Topic Category: Trade & Finance

The 15-member European Union (EU) is negotiating with 13 additional countries to join the European trade bloc. Plus, more and more EU companies are asking U.S. firms to do business in euros, the single European currency. How will a larger EU impact your business, and are you prepared to do business in euros?

The Big Kid on the Block Has Company

Since World War II and throughout the Cold War period, the United States has been the world leader in terms of trade and economic policy. In fact, the Cold War provided much of the glue that held the American-Western European alliance together. However, since the end of the Cold War, and in light of the EU’s expansion plans, the U.S.’s position of dominance is being challenged.

Additionally, developing countries are becoming a more cohesive bloc, and in turn, are generating greater negotiating strength of their own. Thus, of the 144 members of the World Trade Organization (WTO), more than three-quarters are less developed countries, and another 20 are waiting in line to join. Consequently, negotiating U.S. economic interests abroad may become more difficult.

EU Accession Plans Underway

The 15-member EU, which has a population of 375 million consumers, comprises Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, and the United Kingdom.

Accession negotiations for the Czech Republic, Hungary, Poland, Slovenia, Estonia, and Cyprus began on March 31, 1998, and on February 15, 2000 for Latvia, Lithuania, Slovakia, Bulgaria, Malta, and Romania. Accession discussions are also underway with Turkey. These countries represent 170 million consumers.

Greater Challenges Ahead

If all accession candidates become EU members, the population of the trade bloc will rise to 545 million, a number twice as big as the U.S.’s population. What does this mean for your business?

As the EU becomes more influential, U.S. trade policy initiatives and interests are likely to be challenged to a greater extent. Additionally, when dealing in European markets, U.S. companies may find themselves at a competitive disadvantage due to trade barriers that don’t apply to European companies.

Who Is Using the Euro?

Twelve of the 15 EU members, representing a population of 305 million people, have accepted the euro as their official currency, thereby establishing the euro area, also known as Euroland and the Eurozone. The remaining EU members, the United Kingdom, Sweden, and Denmark (which rejected Euroland membership in a national vote on September 28, 2000), are likely to adopt the single currency at some future time.

The euro has been used for non-cash transactions since January 1, 1999. On January 1, 2002, euro coins and notes became available. By February 28, 2002, national currencies will be withdrawn from use.

Increasingly, European companies are asking U.S. firms to use the euro for business transactions. Fulfilling this request may give you an edge over the competition — as well as additional risk.

Consider Doing Business in Euros

If you are not already dealing in euros, you might consider it. This, of course, will involve different steps for different businesses and could get complicated. For example, you might consider printing your price lists in euros, which will require adjusting your ledgers, receivables, and other financial systems accordingly.

To effectively deal with two currency denominations, you may need to invest in new software, training, consulting, and dual documentation systems. Unfortunately, due to the costs involved, many U.S. companies have not taken the appropriate steps, are unprepared, and may miss out on new trans-Atlantic opportunities.

Euro Benefits and Disadvantages

Since its inception on January 1, 1999, the euro has reached a high of $1.19, has fallen to a low of $.82, and closed at approximately $.89 on January 2, 2002. This has various implications for different types of businesses. For example, as the value of the euro slides, the cost of U.S. exports to Europe rise, reducing European demand. On the other hand, European exports to the U.S. and elsewhere become less expensive, compared with U.S. goods and services.

On the investment side, U.S. companies interested in purchasing European assets get more for their money. But, U.S. firms already invested in Europe generate smaller profits when converting their euros into dollars.

Euro Volatility and Risk

Dealing with any foreign currency involves a level of risk and the euro is no exception. As such, it’s essential to factor in a level of instability. To protect yourself, it’s necessary to closely work with your banker to ensure that currency fluctuations do not eat into your profits, or worse, cause a loss.

Additionally, the euro could bring other problems. For example, U.S. prices that end in “9” to achieve a psychological advantage will be lost when converted.

Effect on Your Letters of Credit

The International Chamber of Commerce (ICC), the recognized Paris-based world business organization, issued a policy statement in 1998 entitled The Impact of the European Single Currency (Euro) on Monetary Obligations Related to Transactions Involving ICC Rules. It spells out currencies to use for letters of credit on contracts existing before, during, and after the transitional period (i.e., LCs issued after January 2002 cannot be made in former national currencies of Eurozone states). To view this, go to www.iccwbo.org.

