[Economic Report of the President (2012)]
[Administration of Barack H. Obama]
[Online through the Government Printing Office, www.gpo.gov]


 
CHAPTER 5

International Trade and Finance


Over the past year, global economic growth has slowed, largely due to a range of challenges in the advanced economies. These adverse shocks
are, for the most part, unrelated to policies or business decisions
undertaken within the borders of the United States. Nevertheless, in
an integrated global economy, the United States cannot fully escape
their impact.
One could hardly begin with a starker example of an adverse shock
to the world economy than the massive earthquake that struck Japan's
northeastern coast on March 11. This earthquake was the most powerful
to have hit Japan in recorded history, triggering tsunami waves that
leveled towns and claimed nearly 16,000 lives. Alongside the
devastating human toll, the disaster also had a major impact on the
Japanese economy. The International Monetary Fund (IMF) estimates
that the Japanese economy contracted by 0.9 percent in 2011. The
economic impact also extended far beyond Japan's borders. For
months afterward, supply chains around the world, especially in
the automotive industry, were disrupted by production slowdowns
and parts shortages.
While Japan's severe economic slowdown in 2011 was driven by a
natural disaster, those elsewhere in the developed world were largely
a product of forces outside of nature. Slow growth has exacerbated
sovereign debt and deficit problems in Europe, and austerity measures
put into place in response have impeded near-term growth in a number
of euro-area countries. In January, the IMF reported that the euro
area's gross domestic product (GDP) grew 1.6 percent in 2011, down
from 1.9 percent in 2010, and predicted that the euro area would
contract by 0.5 percent in 2012. Growth in the United Kingdom has
also slowed significantly, in part reflecting tight fiscal policies,
and is estimated by the IMF to have been only 0.9 percent in 2011.
With the European Union, Japan, and the United States collectively
accounting for almost 60 percent of global GDP, slower growth



in these economies was sufficient to lower growth at the global level
in 2011, as Figure 5-1 illustrates.
In the face of the broad-based slowdown in economic growth in the
developed economies, growth in emerging markets also decelerated.\1\
Slower growth in import demand in the large economies meant slower
export growth in emerging markets.2 For example, growth in China is
decelerating because of a decline in export growth as well as a
slowdown in domestic real estate investment. Although the IMF
predicts China is likely to grow more than 8 percent in 2012, its
slowdown contributes to the loss of momentum in global growth.
_____________
\1\ The growth slowdown in some emerging markets also reflected the
impact of policy tightening in some countries to prevent overheating.
As the year progressed, concerns about overheating tended to give
way to concerns about the economic slowdown in the developed
countries.
\2\ The emerging markets aggregate in Figure 5-1 includes Argentina,
Brazil, Chile, China, Colombia, Hong Kong, India, Indonesia, Israel,
Malaysia, Mexico, Peru, Russia, Singapore, South Africa, South Korea,
Taiwan, Thailand, Turkey, Ukraine, and Venezuela. Seventeen member
states of the European Union (the EU-27) use the euro. They are
Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece,
Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, the Slovak
Republic, Slovenia, and Spain.

Viewed in the context of these external challenges, the growth of
U.S. exports over the past year has been a particular bright spot.
Despite a slowing global economy, America's exports of goods and
services have surpassed their pre-crisis peaks and have been growing
more than fast enough to meet the President's goal of doubling the
2009 export level by the end of 2014. Many factors are contributing
to this fast pace of growth, including continued productivity growth
in manufacturing, a shift in unit labor costs that favors U.S.
businesses over those in other advanced countries, and techno-
logical innovation in the energy sector, which is improving America's
trade balance in petroleum products. A possible further weakening of
foreign demand conditions, however, could pose a risk to future U.S.
export growth.
Global economic events could also affect the U.S. economy through
financial links between the United States and the rest of the world.
These links have increased dramatically in recent decades. U.S.-owned
assets abroad and foreign-owned assets in the United States increased
more than six-fold between 1994 and 2010.
"Global rebalancing" has been a major theme of U.S. international
economic policy since the beginning of the Obama Administration. In
the years before the global financial crisis erupted in 2008, large
asymmetries had developed in the global economy. Several countries
characterized by large, persistent current account surpluses,
including Germany, Japan, and China, relied too heavily on
unsustainable growth in net exports to drive economic growth.
Several other countries characterized by large, persistent current
account deficits, including the United States, relied on
unsustainable growth in household consumption and construction of
residential real estate. A more symmetric, better balanced pattern
of growth is needed throughout the major economies. In the United
States, future growth must be driven less by consumption and more by
net exports and investment. Conversely, countries that have
traditionally run large current account surpluses need to rely more
on domestic consumption and less heavily on net exports. So far,
the United States has made significant progress toward rebalancing.
For progress to continue, however, U.S. exports must grow even more,
and consumption in the surplus countries must increase.

THE EURO-AREA CRISIS AND ITS
IMPLICATIONS FOR THE UNITED STATES

A key potential risk in 2012 to the U.S. and global economic recover-
ies remains the sovereign-debt and banking crises in Europe. Economic
and fiscal conditions vary greatly among the 17 economies in the euro
area, as illustrated in Figure 5-2. Although there is significant
heterogeneity among





euro-area economies, economic and fiscal conditions in most of them
deteriorated throughout 2011. In 2012, the economies of Estonia,
Finland, and the Slovak Republic are predicted to grow by more than
2 percent, but those in Greece, Italy, Portugal, and Spain are
predicted to shrink by more than 1.5 percent. Similarly, the ratio
of general government gross debt to GDP is projected to be roughly
70 percent or below in Estonia, Finland, the Netherlands, the Slovak
Republic, and Spain and above 110 percent in Greece, Ireland, Italy,
and Portugal.
Economic research shows that there are many determinants of sov-
ereign credit risk or sovereign borrowing costs, including individual
factors (Berg and Sachs 1988) and global financial factors
(Eichengreen and Mody 2000; Longstaff et al. 2011). Since early
2010, both sets of factors raised borrowing costs for some smaller
and a few larger economies in the euro area. The European Commission
(EC) and the IMF negotiated assistance programs for Ireland
(November 2010), Portugal (May 2011), and Greece (May 2010, July 2011,
and October 2011). In October 2011, the sovereign-debt crisis
intensified in Italy and Spain, the third- and fourth-largest
economies in the euro area.\3\
In response to the marked increase in sovereign borrowing costs,
the European Central Bank (ECB) intervened, resuming its Securities
Markets Program, in an effort designed to lower sovereign bond yields
by purchasing government debt in secondary markets. European leaders
and institutions have also introduced and expanded various measures
to inhibit contagion, such as the European Financial Stability
Facility. While these measures have helped contain the sovereign-debt
crisis in Europe, significant risks remain. Market participants are
expressing ongoing concerns about the fiscal conditions of Italy and
Spain, as well as Greece and Portugal, in part because of fears that
economic growth in these countries is likely to be sluggish for a
prolonged period, exacerbating their fiscal situation.
European banks are among the largest holders of European govern-
ment debt. (See Financial Stability Oversight Council 2011 for a
discussion of the interconnections between U.S. banks, European
banks, and European government debt.) As concerns about sovereign
debt rose, spreads widened on sovereign bond yields relative to
German bond yields in June 2011 (as highlighted in Figure 5-3),
leading to deteriorating conditions of both solvency and liquidity
among European banks. Toward the end of 2011, many European banks
were facing shortened maturities and higher costs of funding in
the interbank market, an important source of bank liquidity.
In December 2011, after two successive cuts in interest rates, the ECB took major steps to provide increased liquidity to euro-area banks. Among
______________
\3\ Assistance programs for Greece negotiated in 2011 have not yet been implemented.






