Regulations disproportionally hurt small businesses

Federal agencies created 29,014 new federal regulations, averaging 70 a week over the past eight years. These regulations range from importation of kiwis from Chile, cost of living adjustments of royalty rates pay for published musical works, reporting and recordkeeping requirements, to health insurance and environmental protection. The Office of Information and Regulatory Affairs (OIRA), an agency within the Executive Office of the President, determined approximately 10% of these regulations adversely affect the economy by at least $100 million a year (i.e., economically significant rules).

 The Regulatory Flexibility Act requires federal agencies to determine if a rule would have a significant effect on a substantial number of small businesses. During the past eight years, federal agencies created 5,340 rules that affected small businesses, 841 of those were economically significant. In other words, small businesses have to use their limited resources to navigate 13 new federal rules every week. Centers for Medicare & Medicaid Services, Food and Drug Administration, and Environmental Protection Agency were among the most active agencies and the most common topics included reporting and recordkeeping requirements, administrative practices and procedures, and government procurement.

 Regulations are necessary to the society. Businesses have to comply with law and regulations to produce safe and sound products and services for their customers. But excessive regulations and red tape have shown to have severe adverse effects on consumers, competitiveness, and economic growth. Small businesses, the backbone of the U.S. economy, should not be using their scarce resources on dealing with red tape but rather to maintain, improve, and innovate products and services to compete at home and abroad. Deregulation and cutting red tape should be top policy priorities for federal as well as local governments to boost economic growth.

30% of holiday sales are imported products

Holiday sales in the U.S. are expected to be $655.8 billion during November and December 2016, according to National Federal Retail forecasts, a 3.6% increase from 2015. Approximately 30% of holiday sales are imported products, ranging from 96% in footwear, 94% in computer products, 92% in apparel and textiles, 86% in communications products to 65% in toys.

 Approximately half of all non-agricultural goods entering the United States are duty free while the rest of imported goods aggregate to around 2% tariffs (trade-weighted average rate), calculated by the Office of the United States Trade Representative. Tariffs are customs duties that are levied either on a percentage of the product’s total value or on a specific basis per unit. The U.S. Harmonized Tariff Schedule contains 7,872 tariff lines.

 Recent policy discussions of a border adjustment tax includes a tax on all imported products. Like any tax, consumers will bear the burden. A 5% import tax on imported products would raise imported product prices by 5%. To put a 5% import tax into context, consumers would have to pay an additional $3.40 tax for a $68 pair of sneakers imported from Vietnam or an additional $5 for a $100 child’s bicycle imported from China. For $1,000 holiday spending this year, 30% representing imported products, Americans would have to pay an additional $15 tax. In addition to consumers, imported taxes could negatively affect jobs and businesses throughout the entire supply chain from transportation to retail stores. Furthermore, an imported tax would trigger retaliations from U.S. trading partners, which will harm U.S. exports.

Nam Pham is Managing Partner at ndp | analytics.

The Benefits of NAFTA on U.S. Trade

Americans export and import over $3.8 trillion of products a year with their trading partners around the world. The positive economic benefits of trading are well documented in every industry. Consumers have more choices at lower prices while producers are able to specialize on their comparative advantages to make products better and cheaper. Low prices mean low inflation which translates in accommodative monetary policy. With low interest rates, consumers and businesses are able to borrow at lower costs. Overall, open trade promotes economic growth.

 The North American Free Trade Agreement (NAFTA), a trilateral trade bloc, is no exception. U.S. exports to Canada and Mexico accounted for 33% of U.S. total exports (averaging nearly $517 billion a year) while U.S. imports from Canada and Mexico accounted for 27% of U.S. total imports (averaging over $606 billion a year). NAFTA provides American consumers with more choices at lower prices as Americans export and import goods of the same industry. For example, the U.S. motor vehicle industry is among the top five export industries to Canada and Mexico and is also among the top five import industries from Canada and Mexico, accounting for 42% of U.S. total motor vehicle exports and 49% of U.S. total motor vehicle imports, respectively. The motor vehicle part industry and oil and gas industry are examples of producers specializing in their comparative advantages along the supply chain within NAFTA. Americans export auto parts and import auto vehicles from Canada and Mexico (77% of U.S. total exports of auto parts); similarly, Americans import raw oil and gas and export petroleum and coal products to Canada and Mexico (30% of U.S. exports of total petroleum and coal products).

 The trading patterns confirm NAFTA benefits both American consumers and producers. NAFTA is vital to the U.S. economy and American consumers. NAFTA drives U.S. trade and economic growth.

Nam Pham is Managing Partner at ndp | analytics.

Innovation Comes from Small Businesses

Innovation is proven to be the growth engine for the economy. American companies are spending more on research and development (R&D) than anywhere else in the world. With innovative products and services, U.S. companies are more competitive in the global markets. More than 65,000 U.S. companies, large and small, invested over $376 billion in R&D in 2013, the latest data reported by the National Science Foundation. The R&D expenditures of U.S. companies accounted for 2.8% of their global sales, ranging from 0.1% of utilities companies to 14.4% of semiconductor machinery manufacturing companies.

Recent data also shows small U.S. manufacturing and non-manufacturing businesses employ four times more R&D personnel than large ones -- small businesses added four R&D employees, for every $10 million in sales revenue, compared to only one R&D employee in large businesses. Consequently, the share of R&D personnel is three times in small business than in large ones -- 12 out of 100 workers are R&D employees in small businesses compared to 6 out of 100 employees in large businesses.

Small businesses take risks to incubate ideas to create new products and services which benefit the U.S economy. They are a workplace for millions of innovators such as software programmers, biotechnology research scientists, semiconductor engineers, and digital artists, just to name a few. To maximize the economic and social benefits, smart and efficient policies are needed to promote small businesses and protect their innovations.