Achieving a Competitive Edge

The cost of dealing with the euro may be significant. However, over the long-term, it may be well worth it. No longer will you need to incur the costs of converting the dollar into a dozen different currencies.

Furthermore, European prices should decrease since it is now easier to compare the prices of goods and services in any Euroland country. But very importantly, accepting euros will give you an edge over companies not accepting the currency. And, in today’s extremely competitive global environment, every advantage helps.

For more information, visit the EU website at www.europa.eu.int.

Slower foreign demand growth and a strong U.S. dollar were cited by the Federal Reserve Bank of New York as reasons for weak U.S. exports in 2001. However, since September 11th, even lower export growth projections are likely.

This means international deals will become more difficult to close and receivables will be more difficult to collect. Consequently, open accounts may need to be reassessed in favor of letters of credit (LCs) or other more secure methods of payment.

But as every exporter knows, during periods of slower economic growth, the ability to offer more attractive terms can greatly enhance your competitive position. But at what level of risk? The longer the length of credit terms, the greater the degree of risk, since it is difficult to determine if the foreign customer will have the financial capacity to make a payment months later.

Understanding the Buyer’s Abilities Can Help

A very important rule of prudent exporters is to “know the customer.” In order to help determine this, a number of questions should be answered. For example, is the foreign customer creditworthy for the shipment or suffering cash flow problems that might delay payment? What is the foreign customer’s reputation for honesty and dependability? How long has the prospect been with his or her bank? Would he or she object if the exporter’s bank writes to this bank to ask for an opinion on the company?

Satisfactory answers are a good start. But keep in mind: a foreign buyer may have an excellent track record and consistently pay you on time, but due to unforeseen difficulties, he or she may default. What’s the solution?

Use Discounted Usance Letters of Credit

By discounting a usance letter of credit (LC), exporters can offer overseas buyers attractive terms of up to 180 days, yet obtain payment almost immediately with no risk. This can make a deal much more attractive, greatly increase the exporter’s level of international competitiveness, and eliminate risk.

How Does It Work?

Upon issuing a usance LC, the issuing bank promises to pay the exporter, against conforming documents, a certain number of days after sight (after the bank sights the documents, usually 10 days to three weeks), or a specified number of days after the bill of lading date (the date the steamship takes on the goods). The fee for this service is small, and is discounted off the LC amount.

And collecting under a usance letter of credit is simple. After shipment, the exporter presents documents per the LC to the negotiating bank. The negotiating bank will then check the documents carefully to verify that they comply with the LC terms. If they do, the negotiating bank will advance funds immediately, less the discount represented by an interest rate. The exporter will be paid slightly less money than he or she would have collected at maturity, but will benefit from the cash flow.

Usance LC Benefits Are Widespread

The exporter’s benefits of discounting a usance LC are vast. Usance LC’s:

• Turn credit sales into cash,
• Eliminate all political and commercial risk,
• Provide relief from administrative and collection activities,
• Afford simple documentation (LC and draft),
• Offer an attractive fixed rate often cheaper than a commercial loan,
• Are vastly used worldwide, and
• Are governed by the UCP 500.

Need More Information?

For more details on usance LCs, how the exporter and importer can benefit, or for other solutions that may be best for you, contact your bank representative.

In 1994, former President Clinton hosted the Summit of the Americas in Miami. At that time, 34 Western Hemisphere countries committed to establish the Free Trade Area of the Americas agreement (FTAA) by 2005. Since then, summits held in Toronto, Buenos Aires, and Quebec have established nine working parties and laid the framework for negotiations to begin.

What is the FTAA?

The FTAA is a comprehensive trade agreement designed to eliminate trade barriers among 34 countries in the Western Hemisphere with a combined population of 800 million. The nine negotiating groups cover market access; agriculture; services; investment; government procurement; intellectual property; subsidies, antidumping, and countervailing duties; competition policy; and dispute settlement.

Currently, trade barriers are relatively high in South America. In fact, according to the National Association of Manufacturers, duties there average 14% or more, and it’s not uncommon for U.S. manufacturers to face duties of 20-30%. Additionally, the region imposes substantial non-tariff barriers that involve costly customs clearance procedures, excessive standards, regulations, and testing procedures. In contrast, the average U.S. import duty is 1.6%.