other measures, the ECB's new longer-term refinancing operation
extended the maturity of loans offered to banks from one year to three
years, and the ECB eased collateral requirements for those loans. The
Federal Reserve also extended and reduced the cost of dollar liquidity
swap arrangements to the ECB, as it had done during the credit freeze
of 2008-09. A currency liquidity swap is an agreement between two or
more parties to exchange a set amount of a given currency for another
currency at a given price until a specific date in the future. In this
case, the Federal Reserve provides dollars for periods ranging from
overnight to as long as three months in exchange for the currency of
the foreign central bank. In turn, the foreign central bank can lend
the dollars during the specified period in its local markets, helping
to relieve funding pressures in those markets and to prevent the
spread of strains to markets elsewhere.
Given the interconnectedness of European and U.S. banks and the
presence of branches, agencies, and subsidiaries of European banks in
the United States, adverse financial conditions in Europe can be
transmitted to American financial institutions. According to the
Federal Reserve's Senior Loan Officer Opinion Survey, several
European branches tightened standards on commercial and industrial
(C&I) loans over the second half of 2011, in contrast to U.S. and
other foreign banks. The C&I loans on the books of European branches
in the United States have in fact declined noticeably since the middle
of 2011. Such financial data are being monitored closely. One of the
goals of recent financial oversight embedded in the Dodd-Frank Wall
Street Reform and Consumer Protection Act is to reduce systemic risk
by increasing transparency. Among other things, the new law supports
trading of financial instruments on central exchanges, including
derivatives. (For a discussion of the role of the Office of Financial
Research in fostering transparency, see Data Watch 5-1.)
Similarly, trade and investment links between the United States
and Europe are broad and deep, and, in recent years, of growing
importance relative to the rest of the world. Europe is a significant
destination for U.S. exports, accounting for more than 20 percent of
U.S. goods exports and nearly 40 percent of U.S. service exports. In
addition, sales by European affiliates of U.S. multinational firms
totaled $3.1 trillion in 2008, making up more than half of the $6.1
trillion in total sales abroad by U.S. multinational firms.
Furthermore, Europe is the leading foreign source of investment and
jobs in America, accounting for $173.2 billion, or 76 percent, of all
foreign direct investment (FDI) inflows into the United States in 2010.

----------------------------------------------------------------------
Data Watch 5-1: The Significance of the Office of Financial Research
(OFR) in Combating Global Risks to the U.S. Financial System

The recent financial crisis presented a stark example of the need
for comprehensive data on the financial system. While the initial
catalyst for the financial crisis was a decline in U.S. housing
prices that in 2007 led to a dramatic rise in subprime mortgage
defaults (Brunnermeier 2009), neither market participants nor
policymakers were aware of the extent to which leverage, reliance on
ultra-cheap short-term funding, and a web of interconnected
transactions and claims had built up in the financial system prior
to that time. It became clear that investors had placed too high a
value on the underlying homes, real estate, and other assets that
were supposed to stand behind their investments. Consequently, as
defaults on mortgages multiplied, they triggered a wholesale flight
from related financial securities, which spread across countries and
financial markets. The inadequacy of information available to assess
risks properly magnified that flight from risk (Squam Lake Working
Group 2009). The resulting credit crunch ultimately triggered a
global economic recession from which many countries are still
recovering.
Responding to the devastating effects of the financial crisis, on
July 21, 2010, Congress enacted the Dodd-Frank Wall Street Reform and
Consumer Protection Act (PL 111-203). The creation of the OFR in that
Act addresses two glaring deficiencies in the financial data
infrastructure that were revealed by the crisis. First, the OFR is
charged with increasing the availability of financial information so
that policymakers can better identify, analyze and monitor potential
risks to the U.S. financial system. Critically, given the
interconnectedness of global financial markets, this legislation
permits the acquisition of data from financial institutions related
to their activities globally that may pose a threat to the financial
stability of the United States. Second, OFR is charged with improving
the quality of financial information, in part by standardizing the
types and formats of data that are reported to regulators.
Standardized data would make it easier for policymakers to accurately
evaluate whether a financial institution or group of institutions--
located either domestically or abroad--or certain financial
activities in which they may be engaged pose a threat to the U.S.
financial system.
Over the past eighteen months, the OFR has laid the critical
groundwork for enhancing both the quantity and the quality of
financial information that is available to U.S. policymakers. The OFR
is in the midst of comprehensively cataloguing the data that are
currently held and collected by U.S. financial regulators.
Concurrently, the OFR will collaborate with the member agencies of
the Financial Stability Oversight Council to identify and fill
deficiencies in the collection of data on financial markets.
Likewise, the OFR has taken an important step toward enhancing the
quality of the financial data infrastructure through the promotion
of a global Legal Entity Identifier (LEI) for financial institutions.
At the G-20 Cannes Summit, leaders supported the development of a
global LEI and tasked the Financial Stability Board with coordinating
this work. U.S. policymakers have partnered with the global financial
services industry, foreign regulators, and associations such as the
International Organization for Standardization to develop and begin
to implement a universal standard for identifying counterparties to
financial transactions (Department of Treasury 2011). In time,
further initiatives will be undertaken to meet the information needs
of regulators in fulfilling the mandate of the Dodd-Frank Wall Street
Reform Act and responding to potential threats to the financial
stability of the United States.
----------------------------------------------------------------------
Outlook for Europe and Implications for the U.S. Economy

As noted, the crisis in Europe has slowed both current and
predicted growth. The IMF estimates that euro-area growth in 2011 was
1.6 percent, but for 2012, the IMF forecasts that economies in the
euro area will contract by 0.5 percent.
Faltering consumer confidence in Europe has spread to countries out-
side the euro area. Britain's Nationwide Consumer Confidence Index
fell for the fifth month in a row in November 2011, reaching an all-
time low of 36 points, compared with a historical average of 77.
Economic growth projections for the European Union for 2012 are lower
than for 2011: -0.1 percent in 2012 compared with 1.6 percent for
2011 (IMF 2012). A slowdown in Europe could affect the U.S. economy
through two channels in addition to the finance channel mentioned
above: trade and direct investment.
Exports. The share of U.S. goods exports to Europe has been over
20 percent for decades. A severe financial episode in Europe could
reduce exports from businesses throughout the United States. As is
the case with flows of inward investment, exports to Europe are
distributed broadly across the United States, as displayed in
Figure 5-4. The European Union is the destination for more than
20 percent of total goods exports from Alabama, Connecticut,
Indiana, Massachusetts, South Carolina, and West Virginia. Exports
range from cars, aircraft, and semiconductors, to coal, gold, soy-
beans, kaolin, and live chickens. Moreover, export data for
commodities underestimate the extent of U.S. trade with Europe
because, as noted, more than one-third of U.S. service exports go
to Europe. Shrinking purchases of





American goods and services by Europeans could have a significant
impact on U.S. employment in several states.
Foreign Direct Investment. Declines in output, profit, and
investor confidence in Europe could have an adverse effect on the
ability and willingness of European firms to invest in American
firms and jobs. The United States received more than $228 billion in
FDI from all foreign sources in 2010, over 75 percent of which came
from Europe. Between 2004 and 2010, FDI flowed into every state,
with Texas receiving the most, followed by Alaska, California, New
York, Indiana, Illinois, Ohio, Alabama, South Carolina, and Georgia.

