in real (i.e., inflation-adjusted) terms by 123 percent between 1980 and 2008. What’s clear, however, is that American manufacturing jobs did not increase correspondingly. In fact, during that same period, about 5.3 million American manufacturing jobs vanished.

How about our success in the years since Obama launched his National Export Initiative? Well, exports of goods in that interval have increased by just over 35 percent, which is fairly decent. But again, jobs have not mirrored that rise. Despite Obama’s recent boast that 500,000 new manufacturing jobs have been created over the past three years, as of February about 579,000 fewer Americans hold manufacturing jobs than when he took office; and the U.S. Bureau of Labor Statistics expects that manufacturing employment in 2020 will actually be lower than in 2010, by a margin of 73,100 jobs.

Factory jobs have continued to disappear not because Obama has done something wrong, but because manufacturing has gotten more efficient. As many analysts have pointed out, making widgets simply requires fewer and fewer employees. This is the biggest reason the number of jobs supported by manufactured exports represents at best about five percent of all private-sector employment in this country.

But even if we ignore the effect of increased productivity, there’s another problem with viewing our manufacturing sector through the lens of exports: our current export statistics are misleadingly robust. Each month, the Census Bureau publishes detailed figures on merchandise exports. These numbers are puffed up by a category called “re-exports”: goods that are imported from abroad and then shipped abroad without any value added during their time in this country. For example, a trading company in Miami might import a consignment of phones from Taiwan in anticipation of landing an order from a retailer in Argentina.

Re-exports are on the rise across the nation—accounting for 12.5 percent of America’s merchandise export trade last year, up from 8.7 percent in 2000. But they don’t create a lot of jobs. Instead, they produce overly sunny numbers. Exclude re-exports from New York’s merchandise export trade since 2000, and what appears to be about a 40-percent increase in exports over that period is really half of that. Exclude re-exports from California’s merchandise export trade, and what emerges is that exports of goods declined by 7.4 percent between 2000 and 2012.

By the way, care to guess what California’s leading re-export was in 2011? Non-industrial, worked diamonds. Value: $4.8 billion. In dollar terms, that makes diamonds one of the state’s biggest exports—three times bigger than wine. Job impact: employment for a handful of trusted couriers.

If export promoters truly wanted to focus on the most promising areas of export growth, they would turn their attention to the service sector. Service exports encompass a wide range of transactions: from money spent here by foreign business travelers, tourists, and students; to fees earned by American architects, engineers, lawyers, business consultants, and financial managers; to royalties claimed by American entertainers. Even digitized-music, -video, and -print sales fall into this category, because digitization is transforming one-time goods into services. (Read the small print, and you’ll find that you do not own the song you just downloaded; you’re leasing access to it.) Nationally, service exports in 2012 were valued at more than $630 billion, or about 40 percent of the size of our merchandise export trade. But of course, promoting such exports is a little more challenging and a lot less photogenic than, say, announcing the sale of 50 jets.

SO IF EXPORT PROMOTION is a hollow concept, how can government leaders create the conditions for more good jobs in the medium and long term? By actually helping to make America’s economy more competitive.

Most economists agree that competitiveness rests on these basic building blocks: high-quality public education, a transportation infrastructure that permits the efficient movement of goods and people, a workforce trained in skills commensurate with the needs of local industry, and a business climate that is attractive to prospective investors, both foreign and domestic.

Regrettably, on the education front, we’re doing poorly. The U.S. invests more in public education per capita than all but a few other nations, but U.S. high-school students rank 14th in reading and 25th in math, according to the 2009 Program for International Student Assessment. In 2010–2011, some 44 percent of high-school graduates who took the Florida College System’s entrance exam failed the math section.

In transportation, much of our infrastructure is outdated and poorly maintained, and our electronic highways are increasingly vulnerable to hackers who mean us harm.

Then there are our workforce-development issues. A 2011 study by Deloitte and the Manufacturing Institute found that manufacturers across the nation were unable to fill as many as 600,000 vacant positions, ranging from machinists and welders to maintenance technicians. Many of the job descriptions for these unfilled positions required education in the so-called STEM fields of science, technology, engineering, and math. Unfortunately, by failing to provide solid secondary education, failing to encourage more college students to pursue the STEM fields, and failing to craft an immigration policy weighted toward high-skill workers, we’re undermining our ability to remain competitive in a global economy. Of course, on the bright side, we’ve left lots of room for improvement.

That leaves the business climate. Here’s where some states and cities have had some success. Most of them have achieved this by focusing less on finding overseas markets for existing manufacturers and more on creating conditions attractive to foreign businesses.

Case in point: Alabama. In a September 2012 report, the Los Angeles-based Milken Institute chided the state of California for lacking a coherent export strategy. It underscored the complaint by noting that Alabama had a much higher rate of export growth.

What seemed to elude the report’s authors, though, is that Alabama’s surging export growth has not been the product of an export strategy. Rather, it stems from an industrial-development strategy dating back to the 1990s, when Alabama managed to lure an automobile company to Tuscaloosa County. The company built a plant that now employs 3,200 workers and exports two-thirds of the vehicles it makes. The name of this powerhouse behind Alabama’s exporting success?