The Importance of Hemispheric Trade

In 2000, U.S. merchandise exports to Western Hemisphere countries totalled $350 billion, representing 45% of total U.S. exports to the world. Based on the U.S. Trade Representative’s multiplier, this supports more than 3.8 million American jobs. U.S. exports south of the border reached $171 billion, just slightly less than U.S. exports to all of Europe.

FTAA Expectations

According to the National Association of Manufacturers, with an FTAA in place, annual U.S. exports to Central and South America would triple.

Since 1994, the year the North American Free Trade Agreement (NAFTA) was implemented, U.S. exports to Mexico rose by 120%, while exports to South America rose by only 34%. Why did exports to Mexico rise so fast? The reduction in Mexican duties resulting from NAFTA certainly played a major part.

The NAFTA Legacy

According to NAFTA At Five Years, published by the Council of the Americas and The U.S. Council of the Mexico-U.S. Business Committee, “NAFTA has led to more high-quality, better-paying jobs for U.S. workers.” Additionally, the report says, “NAFTA has fostered growth in cross-border investment that has improved the competitiveness of American companies and, consequently, their ability to keep high-skill, high-wage jobs in the United States.”

But job gains are only one indicator of the benefits generated by NAFTA. Another significant measure of NAFTA’s performance is its positive impact on economies of scale, technological change, new investments, and productivity growth in the liberated sectors.

The Costs of Not Completing the FTAA

In July 2001, the European Union (EU) and Mercosur, the South American trade bloc comprised of Argentina, Brazil, Uruguay, and Paraguay, began their fifth round of negotiations to establish a free trade agreement. Upon completion of the EU-Mercosur agreement, and in the absence of an FTAA, EU exporters and investors will have preferential access to Mercosur markets, putting U.S. companies at a competitive disadvantage.

Brazilian Opposition & Slowing Economy

Trade analysts indicate that Brazil has resisted an FTAA for some time. It has positioned Mercosur as a competitor with the United States and has challenged the U.S. for regional leadership. Brazil is concerned that direct competition with the U.S. could be difficult.

If Brazil resists an FTAA, analysts believe that Chile, Argentina, and other Latin American countries are likely to individually negotiate free trade deals with the United States, putting Brazil at a competitive disadvantage. Consequently, Brazil would lose Latin American market share as well as foreign investment, which could be diverted to Chile and Argentina. And the strength of Mercosur as a bloc would be greatly diminished.

Currently, the Argentine and Brazilian economies are experiencing severe difficulties. In fact, in the second half of 2001, Brazil could face a sharp economic slowdown due, in part, to Argentina’s slowing market and energy problems. This could further affect Brazil’s outlook and interest in an FTAA.

Preparation is Key

Although obstacles exist, it is very likely that an FTAA, with Brazil’s cooperation, will be completed by 2005. As a result, it’s important that companies do their homework, establish a new Latin American trade and investment strategy, and anticipate greater competition.

U.S. tariffs levied on imports of foreign products originally were established to provide revenue for the federal government, predating income or property taxes. Today, however, tariffs are viewed and used differently.

Several organizations can give you the financial support you need to expand internationally. But which programs should you consider, and how much paperwork do you have to wrestle with? We can help.

Export-Import Bank

The Export-Import Bank of the United States (Ex-Im Bank), an independent U.S. government agency, facilitates the financing of exports of U.S. goods and services.

Ex-Im Bank guarantees the repayment of loans, makes loans to foreign purchasers of U.S. goods and services, and provides guarantees of working capital loans for U.S. exporters. It also provides credit insurance. Ex-Im Bank does not compete with commercial lenders, but assumes the risks they cannot accept.

Overseas Private Investment Corp.

The Overseas Private Investment Corporation (OPIC) is an independent U.S. government agency that facilitates direct U.S. investment in emerging democracies with fledgling free-market economies for the benefit of U.S. firms.

OPIC helps U.S. investors to mitigate related risks through direct loans, loan guarantees, and political risk insurance. Plus, it provides a variety of investor services.

U.S. Trade and Development Agency

In an attempt to promote U.S. technology abroad, the U.S. Trade and Development Agency (TDA) helps U.S. companies in the initial stages of project development. It provides grants for feasibility studies, orientation visits, and conferences that demonstrate U.S. technology and equipment capabilities.

Inter-American Investment Corporation

The Inter-American Investment Corporation (IIC), an affiliate of the Inter-American Development Bank (IDB), provides financing for private sector investment projects in Latin America and the Caribbean. IIC provides loans and makes capital investments designed to facilitate local private development.