International Cooperation in Resolving Crises

The data in Figure 5-3 starkly reflect growing concerns of
market participants regarding the scope and magnitude of euro-area
bank and sovereign-credit risk. In the last decade, systemic risk
related to financial crises has received more attention in the
economics literature, including studies by Allen and Gale (2000),
Kaminsky, Reinhart, and Vegh (2003), Frankel and Wei (2005),
Reinhart and Rogoff (2009), and Ang and Longstaff (2011).
While Europe has the capacity to take responsibility for
addressing its crisis through decisive policy action and a credible
financial backstop, the United States has made clear that the
international community has a strong interest in the successful
resolution of the crisis. The Administration is engaging with
European governments both bilaterally and in multilateral forums.
The United States has also been involved in the response to the
crisis through its role in the IMF.
The Administration continues to urge movement along several
dimensions in Europe: robust implementation of countries' agreed
fiscal and structural reform programs, in the context of steps that
euro-area leaders have outlined to reform fiscal governance in the
euro area; a more substantial financial firewall to ensure that
governments can borrow at sustainable interest rates while
executing policies to strengthen the foundations for growth and to
reduce their debts; and measures to ensure that European banks have
sufficient liquidity and are adequately capitalized to maintain the
full confidence of depositors and creditors.
Global and U.S. economic performance will depend, in part, on
the swift resolution of problems in the euro area. In such times of
global economic and financial disequilibrium, U.S. coordination
with international partners remains essential.

FOREIGN DIRECT INVESTMENT, INTERNATIONAL
TRADE, AND THE U.S. ECONOMY

Experience and economic theory suggest that a global economy can
provide enormous advantages for American workers, consumers, and firms.
In the absence of international trade and investment, a country can
consume only what it produces, it can invest only what it saves, it
can use only the technology that it creates, and it can take advantage
of only those natural resources within its borders. Countries that
have deliberately cut themselves off from international trade and
investment for extensive periods of time have paid a stiff price in
forgone opportunities for investment, consumption, and growth. North
Korea, a nation that has pursued this kind of isolation assiduously,
illustrates this point in a powerful and tragic way. Before Kim Il-
Sung seized power in northern Korea, it was at least as rich as
southern Korea. Today, per capita GDP in South Korea is over 17 times
higher than that of North Korea.
One of America's achievements after World War II was helping to
build the open and integrated global trading and investment system
that now incorporates almost all of the world's economies. Of course,
this system brings challenges, along with opportunities. The Obama
Administration has focused on meeting the challenges of this system
in ways that enable American workers and firms to make the most of
the rich opportunities provided by a more open global trading and
investment system. At the same time, the Administration has sought
to ensure, through strong enforcement efforts, that other countries
play by the rules of the system, and it has sought to protect those
who are potentially adversely affected by global competition with a
stronger safety net and an improved training and reemployment system
(discussed in Chapters 6 and 7).

Investment in the United States by Foreign Companies

The United States had the largest annual flow of inbound FDI of
any economy in the world in every year between 2006 and 2010. By
2010, the cumulative FDI stock in the United States had reached
nearly $3.5 trillion-more than three times the FDI stock in each of
the next three largest recipients (Hong Kong, France, and the United
Kingdom) and more than five times China's cumulative inbound FDI
stock ($579 billion). Given the rapid GDP growth of large emerging
markets such as Brazil, India, and China, both before and after the
global financial crisis, it is not surprising that these countries
and other emerging markets are absorbing an increasing fraction of
the world's FDI. Nevertheless, their inflows remained substantially
below those into the United States throughout this period.
Like trade flows, FDI flows tend to be procyclical, rising when
the global economy expands and contracting when it shrinks. In late
2008 and 2009, as the global economy sank into its deepest postwar
recession, FDI inflows around the world contracted (Figure 5-5); by
2009, total FDI flows were roughly 60 percent of their 2007 levels.
Nonetheless, the United States remained the largest destination for
new FDI inflows. As both the U.S. and global economies recovered from
the recession, FDI inflows into the United States increased 49 percent
from 2009 to 2010. Then, as global growth slowed again in 2011, FDI
into the United States also decelerated. Through the third quarter of
2011, FDI inflows into the United States were running roughly
4 percent below 2010 levels.
If the global economy returns to normal growth rates, FDI
inflows into the United States will likely resume their growth. The
Nation continues to offer a set of "fundamental attractors" to
foreign investors that other countries struggle to match. One such
attractor is the sheer size of America's domestic market. In 2010,
America's GDP was nearly two-and-a-half times larger than that of
China, the world's second-largest economy. The United States also
offers potential investors a strong rule of law, a highly skilled,
motivated workforce, a highly developed financial system, and
effective protection of property rights. The United States continues
to lead the world in key technologies, attracting investment by firms
eager to conduct world-class research in close proximity to the
world's top universities. For all of these reasons, leading companies
around the world continue to be attracted to investment opportunities
within the borders of the United States.




