3 Reasons 2015 Will Be A Big Year For Global Trade

2015 is shaping up to be a big year for the global economy. The U.S.-led free trade agreements have new life. The U.S. and China reached a monumental agreement on information and communications technology tariffs. And India and the U.S. came to consensus on food stockpiles that helps bring the World Trade Organization’s Trade Facilitation Agreement (TFA) one step closer to reality. The U.S. cannot squander this opportunity.

Photo courtesy of Reuters.
  1. On the U.S. FTAs: The Trans-Pacific Partnership (TTIP) and Trans-Atlantic Trade and Investment Partnership (TTIP) have returned to the conversation among policymakers as something the President and Congress can accomplish during the lame-duck session. The success of these agreements hinges on the President and Congress re-enacting the Trade Promotion Authority to allow negotiated trade deals to be voted on in Congress without having them picked apart. And, as we noted in our previous report, there are substantial benefits to TPP countries due to intellectual property-intensive industries that are vital to prosperity, innovation, and competitiveness of all countries in the TPP. 
  2. On U.S./China ITA: The U.S. and China finally agreed to adopt an updated Information Technology Agreement (ITA) that eliminates tariffs on trade for hundreds of information and communications technology (ITC) products. These tariff eliminations, which stood at a range from 8 percent for medical devices to 30 percent for video game consoles, are massively important for the U.S. economy and consumers. The ITA expansion is estimated to increase U.S. exports by $2.8 billion, advance revenues of U.S. companies by $10 billion, and create 60,000 new jobs. Overall, the agreement stands to increase global GDP $190 billion annually. 
  3. On the WTO’s TFA: The U.S. and India reached an agreement over food stockpiles that pulls the Group of 20 major economies closer to consensus on the Bali Agreement. The agreement would be the biggest trade deal in the WTO since its inception. The TFA will remove delays at border crossing and ports by bringing uniform standards at customs and ports. The WTO estimates TFA will stimulate the global economy by $1 trillion. 

The opening of global markets beyond the incremental steps taken over the past few years is a great thing for a sputtering global economy. Businesses benefit by having access to many more customers. Consumers gain access to goods and products are lower prices and a greater variety. Washington has a grand opportunity to lead on global trade. It better not spoil it.

New Report: Enterprising Cities -- Regulatory Climate Index 2014

Cities are the engines of economic growth and prosperity in the United States. Our urban economies thrive on innovation, expansion of small businesses, and entrepreneurship. Our economic achievement is inherently tied to a legal infrastructure and regulatory environment that is sensible for entrepreneurs and small businesses. ndp | analytics and the U.S. Chamber of Commerce Foundation are proud to release the Enterprising Cities: Regulatory Climate Index 2014 (the Index), which compares and ranks the efficiency of local regulations applying to small businesses in ten cities across the United States. 

The Index measures three components (number of procedures, time, and costs) that are required to comply with five areas of business regulation in each city. The Index assesses the areas of starting a business, dealing with construction permits, registering property, paying taxes, and enforcing contracts. The results act as a barometer for the overall business environment and point to areas where reform is necessary for competitiveness. 

The main results of the study are:

Among the 10 cities in the 2014 Index, the most efficient cities across all 5 areas of business regulation are Dallas and St. Louis. The cities of Raleigh, Boston, Atlanta, and Detroit have moderate levels of regulatory efficiency. Chicago, Los Angeles, San Francisco, and New York City have the least efficient regulatory environments.

There are sizable variations in the design, practice, and costs to fulfill basic regulatory requirements for small businesses. Geographical and historical influences seem to account for much of this variance. The basic regulatory steps for opening and operating a business remain relatively similar across the cities measured. In recent years, these places have begun to adopt smarter business regulations and to streamline bureaucracies; however, the scope for improving their business environments remains significant.

Each city evaluated has its own clear strengths and weaknesses. For example, Los Angeles and San Francisco have the best practices for opening a business, yet both cities have the highest requirements and costs to obtain construction permits. St. Louis has the best practice for the registration of properties but scores below average in enforcing contracts. Chicago ranks highly for enforcing contracts while ranking lower for starting a business. 

All cities provide small businesses with information and materials to comply with their regulations. Yet the websites and publications are often disorganized, missing information, or unclear to third parties. Few cities provide detailed information on the procedures, expected waiting time, and administrative costs for construction permits. Overall, no city provides comprehensive information. 