International Finance Corporation

The International Finance Corporation (IFC), a member of the World Bank Group, invests in developing country private ventures by offering equity financing and loans without government guarantees in collaboration with other investors. Always a minority partner, IFC seeks project sponsors from around the world with which it can form joint enterprises.

World merchandise trade increased 10% in 2000, according to early estimates of the World Trade Organization (WTO). That’s twice the rate for 1999, and one of the highest in the last decade. World merchandise trade in 2001 is estimated to grow at a healthy rate of 7%, still ahead of the overall levels in the ‘90s.

While there may be minor adjustments when the final figures are released in the spring, it is clear that 2000 was a banner year for trade and for companies trading internationally.

Several Factors Led to Strong Growth

A combination of factors triggered the large gain in world trade. This included the elimination of tariff and non-tariff barriers negotiated under the General Agreement on Tariffs and Trade (GATT) Uruguay Round agreement. Exceptionally strong economic growth in the United States and Asia’s recovery from its recent economic crisis further contributed.

Reduced Trade Barriers Boost Trade

Eight rounds of multilateral trade negotiations since 1947 under the auspices of GATT, now the WTO, have paid off. The goal of each round was to reduce or eliminate tariffs. By 1999, the bulk of the impact from tariff reductions negotiated under the most recent 1993 agreement, the Uruguay Round, was realized in developed countries.

The elimination of tariff barriers led to a 10% reduction in customs duties collected by the United States, the European Union (EU), and Japan from 1994 through 1999. This and other factors resulted in a 40% increase in imports by these three entities, representing approximately half the world’s imports. This boosted total world trade significantly.

Impact of U.S. and Asian Economic Growth

The strength of U.S. domestic demand, combined with the high value of the U.S. dollar, led to an increase in the share of U.S. world merchandise imports. In 1999, it rose to 18%, considerably higher than its share of 12% registered in 1980. On the other hand, America’s highly competitive industry captured more than 12% of world exports, slightly higher than 11% recorded in 1980. The U.S. world share of service exports and imports in 1999 was 19% and 13%, respectively.

The reenergizing of Asia after its economic crisis also was responsible for increased world trade. Its share of world exports jumped from 16% in 1980 to 27.5% in 1999, while its share of world imports rose from 17% in 1980 to 23% in 1999. Considering that Asia’s volume of imports decreased by 8.5% from 1997 to 1998, its 11.5% increase from 1998 to 1999 represented quite a comeback.

Developed vs. Developing Countries

If the differences expressed between the developed and developing countries attending last November’s Asia-Pacific Economic Cooperation (APEC) meeting is an indication of their future positions, reaching a consensus on issues likely will be difficult. The challenges presented by globalization and equal access to each other’s markets will continue to be areas of concern. The trade figures also indicate substantial differences.

According to the WTO, developing countries’ merchandise exports expanded by 9% in 1999, approximately two times faster than the global trade average. Their share of world merchandise exports and imports reached 27% and 25%, respectively.

China captured a world export and import share of 3.5% and 2.8% respectively; Hong Kong, 3.1% and 3.1%; North Korea, 2.6% and 2%; Mexico, 2.4% and 2.5%; Taiwan, 2.2% and 1.9%; and Singapore, 2% and 1.9%.

The vast majority of merchandise exports was produced by developed countries. However, their merchandise exports increased less than 2% from 1998 through 1999. Leading the pack was the United States with a 12.4% share of world exports and 18% of imports; Germany, 9.6% and 8%; Japan, 7.5% and 5.3%; U.K., 4.8% and 5.5%; France, 5.3% and 4.9%; and Canada, 4.2% and 3.7%.

Goods and Services Trade Expands

The global export value of world services recovered in 1999 after a poor performance in 1998. Commercial services rose by 1.5% from 1998 through 1999. Trade of travel services increased by 2%. Most activity was seen in North America and Asia. Eastern Europe and Latin America, however, performed poorly in service exports.

World exports of goods experienced the largest jump in fuels, followed by office and telecom equipment, automotive products, consumer goods, and chemicals. A decrease was witnessed in textiles, iron and steel. The value of world exports of agricultural foods and commodities decreased primarily due to weaker prices.

World clothing exports slightly expanded. Together, North America’s clothing imports slowed sharply from double-digit growth recorded in 1998 and 1997. Western Europe’s clothing imports declined modestly, partly due to the weakening Euro, while Japan’s imports rose.