The Benefits of FDI. U.S. affiliates of foreign firms make
significant contributions to U.S. employment, output, investment,
research and development (R&D), and exports. The Bureau of Economic
Analysis (BEA) of the U.S. Department of Commerce surveys the
activities of foreign-owned affiliates in the United States.
According to its data, in 2008, subsidiaries of foreign companies
accounted for nearly 5 percent of U.S. private-sector jobs, more
than 11 percent of all U.S. private capital investment, more than
14 percent of all U.S. private-sector R&D, and 19 percent of all
U.S. goods exported. In that year, the U.S. employees of these
global companies earned an average annual compensation of about
$73,000--about one-third more than the economy-wide average.
Economic research shows that the benefits of foreign investment
are even greater than these measures indicate. When foreign
subsidiaries use advanced technologies and effective management to
achieve high levels of productivity in their U.S. operations, the
benefits can "spill over" to their American competitors (Keller and
Yeaple 2009). As U.S. firms increasingly interact in their home
market with highly productive foreign subsidiaries, the U.S. firms
may be able to learn from their competitors' strengths. Keller and
Yeaple find that 14 percent of the aggregate productivity growth
between 1987 and 1996 (a period of rapidly rising FDI in the United
States) resulted from FDI-related productivity spillovers. These
spillovers were particularly valuable for small firms, which do not
routinely encounter these competitors in markets outside the United
States. One reason proximity matters is that employees who move from
foreign firms to domestic firms are often an important conduit
through which knowledge diffuses from foreign to domestic firms
(Poole forthcoming).
While foreign firms sometimes establish entirely new enterprises
in the United States, with newly constructed plants and newly hired
workers (known as "greenfield" investment), they more often gain a
foothold in the U.S. market by merging with or acquiring existing
domestic businesses. These transactions can be beneficial. Finally,
FDI can help connect domestic firms to export networks and
opportunities. The importance of such connections is well documented
in developing countries (Aitken, Hanson, and Harrison 1997), but the
United States can also benefit from such connections.
Encouraging FDI in the United States. The Obama Administration
has taken vigorous steps to facilitate and promote inward FDI in the
United States. As emerging markets expand, the forces of economic
gravity are likely to pull more and more of the world's FDI inflows
into these economies. Recognizing the reality of greater global
competition for FDI, the Obama Administration has set up SelectUSA,
a "one-stop shop" based in the Department of Commerce that helps both
foreign and U.S. investors find the best options for their prospective
businesses within the borders of the United States. SelectUSA is the
first systematic Federal Government initiative to identify, inform,
assist, and attract potential investors to the United States. It is
also finding ways to partner with state and local economic development
agencies, so that governments at all levels can coordinate efforts to
attract investment. In the United States, state, local, and regional
economic development organizations (EDOs) facilitate business
investment attraction, retention, and expansion. SelectUSA can help
these organizations compete more successfully with alternative
production sites outside the United States; it can also function as
an important resource for these organizations on international
investment issues.
SelectUSA's activities cover a broad range of investment
promotion functions. Staff respond to investment inquiries, help
connect investors to appropriate federal and state agencies, and
educate investors regarding relevant U.S. policies and procedures.
SelectUSA staff and senior leadership also serve as ombudsmen for
the investment community in Washington, working across the Federal
Government to address investor concerns and issues involving federal
agencies. Finally, SelectUSA works with U.S. EDO officials and U.S.
embassies and consulates to organize events abroad that enable U.S.
locales to promote themselves as a destination for FDI. President
Obama has recently called for a substantial increase in support for
SelectUSA, proposing $12 million in new resources and an increase in
staff to 35 full-time employees. Complementing this investment,
President Obama has proposed to increase the presence of the
Department of Commerce's U.S. and Foreign Commercial Service officers
in key markets. These new officers will enhance the ability of the
U.S. global network of embassies and consulates to promote FDI in
the United States.
President Obama has also called for tax reforms that will help
attract more FDI. These proposals include a decrease in the United
States' corporate income tax rate, as well as additional tax
incentives for firms that manufacture, conduct R&D, or invest in
the capability to produce clean energy products within the borders
of the United States. At the same time, the President's proposals
eliminate incentives for U.S. firms to move jobs and production
offshore. By complementing the United States' fundamental attractors
with well-targeted FDI promotion efforts, the Federal Government can
help ensure that the United States remains a premier destination for
foreign direct investment for many years to come.

The National Export Initiative

In his January 2010 State of the Union address, President Obama
set a goal of doubling U.S. exports of goods and services in five
years, meaning that nominal exports would double from their 2009
level of $1.58 trillion to an annual level of $3.16 trillion by the
end of 2014. To meet that goal, nominal U.S. exports must grow an
average of 15 percent a year. So far, exports have grown even faster,
putting the U.S. economy on track to meet the President's goal. In
fact, the United States is currently ahead of schedule, despite the
recent global trade slowdown. Over the 12 months ending in November
2011, total U.S. exports of goods and services exceeded $2.08
trillion, surpassing the pre-crisis peak level of $1.7 trillion and
establishing a historical record. Current data suggest that the
ratio of exports to GDP nearly reached 14 percent in 2011, another
historical record.
Anatomy of Recent Growth in Goods Exports. U.S. trade data
provide an interesting picture of the markets and goods in which
America's export growth has been concentrated since the global
financial crisis. Table 5-1 ranks U.S. export goods categories in
order of the biggest increases in export value between the first
half of 2009 and the first half of 2011. The top 10 categories
collectively account for 72 percent of the total value increase in
exports between the two periods.
The biggest increases have been concentrated in manufacturing
industries characterized by high technology and capital intensity and
in primary products, reflecting America's abundant endowments of
human and physical capital, its technological prowess, and its
natural-resource wealth. Between the first half of 2009 and the first
half of 2011, the United States increased its exports of vehicles by
more than $26 billion (83 percent); its exports of engines,
appliances, and general machinery by more than $25 billion (35
percent); and its exports of electrical machinery by more than $19
billion (33 percent). Exports of plastics, organic chemicals, and
steel and ferrous metals increased by 53 percent, 57 percent, and
78 percent, respectively. These data point to America's
competitiveness in important sectors of manufacturing.
At the same time, the data reaffirm the United States' strength
as an exporter of natural-resource-intensive goods. Exports of
mineral fuels and oils (a commodity dominated by shale oil) surged
by 150 percent, or more than $35 billion, over the two-year period.
That surge stems from technological breakthroughs in horizontal
drilling and hydraulic fracturing that are allowing U.S. producers to
extract oil from previously unusable areas; these technological
developments are reviewed further in Chapter 8. Fuel exports have
grown so much that the United States became a net exporter in 2011,
for the first time in decades. The United States remains the world's
largest importer of crude oil, and U.S. net imports of crude remain
large relative to net exports of fuel products, but increased
domestic production is offsetting some crude oil imports. Exports of
gold, diamonds, and precious metals grew 94 percent, reflecting the
high prices of those commodities on international markets.
Exports of cereals grew 77 percent, reflecting America's strength
as a producer of agricultural commodities. This strength is also
reflected in the impressive growth of total agricultural exports, a
broader category not shown in the table, which increased by 51.8
percent over the same period, an expansion of $24 billion in dollar
terms. The U.S. Department of Agriculture reports that U.S.
agricultural exports reached a record high of $137.4 billion in
Fiscal Year 2011, and that America's agricultural sector recorded a
trade surplus of $42 billion over that period. America's ranchers,
farmers, and producers are benefiting from the Administration's focus
on free trade agreements and increased market access abroad.
Trends Driving Growth in Goods Exports. The sharp growth in goods
exports reflects, in part, the impact of recovering from the depth of
the global financial and economic crisis. It also reflects the impact
of coordinated Federal Government action flowing from the President's
National Export Initiative. These actions amplify the positive
influence of longer-term trends that are enhancing the competitiveness
of the U.S. tradable goods sector, particularly in manufacturing.
U.S. workers are more productive than those of any other G-20 economy,
and U.S. productivity growth has been especially strong in the
manufacturing sector. However, highly productive




U.S. workers can be placed at a competitive disadvantage because of
low labor costs abroad. This disadvantage was especially severe in
the early years of the 2000s when the enduring effects of earlier
financial crises in many parts of the world depressed production
costs in much of Asia, Brazil, Russia, and elsewhere.
Since then, continued robust productivity growth in the United
States, particularly in the manufacturing sector, has been reinforced
by a gradual realignment of the currencies of many U.S. trading
partners. The result has been a sharp improvement in relative unit
labor costs in the United States. For example, the U.S. Bureau of
Labor Statistics (BLS) tracks changes over time in the unit labor
cost of manufacturing in the United States and in key trading
partners. U.S. hourly compensation in manufacturing has grown over
the past decade, but rapid productivity growth in the United States
has reduced the cost of producing a unit of manufactured output.
Meanwhile, measured in U.S. dollars, the cost of producing a unit
of manufactured output in key trading partners has risen, in some
cases substantially. Of the 19 economies tracked by the BLS, only
Taiwan managed to improve its unit labor cost position more than the
United States did.\4\ Figure 5-6 displays changes in manufacturing
unit labor costs for some of the key economies tracked by the BLS.
______________
\4\ Although the BLS does not track Chinese unit labor costs, it has
tracked an index of import prices from China since 2003, and the
most recent movements in this index suggest that Chinese unit labor
costs are also rising.




