U.S. Could Give Exporters a Helping Hand

(Bloomberg View) -- Economics commentators have a habit of referring to any and all government interventions in international trade under the blanket terms of protectionism and trade barriers. As for economists themselves, the general consensus in favor of free trade seems to prevent most researchers from publicly suggesting policy experiments that interfere with trade. But not all interventions are created equal. There’s a good case to be made that export subsidies are a good policy, conferring some of the benefits that economists typically associate with free trade.

The U.S. is a big country. That’s probably one reason why it doesn’t export much, compared to other rich countries:

U.S. Could Give Exporters a Helping Hand

Big companies such as Boeing Co. and Apple Inc. already export plenty. But lots of smaller U.S. companies stick to the cozy, comfortable local market. A sophisticated program of export subsidies would encourage these sleepy domestic-oriented companies to start trying to export. Instead of directly paying them to enter overseas markets -- which is forbidden by the World Trade Organization -- the program would find U.S. companies that don’t currently export and match them with foreign buyers. It would also provide them with export credit. And it would have a sunset clause built in, so that if companies fail in export markets, the government won’t throw good money after bad.

This program would face a lot of upturned noses from economics commentators. In the simple economic models that undergrads learn in their intro classes -- and which pundits and think-tank researchers tend to fall back on -- export subsidies are always bad for the country giving the subsidy. The taxes required to pay for the subsidy distort the economy in some way. And prices rise for domestic consumers, since that’s the only way to motivate exporters to sell some of their products domestically instead of overseas.

On the other hand, politicians who talk about export subsidies often think of them in competitive terms -- whether “our” exports beat “theirs.” In this view, trade deficits are losses, while trade surpluses count as a victory for the home team. Export subsidies are therefore seen as us giving a boost to our team -- and who wouldn’t want to help out their team?

Both perspectives are severely limited. The competitive view of exports sees international trade as a zero-sum game, but it’s not -- overall, the gains from trade typically far outweigh any negative effects of trade deficits. But the Econ 101 view is constrained by the assumption that companies’ productivity is fixed, that every business knows the opportunities available to it and that demand doesn’t change when trade opens up. All of these assumptions are probably wrong in real life, at least to some degree.

A more sophisticated case for export subsidies is based on the idea that competing in world markets makes companies more productive. The global market tends to be a much bigger pond than the domestic one, with more capable and aggressive rivals. When companies leave the safety of the local market and enter the larger arena, some will fail and be forced to pull back -- but others will step up their game and improve themselves, to the benefit of the whole economy.

There’s some evidence in support of this view -- at least, for developing countries. In a recent study, economists David Atkin, Amit K. Khandelwal and Adam Osman conducted an experiment in which they contacted random Egyptian rugmakers and matched them with a German buyer, encouraging them to start selling their wares overseas. Many of the rugmakers hadn’t realized that people outside of Egypt would want to buy their products. But rugmakers that were randomly contacted by the economists ended up increasing their profits by an average of as much as 26 percent. They also increased their efficiency and produced rugs of higher quality (as determined by an independent assessor). All it took was being turned on to the idea of exporting. Studies from Vietnam suggest similar processes at work.

Egypt and Vietnam, of course, are developing countries, and this sort of experiment needs to be run in the U.S. But since there’s a correlation between exporting and productivity improvements in the U.S. and the U.K., as well, it’s a good bet that some of this represents causation.

A second argument is that global markets allow companies to discover their comparative advantage. Domestic markets are comfortable and familiar. But once a company decides to make the scary jump and start competing on the global stage, it may find that it has lots of profit opportunities that its managers never dreamed of. Customers from India, Japan, Brazil or Poland will tend to want different things than their American counterparts. And once they start trying to export, American companies may discover that they’re actually good at producing the things international consumers want. This is the argument put forth by Harvard economist Dani Rodrik, a champion of export subsidies.

In other words, export subsidies might be the opposite of protectionism. Encouraging local companies to start exporting might have the same salutary effect as allowing more imports -- in both cases, international competition pushes domestic companies to raise their game. This is a policy idea that deserves more respect and attention than it now gets.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.

To contact the author of this story: Noah Smith at nsmith150@bloomberg.net.

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