Trade Bloc Performance Varied

The performance of regional trade blocs in 1999 differed. Intra-trade exports and imports among North American Free Trade Agreement (NAFTA) members increased by 11% and 12%, respectively, over 1998. The 10-member Association of Southeast Asian Nations (ASEAN) also experienced solid expansion of trade among members. In 1999, intra-ASEAN exports and imports jumped 10% and 7%, respectively, from the previous year.

However, recession in the Mercosur trade bloc, which includes Brazil, Paraguay, Uruguay, and Argentina, led to a trade contraction of 26% in intra-trade exports and a decrease of 24% in imports. Intra-EU trade also didn’t perform well. In 1999, both intra-trade exports and imports were stagnant compared to 1998.

What Does This Mean for Your Business?

Real global gross domestic product (GDP) growth is projected to decrease from 4.1% in 2000 to 2.7% in 2001. However, it is expected to increase to 3.5% in 2002, according to Bank of America. Similarly, U.S. real GDP is projected to decrease from 5.0% in 2000 to 1.9% in 2001, and projected to rise in 2002, reaching 3.5%.

Understanding past and present growth and world trade patterns is necessary in order to craft a sound short- and long-term world trade and investment strategy. But, in the absence of a crystal ball, projecting future activity is difficult at best. As a result, a policy of pursuing several favorable markets with products in demand will help to mitigate risks should your primary markets experience slow economic growth.

There is no doubt that international trade sometimes causes employment to increase in some sectors while decrease in others. But exaggerated fears of massive job losses due to imports are misplaced. Contrary to public belief, only a very small percentage of American jobs are at risk from imports.

According to the Joint Economic Committee of Congress report, Economic Indicators, April 1999, service workers accounted for 30% of the non-farm workforce, followed by the retail trade (18%), government (16%), manufacturing and mining (15%), finance, insurance and real estate (6%), wholesale trade (5%), transportation and public utilities (5%), and construction (5%) sectors.

According to Trade, Jobs and Manufacturing, of these categories, the 85% of all workers not in the manufacturing and mining sector are in industries that by their nature do not produce tradable goods or services, or where imports account for a very small to nonexistent share of domestic supply. And in the manufacturing and mining sector (the remaining 15%), only a small number of workers are in industries considered import-sensitive, defined as having an import penetration of at least 30%. How is this determined?

Of more than 450 separate four-digit Standard Industrial Classifications (SIC) manufacturing sectors, only 66 were identified by the Cato study as being import-sensitive. Employment in these 66 categories represented 12% of manufacturing workers in 1994 — or less than 2% of total non-farm workers — a surprisingly small figure!

In 1998, agricultural workers numbered 3.4 million and represented 2.6% of total U.S. employment. Stated in the Cato study, “Fear of imports looms large in some sectors of agriculture, such as dairy products, sugar, and peanuts, but for those who make their living in the larger export-oriented sectors such as wheat, corn, and soybeans, the chief worry is not rising imports but sagging exports caused by economic troubles abroad. Even in farm sectors most vulnerable to import competition, the potential job losses are minuscule in relation to the overall U.S. labor force.”

The Economic Report of the President, provided to Congress in February 2000, has come to the same conclusion and determined that “roughly 10% or less” of worker dislocation is attributable to trade. The Cato study concludes that the “lingering myth that imports cause a net decrease in jobs is refuted by the evidence of the last two decades. Since 1980, the annual volume of imports to the United States has more than tripled. During that same period, the number of Americans employed has increased by 31 million.” The report’s compelling evidence points to technological change as the real displacer of jobs.

The Cost of Protectionism Is High

Reducing the number of imports through the use of trade barriers only raises the costs of goods and services to consumers, and promotes higher inflation. According to the WTO, in 1988 it was determined that $3 billion a year is added to grocery bills of U.S. consumers to support sugar import restrictions.

According to Trade, Jobs and Manufacturing, if import barriers on sugar products were eliminated, imports would surge by almost 50% and domestic production would fall by 7.2%. The resulting job losses in sugar-related industries would total 2,290 out of 16,400 full-time industry jobs — “a small number compared to an average of 235,000 net new jobs the U.S. economy has created each month during the past seven years.”

In the late 1980s, U.S. trade barriers on textile and clothing imports raised the cost of these goods to consumers by 58%. When the U.S. limited Japanese car imports in the early 1980s, car prices rose by 41% between 1981 and 1984. The objective was to save American jobs. However, in the end it cost more jobs due to a reduction in the sale of U.S.-made automobiles, according to the WTO.