The impact of these shifts can be seen in a number of industries
including the auto industry. As U.S. auto demand recovers, the Big 3
domestic auto companies and the foreign-domiciled companies have been
expanding U.S. production. This expansion is designed not only to
serve the U.S. market but also to use U.S. production sites as an
export platform from which to serve other markets within the Americas
and beyond. Ford has announced intentions to increase investment in
the United States, both to serve the U.S. market and to export. Such
plans include insourcing production of its F-650 and F-750 medium-
duty trucks to Ohio from Mexico; it also reportedly plans to move
manufacture of components like transmission oil pumps from China to
Michigan.
Improved competitiveness also appears to be reflected in
employment data. U.S. manufacturers have added jobs for two
consecutive years, something that had not happened since the late
1990s. Manufacturing employment has grown faster in the United States
than in any other leading developed economy since the start of the
recovery. As of the most recent period for which comprehensive data
are available, the United States has added more net manufacturing
jobs since the start of 2010 than the rest of the Group of 7
countries put together, with over 300,000 created since December
2009. While the economy is still far from recovering all the
manufacturing jobs lost during the recession, signs suggest that
the United States may be experiencing a manufacturing revival.
Between 2010:Q1 and 2011:Q3, manufacturing employment rose 2.5
percent in the United States compared with 2.4 percent in Germany
and 1.8 percent in Canada.
In some industries, the advantage created by high U.S.
productivity is reinforced by the additional advantage of abundant,
domestic, low-cost natural gas. Only a few years ago, leaders of
the domestic organic chemical industry predicted that shortages in
natural gas would dramatically raise the domestic price of natural
gas, one of their key inputs. Without adequate domestic supplies of
natural gas at reasonable prices, it seemed likely that chemical
production would have to shift overseas.
Since the mid-2000s, however, the discovery of new natural gas
reserves, such as those within the Marcellus Shale Formation, and
the development of hydraulic fracturing techniques to extract natural
gas from these reserves have led to rapidly growing domestic
production and relatively low domestic prices for households and
downstream industrial users. By keeping domestic energy costs
relatively low, the increased supply from this resource supports
energy-intensive manufacturing in the United States. In fact,
companies such as Dow Chemical and Westlake Chemical have announced
intentions to make major investments in new U.S. facilities over the
next several years. In the longer run, the scale of America's natural
gas endowment appears to be large enough that exports of natural gas
to other major markets could be economically viable. The Obama
Administration is taking steps to ensure that this resource is
developed in a safe and environmentally responsible way.
However, in most of the manufacturing industries where American
firms continue to enjoy robust export sales, U.S. producers rely
principally on high productivity, rather than inexpensive inputs, to
offset the higher wages and other labor compensation they pay their
U.S. workers. The openness and competitive intensity of the American
economy have been a key source of our national strength, since they
have increased the efficiency of U.S. firms and industries. (See
Hsieh and Klenow 2009, 2011 for recent research.) As a consequence,
even extremely low wages in developing countries are not sufficient
to provide a commanding cost advantage with respect to U.S. firms,
at least in some product categories.
Exports can also be measured by looking at major destination
markets. Table 5-2 ranks destination markets by the increase in value
of exports between the first half of 2009 and the first half of 2011.
The top 10 markets collectively accounted for 70 percent of the total
increase in export value. Export flows to Canada and Mexico increased
by nearly $80 billion. Much of the rest of the U.S. export expansion
was driven by exports to Asia. Even the tsunami-battered Japanese
economy purchased nearly $8 billion more



in U.S. exports in the first half of 2011 than it did in the first
half of 2009. Outside of North America and Asia, Brazil continued to
display its emerging economic importance, absorbing a 71 percent
increase in U.S. exports that, in dollar terms, slightly exceeded
export growth to Japan.

The Role of Services in Export Growth and America's Current Account
Balance

While export growth is critical, exports are just one component
of the current account balance, the most comprehensive measure of the
Nation's exchange of goods and services with the rest of the world.
The main components of the current account include exports and
imports of goods, exports and imports of services, and the income
balance--the difference between the income American firms earn from
their foreign businesses and the income foreign firms earn from their
U.S. businesses.
A look at the recent history of the U.S. current account balance
and its key components reveals some interesting patterns. Although
U.S. exports of goods are at historical highs, reflecting in part the
improved competitiveness of American manufacturers, the U.S. trade
deficit in goods (which does not include trade in services) has
nevertheless widened significantly since early 2009, as an expanding
economy has boosted demand for imports (Figure 5-7). The trajectory
of the U.S. current account, however, is following a different path
now than it did in the previous recovery, and the difference
primarily reflects the impact of the other two main elements of the
current account--services trade and the U.S. income balance.

From the early 2000s through 2006, the current account balance
tracked the trade balance in goods quite closely. The two series
began to diverge in late 2007. The balance on goods remained in deep
deficit, but the trade surplus in services began to increase, and the
income balance grew even more rapidly. When the global financial
crisis hit in earnest in the third quarter of 2008, U.S. growth and
import demand dried up, and the two series moved closely together
(this time rapidly toward balance) through early 2009. Then, as
financial markets stabilized and growth resumed, a gap opened up once
again. The balance on goods deteriorated, but the services surplus
expanded and the income balance grew even more sharply, largely
offsetting the declining balance in goods and keeping the current
account relatively stable. More recently, the goods trade balance
appears to have broadly stabilized, whereas the services surplus and
the income balance continue to grow. With a need to further
strengthen the current account balance, federal policymakers
recognize the need not only to encourage exports of goods, but also
to expand the important role that services trade can play in that
process.
The Prospects for Trade Growth in Services. Like most other
advanced economies, U.S. GDP is dominated by service industries.
According to the Bureau of Economic Analysis, services, broadly
defined, account for more than 60 percent of U.S. GDP. However, the
role of business services within