 

Nam Pham is Managing Partner at ndp | analytics, a strategic economic consulting firm.

A Changing (Clean) Energy Landscape

Energy is trending. Since January, Congress has introduced 415 bills pertaining to both energy and environmental protection policy. At the same time, government agencies have proposed 43 rules deemed economically significant of the same nature. Most recently, the Obama administration unveiled the final version of the Clean Power Plan which establish the first national standards to limit carbon pollution from power plants.

The plan is ambitious, aiming to reduce carbon emissions by 32 percent from 2005 levels by 2030. While the federal government enforces the regulation, the onus of compliance is largely borne to the state legislators and policymakers. A number of policymakers champion the act as a huge step forward in addressing climate change, others see it as overreach of government and a “War on Coal.” Either way, the rule will create winners and losers in terms of jobs and economic growth.

According to the most recent U.S. Census data, the coal industry employed nearly 80,000 workers in 2013, the vast majority of which worked in mining production. Over half of those workers are located in just two states, Kentucky and West Virginia, while the rest are spread across the country. With upcoming gubernatorial elections happening in both of these states, the topic of EPA regulation and carbon emissions is sure to be a hot-button issue for candidates on both sides of the aisle.

On the flip side of the equation, companies in the solar and wind energy industries stand to gain from these recent rules. In 2013, clean energy generation industries employed 7,000 workers across 900 establishments, according to the U.S. Census. With recent innovations in solar panel production leading to decreased costs of implementation, solar energy providers stand to grow significantly over the next decade. Wind energy is also well positioned to grow significantly. With the implementation of the Clean Power Plan, wind energy electricity generation capacity is expected to triple by 2040, according to the Energy Information Administration, resulting in job creation and economic growth due to increased manufacturing.

In a landmark regulation such as the Clean Power Plan, effects will be felt across industries, helping some and hurting others. States will have find solutions that meet compliance, but also encourage growth. Heading into an election year, the long-term viability of clean energy as well as the economic impact of new standards is shaping up to be much more than just a talking point, it will require action.

Increase Economic Growth through IP & Innovation

Last week’s Bureau of Economic Analysis (BEA) report on GDP had some good news; the advance second quarter GDP estimates reflected overall growth, with improvements in consumer spending, and an increase in exports. However, business investment, as a component of GDP, is lagging. This is where policymakers need to focus. Business investment, which includes R&D expenditures, is key to economic growth.

Washington needs to ensure protection of intellectual property in order to capitalize on investment potential and increase innovation. Innovation boosts GDP in several ways: it increases investment through R&D expenditures which impacts consumption by creating new and improved goods and services (or more efficient processes for production) and increases export opportunities by providing these new products and services globally.

National Science Foundation found that 64% of companies who invested in R&D produced ‘new or significantly improved’ products or processes; that number fell to only 12% for companies with no R&D (NSF). Moreover, we know that innovative companies value IP protections because companies who invest in R&D protect their investment through the patent system. NSF estimates that 93% of patents issued, and 92% of a patent applications filed, belong to companies who fund R&D efforts (NSF).

The value companies receive from protecting their investments is evident in their continued use of patent system. Therefore, maximizing innovation requires strong, and smart protection of IP rights. Policy makers need to support policies that maximize these protections, while deterring system abuse, in order to increase innovation and ensure economic growth.

Americans Need to Export More and Not Less

It is unclear what free trade opponents are against in the current trade debate. Is it about Trade Promotion Authority (TPA), Trans-Pacific Partnership (TPP), or something that has nothing to do with free trade? Contrary to claims that trade agreements have been big failures and disastrous to American workers and the U.S. economy, the numbers decisively tell a success story. The U.S. needs to export more and not less.

Since its first Free Trade Agreement (FTA) with Israel in 1985, the United States has implemented 14 preferential trade agreements with 20 countries located in the Americas, North Africa, the Middle East, and Asia. Nearly half of U.S. merchandise exports went to these FTA partner countries. While having more than $524 billion trade deficits in manufactured goods in 2014, the U.S. enjoyed a $55 billion trade surplus in manufactured goods with FTA partners.

We applied trade data to estimate the impacts of FTAs on U.S. exports over the past 30 years. Our analysis indicates that FTAs spurred more than $41.9 billion and 7.3% of U.S. manufacturing exports to FTA partners. As expected, our analysis shows that Americans export intellectual property (IP)-intensive products such as pharmaceuticals, computer and electronic products, transportation equipment, chemical products, and medical devices; all areas where Americans have comparative advantages in the global markets. We also found that FTAs spurred over $34.2 billion in exports from IP-intensive industries, or 10.9% of IP-intensive exports. In comparison, exports of non-IP-intensive industries grew by approximately $7.7 billion, or 3.0% of U.S. exports, to those FTA partner countries.

By reducing and eliminating tariffs and non-tariff barriers, trade agreements have boosted exports which consequently raised outputs, employment, and wages in the exporting countries. Our analysis show that IP-intensive manufacturing industries added more jobs during the most recent economic recovery period while non-IP-intensive manufacturing industries cut more jobs during the economic downturn. While IP-intensive manufacturing industries employ nearly 30% of American manufacturing workers, they account for nearly 50% of gross output (total sales) of manufacturing industries. IP-intensive manufacturing industries pay 50% higher wages than non-IP-intensive manufacturing industries (approximately $60,000 compared to $40,000 per employee annually).

All in all, the numbers are favorable for U.S. trade agreements. Although U.S. exports have increased substantially in the past 30 years since its first trade agreement with Israel, the share of U.S. merchandise exports has declined from 11.2% to 8.6% of world exports as world exports have increased more than ten times. With the rapid increase in global economic integration, it makes perfect sense that American leaders are in search for FTA partners.