Technology Is the Real Displacer of Jobs

Scholars and leaders of industry alike have argued that even if a greater level of protectionism were implemented, low-technology jobs would still disappear. Robert Reich, former U.S. Secretary of Labor, stated that “Even if millions of workers in developing nations were not eager to do these [low-technology] jobs at a fraction of the wages of U.S. workers, such jobs would still be vanishing. Domestic competition would drive companies to cut costs by installing robots, computer integrated manufacturing systems, or other means of replacing the work of unskilled Americans with machinery that can be programmed to do much the same thing.”

There are many examples of technology eliminating jobs. According to Trade, Jobs and Manufacturing, “Technology shoves far more Americans out of jobs than do imports. In the last two decades, tens of thousands of telephone operators and bank tellers have been displaced from their jobs, not by imports, but by computerized switching and automated teller machines.”

Education Is Key to Future Success

As Thomas Friedman points out, “Every night the lion goes to sleep knowing that in the morning, when the sun comes up, if it can’t outrun the slowest gazelle, it will go hungry. Every night the gazelle goes to sleep knowing that in the morning, when the sun comes up, if it can’t outrun the fastest lion, it’s going to be somebody’s breakfast. But the one thing the lion and gazelle both know when they go to sleep is that in the morning, when the sun comes up, they had better start running. Unfortunately, not everyone is equipped to run fast.”

Today, one’s ability to run fast is often dependent on the level of education obtained. Thus, it is no secret that unemployment is commensurate with lack of education and skills. For example, in May 2000, the annual U.S. unemployment rate for the civilian labor force averaged 4.1%. However, of the civilian labor force age 25 years and older, the rate of unemployment was 6.1% for workers without a high school diploma. It declined to 3.7% for high school graduates, 2.9% for those with some college education, and 1.8% for college graduates.

Not surprisingly, the occupational groups projected to decline or be among the slowest growing are more likely to be dominated by workers who do not obtain education beyond high school. Conversely, occupations having the highest rates of growth are more likely to have workers with higher educational attainment.

According to the U.S. Department of Labor’s report, Futurework, “We are living in a new economy — powered by technology, fueled by information, and driven by opportunity on our side.” By 2050, the report indicates, the U.S. population is expected to increase by 50%. As the new economy emerges, it is essential that New York’s young population develop the skills needed tomorrow. It is very clear: as globalization creates opportunity, it generates more for those workers who are better educated. Because the uneducated could be left behind, life-long learning policies are essential in today’s economy and more so in tomorrow’s economy.

Contrary to public opinion, imports are not bad for the economy or workers. In fact, the opposite is true. Imports allow American consumers greater choices, a wider range of quality, and access to lower-cost goods and services. They create competition, forcing domestic producers to improve value by increasing quality and/or by reducing costs. And, since imports allow the American family to purchase more goods for less money — stretching the dollar — more disposable income is available for education, healthcare, home mortgages, vacations, etc. And imports help keep inflation down, one of the most important factors in raising our standard of living.

“Three out of four families living below the poverty line in America today own a washing machine and at least one car. Ninety-seven percent own a television; three out of four have a VCR. Thanks to all that terrible competition, many gadgets are much more affordable, particularly in terms of the number of work hours needed to acquire them,” remarked John Micklethwait and Adrian Wooldridge.

Imports Help Local Companies Become More Competitive

Imports do more than afford American families a higher standard of living — a primary economic goal. Through the availability of lower-cost imported inputs, such as components and materials, U.S. producers are much more competitive, resulting in enormous benefits.

According to Trade, Jobs and Manufacturing, published by the Cato Institute’s Center for Trade Policy Studies, “In 1998, more than half the $919 billion in goods Americans imported were not final consumer goods but rather capital goods ($270 billion) or industrial supplies and materials ($203 billion). Such imports as petroleum, raw materials, steel, and semiconductors are used directly by American producers to lower the cost of their final products. The lower costs in turn lead to increased sales at home and abroad and, in many cases, higher employment within the industry.”

Additionally, according to the World Trade Organization (WTO), “Imports expand the range of final products and services that are made by domestic producers by increasing the range of technologies they can use. When mobile telephone equipment became available, services sprang up even in the countries that did not make the equipment.”