the U.S. economy is less widely recognized. In 2007, a year
unaffected by the recent severe downturn and gradual recovery,
business services, a collection of industries that includes finance,
engineering services, research and development services, and
software production, employed 25 percent of the U.S. workforce
according to data from the Economic Census. The share of employment
in business services was substantially larger than in the entire
manufacturing sector in that year (10 percent), and the average wage
in business services, $56,000, was significantly higher than in
manufacturing
($46,000) (Jensen 2011).
While services remain more difficult to trade than goods,
advances in communications technologies and the growing ease and
declining expense of international travel are making business
services increasingly tradable across countries. As this trend
gained strength, employment in the business service sector increased
almost 30 percent between 1997 and 2007, while manufacturing
employment decreased more than 20 percent. Most tradable business
services rely intensively on highly skilled experts, which the United
States has in large numbers. In other words, the growing tradability
of business services plays to America's comparative advantage. Some
evidence of this potential is apparent when one looks at the broader
context of America's trade across the full range of service
industries.
Services exports have expanded dramatically, growing by 114
percent between 1997 and 2010, according to official data. They now
account for nearly 30 percent of total U.S. exports. Imports of
services have also expanded rapidly, but the U.S. surplus in services
trade, already large, has more than tripled since 2003.
What are the categories of services exports, and what is their
relative contribution to the surplus? Figure 5-8 depicts the
aggregate service trade flows in the five main categories tracked by
official statistics and measures their contribution to America's
overall services trade surplus.
Travel exports reflect the spending of foreign tourists and
business travelers to the United States who purchase goods and
services here, while travel imports reflect purchases made by U.S.
residents traveling abroad. The United States remains among the
world's leading tourist destinations and runs a surplus in travel
trade. The Obama Administration has sought to expand U.S. travel
exports with unprecedented federal action to promote international
tourism in the United States. In 2010, the President signed into law
the Travel Promotion Act, which established the Corporation for
Travel Promotion, now known as Brand USA, a public-private
partnership dedicated to promoting travel to the United States. The
State Department has also increased its visa-processing capacity in
priority countries like Brazil




and China to ensure that the United States benefits from the rapid
expansion of outbound tourism from these emerging markets.
Moreover, on January 19, the President established a Task Force
on Travel and Competitiveness that will develop a National Travel and
Tourism Strategy with a goal of making the United States the world's
top travel and tourism destination. The benefits of that strategy
include not only the potential increase in travel exports, but also
lower travel imports as it will provide Americans with more and
better choices of travel and tourism destinations within the United
States. Because of their value as public goods, the government has
an important role in ensuring that national treasures such as
Yellowstone National Park and the Statue of Liberty are
appropriately maintained and made accessible to domestic and
international tourists. While there are many private, state, and
local destinations in the United States, public expenditures on
the National Park System (NPS) are much lower than the benefits
they provide to all Americans, even to those who are not necessarily
planning a vacation or visit to one of the 397 destinations that make
up the NPS (National Research Council 1996). This provides yet
another example of the ways in which investments in the environment
yield benefits for the economy (Chapter 8).
In the category of passenger fares, exports are those received
by U.S. carriers from foreign residents; imports are those paid by
U.S. residents to foreign carriers. Other transportation exports and
imports include U.S. international transactions arising from the
transportation of goods by ocean, air, land, pipeline, and inland
water carriers.
Royalties and license fees cover transactions with nonresidents
that involve intangible assets, including patents and trade secrets,
which are involved in the production of goods. This category also
includes copyrights, trademarks, franchises, rights to reproduce or
distribute motion pictures and television recordings, rights to
broadcast live events, software licensing fees, and other
intellectual property rights. In 2010, this category was the largest
single contributor to the services surplus, highlighting the
importance to the United States of enforcement of strong intellectual
property rights in other countries.\5\
The final category, other private services (OPS), generates by
far the highest level of exports, and it is this category in which
the promise of business services exports is seen. The main services
included in OPS are education, financial, insurance,
telecommunications, and business, professional, and technical
services. The most important subcategory--business, professional,
and technical services--accounts for more than half of OPS exports.
Altogether, OPS exports expanded by about 150 percent from 2000
through 2010--a compound average growth rate of nearly 10 percent a
year.
The additional detail on service exports and imports presented
in Table 5-3 and Table 5-4 underlines two important facts about U.S.
services trade. First, the other advanced industrial countries are
still America's dominant trading partners in this sector, both as
markets and as suppliers. As rapid economic growth raises income
levels in large emerging markets, however, U.S. service export flows
to these countries are likely to grow. Second, as noted, the surplus
in services is disproportionately driven by two categories--other
private services and royalties and licensing--that are skill-
intensive and thus conform to America's comparative advantage as
a technologically advanced nation with an abundant supply of highly
educated workers. This supply of skilled workers and the broader
role that education plays in the U.S. labor market is discussed in
Chapter 6.
In addition to exporting services, U.S. firms provide services
through affiliates in foreign markets. Over the past decade, services
provided through affiliates have grown rapidly, and in 2009, the most
recent year for which comprehensive data are available, services
supplied through the foreign affiliates of U.S. firms totaled $1.1
trillion. Of course, U.S. customers also purchase services from the
U.S. affiliates of foreign firms. These purchases totaled $668.8
billion in 2009. The difference between services received from and
supplied to the United States via the channel of affiliate sales
was $407.6 billion, providing yet another reflection of America's
comparative advantage in this domain (Koncz-Bruner and Flatness 2011).

_______________
\5\ In fact, the official numbers for royalty and license fees may
understate, perhaps substantially, America's receipts for the use of
its intangible assets. A report submitted last year by leading
international economists (Feenstra et al. 2010) noted the ability
of multinational corporations to effectively locate their
intellectual property in low-tax jurisdictions, minimizing their
global tax liability as well as measured U.S. royalties and license
fees.

Policy Initiatives to Support Export Growth in Goods and Services

Recent economic research has focused on U.S. firm productivity
and the fixed cost of exporting as fundamental determinants of U.S.
exports at the firm and product level (Bernard et al. 2003; Melitz
2003). Fixed costs for firms are associated not only with the
decision to begin exporting but also with the decision to export to
a specific country. Before significant exports to a given country can
begin, a prospective exporting firm must develop a strategy that
allows it to compete successfully against experienced rivals in that
country, which operates under a different legal system and may use a
different language. Successful exporters must invest considerable
management attention and time to developing this strategy before they
can begin to earn any returns from exporting. The costs of serving
a particular foreign market may also increase if the firm's products
and complementary services must be significantly altered to meet the
demands and tastes of customers in that market. Exporters also must
incur the costs of finding distribution channels in the foreign
country and the ongoing costs of transporting their goods across
national borders and contending with tariff or nontariff barriers to
trade. These costs are worth incurring only if the firm is dynamic
and productive enough to have a high probability of success.
Federal programs exist to help firms deal with these costs.
While private firms must take the lead in crafting their export
strategies, the Department of Commerce's International Trade
Administration maintains offices of trade professionals in more than
100 U.S. communities and 77 foreign countries to help U.S. firms
become export-ready, identify target markets, and navigate the
demands of foreign regulation and cultural differences. The Federal
Government can also use effective multilateral, bilateral, or
regional trade negotiations to reduce the costs imposed on U.S. firms
by foreign tariff and nontariff barriers. It can also seek to ensure
that American firms face a level playing field by insisting that U.S.
trading partners honor their treaty commitments regarding market
access for U.S. firms. Finally, in circumstances in which a
particular exporter faces financing constraints or the threat of
subsidized finance for international competitors, the Federal
Government can seek to alleviate these constraints and counter
foreign government efforts. Over the past three years, the Obama Administration has placed renewed emphasis on all of these policy domains.






Free Trade Agreements with Colombia, Panama, and Korea. The
Obama Administration has worked to restore the Nation's economic
stability and support jobs for more Americans with the expansion of
smart, responsible trade policy. From day one, the Obama
Administration has insisted on higher standards for trade agreements.
The President moved to address important concerns that the
Administration, certain stakeholders, and Members of Congress had
with respect to the situations in Colombia, Panama, and Korea. This
domestic consultation and further consultations with U.S. trading
partners took time, as did negotiations with Congress to ensure that
the passage of the free trade agreements was accompanied by a
strengthening of America's Trade Adjustment Assistance program for
workers adversely impacted by international competition and by an
extension of key trade preference programs. Once this process was
complete, Congress passed the three agreements in quick succession in
the fall of 2011, marking the biggest step forward in American trade
liberalization in nearly two decades. Of the three agreements, the
most economically significant was the Korea-United States free trade
agreement, which was expected to boost annual U.S. goods exports to
Korea by as much as $11 billion. The agreement also included Korean
commitments expected to result in considerable expansion of U.S.
services exports.
The Trans-Pacific Partnership. In November 2009, President
Obama announced the Administration's intention to participate in
Trans-Pacific Partnership (TPP) negotiations to conclude a free trade
agreement with key trading partners in the Asia-Pacific region. The
agreement aims to set a new and higher standard for regional free
trade agreements, not only addressing the traditional core issues in
such agreements but broadening the scope to include regulatory
coherence and priorities for small and medium-size enterprises. In
addition to the United States, the other countries participating in
the negotiations currently include Australia, Brunei Darussalam,
Chile, Malaysia, New Zealand, Peru, Singapore, and Vietnam.
At the November 2011 APEC meeting in Honolulu, TPP leaders
announced the broad outlines of a TPP agreement. In addition to
existing negotiating partners, Japan, Canada, and Mexico have
formally expressed their interest in joining TPP negotiations. While
no decision has been made yet by the TPP countries regarding
expanding negotiations, interest by Japan, Canada, and Mexico in the
TPP demonstrates the economic and strategic importance of this
initiative to the Asia-Pacific region.
Support for Small Exporters. In a world of imperfect financial
markets, the costs of financing export operations pose an additional
barrier for smaller firms. Given that export opportunities can come to
small exporters with significant risks attached, domestic financial
institutions may regard a small firm that is highly dependent on
exports as a riskier (and therefore less creditworthy) borrower than
one with an exclusively domestic focus. The relatively modest
financing needs of small exporters are a further disincentive to
private financial institutions, which would have to engage in
time-consuming assessments of the firm, its products, and the
country-specific risks involved in a transaction to originate only a
small loan with limited value for the lending institution. Unless it
is obvious to the lender that the firm has excellent prospects for
significant export growth, and brings with it the near certainty of
rapid expansion in loan volume, the money a private bank can make on
such a transaction is limited relative to the transaction costs
themselves.
To address these issues the Federal Government has directed the
Export-Import Bank of the United States to proactively support small
and medium-size firms. First established in the 1930s to finance
U.S. international trade when and where private-sector financing was
difficult or unreasonably costly to obtain, the Ex-Im Bank has
historically focused much of its lending activity on larger,
established exporters. The Obama Administration, however, has
encouraged the bank to substantially increase lending to smaller
firms, and in Fiscal Year 2010, the Ex-Im Bank authorized $5
billion--20 percent of its total authorizations--to support small
businesses as primary exporters. The Ex-Im Bank approved 3,091
transactions involving small business exporters--88 percent of total
authorizations. In the same year, the bank issued 2,524 insurance
policies to small business exporters, 90 percent of such policies for
the year. The bank also authorized a record $2.2 billion in
working-capital guarantees, 70 percent of which supported small
business.
Financial support for the expanding international activities of
small business extends beyond the Ex-Im Bank. The Overseas Private
Investment Corporation (OPIC), the U.S. Government's development
finance institution, extends medium- to long-term financing through
direct loans, loan guaranties, political risk insurance, and support
for investment funds to eligible investment projects in developing
and emerging markets, where conventional financial institutions often
are reluctant or unable to lend. In Fiscal Year 2011, 78 percent of
OPIC's projects, representing nearly $1 billion in commitments,
involved American small and medium-sized businesses.\6\
_______________
\6\ The Ex-Im Bank and OPIC follow the Small Business
Administration's definition of a small business, using guidelines
that reflect, among other things, sales, employment levels, and
sector of economic activity. These guidelines are available online
at http://www.sba.gov/sites/default/files/Size_Standards_Table.pdf.

Promoting U.S. Economic Interests Abroad. Even as it seeks to
open up new markets for American business through new trade
agreements, the Obama Administration is also working to protect
American commercial interests under existing trade agreements. An
historic victory came in May 2011, when the World Trade Organization
(WTO) issued a final ruling siding with the United States in its case
against the European Union over illegal subsidies to Airbus. After
decades of dispute and more than five years of official proceedings,
the WTO ruled that the EU governments had provided $18 billion in
illegal subsidies to Airbus and ordered them removed by the end of the
year. U.S. Trade Representative Ron Kirk hailed the ruling, saying,
"The WTO Appellate Body has confirmed without a doubt that Airbus
received massive subsidies for more than 40 years and that these
subsidies have greatly harmed the United States, including causing
Boeing to lose sales and market share in key markets throughout the
world." If the European Union fails to comply with the WTO directive,
the United States can seek the right to impose countermeasures.
In its ongoing dialogue with China, the Obama Administration
secured a strong commitment from Chinese President Hu Jintao that
China would stop discriminating against U.S. technologies and
intellectual property in its government procurement plans. The
Administration is monitoring developments closely to ensure that
market realities conform to central government directives. The United
States has filed a WTO case against China, challenging the troubling
imposition by China of antidumping and countervailing duties against
imports of U.S. chicken "broiler products." The Administration scored
another major victory in January 2012 when the WTO's Appellate Body
upheld a WTO panel ruling condemning Chinese export quotas and duties
on certain key industrial raw materials as a violation of China's
WTO commitments. These actions add to a series of cases in which the
Federal Government has taken action at the WTO to protect U.S.
economic interests jeopardized by Chinese policy in areas such as
steel products, electronic payment services, and wind power equipment.
In November 2011, the United States gained China's confirmation
through bilateral negotiations that it would not require foreign
electric vehicle manufacturers to transfer technology to Chinese
enterprises or to establish Chinese brands as a condition for
investing and selling in China. One year earlier, the United States
successfully persuaded China to adopt transparent and
non-discriminatory technology standards for its emerging smart grid
market and to remain technologically neutral with regard to the
development of third-generation and future technologies for its
telecommunications market.