Protectionism Doesn’t Protect Jobs

Although protectionism may be beneficial in some instances to help fledgling industries for limited periods of time, numerous studies have indicated that this approach does have severe negative consequences.

Commenting on a report by the General Agreement on Tariffs and Trade (GATT), now the World Trade Organization, on the true costs to consumers of protectionism, Peter Sutherland, former Director General of GATT, said, “It is high time that governments made clear to consumers just how much they pay — in the shops and as taxpayers — for decisions to protect domestic industries from import competition. Virtually all protection means higher prices. And someone has to pay; either the consumer or, in the case of intermediate goods, another producer. The result is a drop in real income and an inability to buy other products and services.”

Mr. Sutherland continued, “Maybe consumers would feel better about paying higher prices if they could be assured it was an effective way of maintaining employment. Unfortunately, the reality is that the cost of saving a job, in terms of higher prices and taxes, is frequently far higher than the wage paid to the workers concerned. In the end, in any case, the job often disappears as the protected companies either introduce new labor-saving technology or become less competitive. A far better approach would be to use the money to pay adjustment costs, like retraining programs and the provision of infrastructure.”

Globalization enables producers of goods and services to move more easily beyond the U.S. market of 276 million people and sell to the world market of 6.1 billion. This is very good news, since exports now account for almost one-third of real U.S. economic growth — and a very large portion of New York’s economic development. Consequently, the income of local workers and farmers, and the growth prospects of an increasing number of New York-based businesses are pegged to globalization.

In 1999, the United States exported $684.4 billion in goods and $271.9 billion in services for a total of $956.2 billion. Since 1993, this represents an increase of 49%. Based on calculations provided by the U.S. Trade Representative ($1 billion in goods and service exports sustains 11,986 jobs), this growth supported 11.5 million jobs. And these jobs pay more than the average U.S. wage. How much more?

According to the U.S. Department of Commerce, workers in jobs supported directly by exports earn 20% more than the national average, while workers in high-technology jobs supported directly by exports receive 34% more. Combined, workers in jobs supported both directly and indirectly by exports are paid 13% more. Why Exports Matter: More!, a report published by the Institute for International Economics and The Manufacturers Institute, states that unskilled workers also earn more at exporting plants.

Why Exports Matter: More! indicates that worker productivity is higher and employment growth is stronger at exporting firms, as compared to non-exporting firms of the same size in the same industry. Thus, during a five-year period, it was revealed that the measure of value-added input per employee (one measure of productivity) was almost one-sixth higher in exporting plants than in comparable non-exporting plants.

Additionally, exporting firms experienced almost 20% faster employment growth than non-exporters, and were 9% less likely to go out of business. Communities where exporters reside also benefit through a more stable workforce and a strong tax base. Furthermore, the revenue generated from exports flows to local communities, through restaurants, retail stores, movie theaters, etc., and spreads risk should the domestic market enter a period of slow growth or recession.

Exports of Services Outpace Merchandise

Every year for almost three decades, the U.S. service sector has enjoyed a trade surplus that has consistently reduced the U.S. trade deficit. For example, in 1999, U.S. exports of services decreased the overall trade deficit by more than $80 billion — that’s a 25% reduction. And since 1980, U.S. exports of services have grown 130% faster than exports of goods. These facts are often overlooked. But more importantly, not always realized are the tremendous benefits currently derived from — and the huge potential offered by — the service sector in terms of economic growth, personal income, employment, and exports.

According to Recent Trends in U.S. Services Trade published by the U.S. International Trade Commission, travel and tourism was the largest U.S. service export via cross-border trade in 1998, accounting for 29% of the total. This was followed by the exports of intangible intellectual property (reported as royalties and license fees), 15%; business, professional, and technical services, 10%; maritime and air freight transportation services (including port services), 9%; and passenger fares (airline and maritime), 8%.

In August 2000, average hourly service sector earnings in the United States were $13.72, only slightly less than hourly earnings in manufacturing, according to the Bureau of Labor Statistics.

The U.S. service sector, especially the New York service industry, is extremely advanced and internationally competitive. With the recent introduction and availability of new and inexpensive technology — led by telecommunications, computers, and the internet — millions of people and companies worldwide now have the ability to purchase services from anywhere.

As a result, it is anticipated that the export of business, professional and technical services (accounting, advertising, engineering, franchising, consulting, public relations, testing and training, in addition to many others) will increase rapidly.