Several of America's trading partners, including China, have
effectively imposed bans on U.S. meat product exports. These bans
have no scientific basis, and the Administration has been trying to
bring these bans to an end as soon as possible. In 2011, agreements
were reached to resume exports to Chile and Egypt. Fifty-seven
countries have removed their avian influenza bans on imports of
poultry products from the United States since 2008. Most of the
countries that imposed bans on the import of U.S. swine, pork, and
pork products in the wake of international concern over the H1N1
virus have removed those bans.
With strong support from the United States, Russia concluded
negotiations to join the WTO in December 2011. In supporting Russia's
WTO accession, the Obama Administration has laid the basis for a
more effective, rules-based approach to managing U.S. trade relations
with the largest economy not yet inside the WTO system. The
Administration will be working with Congress to end application of
the "Jackson-Vanik" amendment to Russia so that the United States can
enjoy all of the benefits of Russia's membership in the WTO and U.S.
companies and workers can compete on a level playing field with those
of other WTO Members in exporting products and services to Russia.\7\
To further enhance the Federal Government's ability to protect
the Nation's commercial interests, the President is creating and
seeking funding for a new Trade Enforcement Unit, which will
significantly enhance the Administration's capabilities to
aggressively challenge unfair trade practices under international and
domestic trade rules. The President is also proposing to improve
trade inspection capabilities of the Customs and Border Patrol and
the Food and Drug Administration, to increase the likelihood of
stopping counterfeit, pirated, or unsafe goods before they enter
the U.S. market. Certain countries, including China, aggressively
use subsidized capital to promote their exports, and appear to offer
such export financing on better terms than allowed under current
international best practices. In response, the Administration will
actively employ its existing authorities so that the Ex-Im Bank can
provide U.S. firms competing for domestic or third-country sales with
matching financial support to counter foreign noncompetitive
official financing that fails to observe international best
practices.
The IMF estimates that sub-Saharan Africa will grow by 5.5
percent in 2012, faster than advanced, emerging, and developing
economies as a whole. Between 2000 and 2010, five of the 10 fastest-
growing economies in the world were in sub-Saharan Africa, and trade
between Africa and the rest of the world increased more than 200
percent. Central to the United States' economic policy for Africa is
the African Growth and Opportunity Act (AGOA), which provides duty-
free access to a broad range of exports from 37 eligible sub-Saharan
African countries. To help African countries make the most of AGOA's
trade benefits, the United States funds technical assistance work at
Regional Trade Hubs. The United States also fosters investment by
negotiating Bilateral Investment Treaties (BITs) with African
countries. In 2009, the United States launched BIT negotiations with
Mauritius, and, in 2011, the U.S. Senate ratified the U.S.-Rwanda BIT.
________________
\7\ The Jackson-Vanik amendment is a provision in the 1974 Trade Act
that denies most favored nation status to certain countries that
restrict emigration. It was introduced during the Cold War, partly
as a response to efforts by the Soviet Union to restrict emigration.

In agriculture and other sectors, the U.S. Agency for
International Development uses public-private partnerships to build
new markets and has been recognized by the Organisation for Economic
Co-operation and Development as the best among its peers with respect
to private-sector engagement. The Millennium Challenge Corporation
(MCC) is partnering with American and local businesses. From helping
the Port of Cotonou in Benin cut its average customs-clearance time
in half to facilitating an American company's efforts to provide
much-needed power to Tanzania's national grid, the MCC is investing
in infrastructure to expand trade, commerce, and development across
the African continent. Other agencies--including OPIC and the Ex-Im
Bank--have significantly increased their investment in Africa.
These activities are consistent with the goals of President
Obama's Presidential Policy Directive on Global Development signed
in September 2010 that establishes a new model for U.S. development
efforts.
Tax  Reform   to  Promote American   Competitiveness. The
Administration's proposed reform of the U.S. corporate income tax
seeks to enhance American competitiveness, promote investment in the
United States, and support continued robust growth of American
exports. As part of a comprehensive tax reform plan, the President
has proposed a reduction in the U.S. corporate income tax rate, with
additional incentives available for firms that manufacture, conduct
research and development, or invest in the capability to produce
clean energy products within the borders of the United States. At the
same time, the President addresses longstanding features of the
American corporate tax system that encourage some companies to move
jobs and production overseas.
Increasing Market Access for Services. As noted, the United
States has a strong comparative advantage in services. The global
market for services trade, however, remains far more closed than the
global market for manufactured goods. The long history of extensive
trade in goods, the relatively simple nature of many barriers
(tariffs and quotas) to such trade, and the cumulative result of six
decades of multilateral, bilateral, and regional trade liberalization
efforts have resulted in a global economy in which formal barriers to
trade in manufactured goods are reasonably low, especially in the
advanced industrial countries.
The barriers to trade in services are more complex and harder to
quantify. Hufbauer, Schott, and Wong (2010) review a number of
methodologies for quantifying the barriers to trade in services and
present new estimates at the country level of the tariff equivalents
of these barriers. Their findings suggest that the aggregate level of
discrimination against services imports in important emerging markets
such as China, India, and Indonesia is equivalent to a tariff on these
imports of more than 60 percent. The size of these barriers may not
be surprising--extensive international trade in services is a recent
phenomenon, and diplomatic efforts to open services markets are just
beginning--but these barriers deprive American firms of critical
export opportunities to rapidly emerging markets in an area where
their international comparative advantage is the strongest.
America's productive exporters of services cannot solve this
problem on their own. The President is committed to negotiating
effectively and aggressively for increased liberalization of services
trade. The Administration has already made progress in bilateral and
regional trade agreements, but the largest emerging-market economies
have not yet been fully engaged in these initiatives. The primary
multilateral means for seeking greater services market access has
been through negotiations pursuant to the General Agreement on Trade
in Services (GATS) and, to a lesser degree, the WTO Agreement on
Government Procurement. While taking existing GATS disciplines and
market access commitments into account, the United States is also
pursuing additional pathways to services liberalization, including
a new, multiparty agreement open to any country ready to take on
high standards and address new issues such as trade in the digital
economy. Other advanced countries and progressive developing
countries are likely to share the U.S. interest in pushing for
greater liberalization of services trade and may be willing partners
in this effort.
Recent scholarship demonstrates that services liberalization is
in the interest of countries that are importing services as well as
those that are exporting services. Better access to world-class
services raises productivity and living standards in emerging-market
economies. Interesting evidence on this point comes from a
randomized experiment in India (Bloom et al. 2011). Researchers based
at Stanford University and the World Bank randomly selected a set of
Indian textile factories to receive a complimentary five-month
program of consulting services from a leading international firm.
Upon arriving in these factories, the researchers and consultants
found that productivity was hampered by poor management practices.
Over the next five months, the consultants worked with the firms to
implement standard management practices proven to have enhanced
productivity, output, and profitability in the West. When the project
ended, the "treated" factories had cut defects roughly in half,
substantially reduced inventories, and increased output, while the
control factories saw little change. The authors calculate that
these performance improvements increased profits by about $350,000 a
year. These are sufficiently large increases that the firms would
have made enough money from the consulting projects to be able to pay
the consultants commercial rates for their engagement in the projects.
Given the magnitude of the improvement, why had the firms not
adopted these practices earlier? The researchers' results suggest
that informational barriers were the primary factor explaining the
lack of adoption. What is true for India is likely to be true
throughout the developing world. By reducing barriers to trade in
services, developing countries can help their own firms move toward
the productivity frontier achieved in the West.

CONCLUSION

Over the course of 2011, the pace of growth in the global
economy slowed, posing challenges for the U.S. recovery. Nevertheless,
U.S. exports have climbed to record high levels, the current account
deficit narrowed to 2.9 percent of GDP in the third quarter, and the
economy has begun to rebalance its sources of growth, laying the
foundation for sustained future expansion. The greatest threats to
continued progress in these domains lie beyond America's borders.
Provided Europe's debt crisis can be resolved, America's export
growth and progress toward rebalancing are likely to continue at a
brisk pace. Other developments in the global economy, notably the
continued expansion of international trade in services and the
interest of major trading partners in new U.S. trade initiatives,
provide a foundation of new opportunities on which the U.S. economy
can build in the years to come.