At a time when America’s entrepreneurial dynamism is in decline, the costs of housing in our cities is soaring, and governments are challenging the existence of transformative companies, this project is more important than ever. The ease of doing business in America’s cities will help determine the future of America’s economic growth. The success of these places depends on improving existing regulatory processes, simplifying application and compliance with local laws, and trimming the barriers to entry for entrepreneurs.

American Entrepreneurship Is Declining

America’s entrepreneurial and small business dynamism—the process in which firms are created, fail, expand, and contract—is in decline. That’s the conclusion from a new report released by the Brookings Institution. Ian Hathaway and Bob Litan examine firm entry and exit rates in the United States from 1978 to 2011. The authors find that the firm entry rate (the share of firms that are one year old or younger) fell from nearly 15 percent in the late 1970s to around 8 percent in 2011. 

Source: Brookings Institution

Source: Brookings Institution

This trend is similar on the state and metropolitan level. 

Source: Brookings Institution

Source: Brookings Institution

Chris Ingraham at the Washington Post took the authors' data and mapped it across 50 states. The top 5 states with the small declines include New York, Illinois, Texas, New Jersey, and Missouri in the top 5. Wyoming, New Mexico, Vermont, Hawaii, and Alaska rank at the bottom for the steepest decline. 

Of course, this isn’t a good thing for the U.S. economy. Economies that allow creative destruction to run its course grow to be more productive and prosperous, while citizens enjoy new and better products, better jobs, and increased standard of living. Resources flow to innovating firms and industries, and away from less innovative firms and industries. While creative destruction is an essential facet of a market economy, the severe downturn of this trend is alarming. 

So why is America’s start-up engine experiencing this decline? Hathaway and Litan don’t really go into details and there isn’t really a straight answer. The authors observe that business consolidation is occurring in the U.S. economy and larger businesses are doing better relative to younger, smaller firms. The authors offer suggestions on what the policymakers can do to induce increased entrepreneurship rates including work visas for immigrant entrepreneurs and business accelerators at the state and local level. 

These are good ideas, but they only scratch the surface. Reforming the tax-code that’s more favorable to start-ups and entrepreneurs, easing burdensome local regulations, and allowing for greater public investments in innovation, infrastructure, and broadband are a few things we could do to recover from this decline. Fortunately, we’re seeing these policy changes on the local level. But it will take a lot more than a few dozen forward thinking cities to reverse this trend.

Intellectual Property is Key Economic Factor in Free Trade Deal

When IP rights are protected, companies are more confident in trading with and investing in those countries, which also increases exports and economic growth at home.

President Obama’s trip to Asia this week to promote the Trans-Pacific Partnership (TPP) has significant ramifications for the future of the U.S. and global economy. Yet, the TPP negotiations between the United States and Japan leading up to his trip have stalled with little progress in sight. This setback reveals the difficulty of negotiating a free trade treaty between two countries, let alone twelve.

In the U.S., some free trade skeptics are unconvinced of the TPP’s economic merits, particularly the provisions strengthening the enforcement of intellectual property. However, it is clear that the key economic benefits from a TPP deal come from a strong legal framework that protects innovation and IP.

Our empirical analysis shows that two-thirds of the economic gains from concluding a TPP would come from IP-intensive industries. Harmonizing IP protections creates jobs, produces more exports, attracts more direct investments from other countries, and enables the transfer of technology across countries and industries, all of which helps to raise incomes and living standards across all participating countries.

The TPP would unite 12 Pacific Rim countries, which stretch from Canada to Chile and across the globe to Japan, Australia, and east to Vietnam. These dozen nations are home to more than 800 million people and have a combined gross domestic product of more than $27 trillion, or about 40 percent of the world’s economy. According to the U.S. Trade Representative’s office, a TPP agreement could add $223 billion to global income and boost U.S. exports by $124 billion by 2025. We estimate the immediate benefits from TPP will create more than 107,000 new jobs, generate $4.8 billion in wages, produce $47.5 billion in manufacturing sector sales, and add $15.4 billion to GDP in all 12 participating countries.

While free trade agreements have traditionally sought to reduce tariff barriers to trade between countries, these barriers have been mostly eliminated among TPP countries. However, nontariff barriers to trade are still a problem. The TPP focuses on the reduction of these nontariff barriers to trade, particularly weak or inconsistent IP protection, which is the most significant nontariff trade barrier in the 21st century global economy.

When IP rights are protected, companies are more confident in trading with and investing in those countries, which also increases exports and economic growth at home. Therefore, strong legal frameworks for protecting IP rights leads to higher economic growth and standards of living across the globe.

The TPP also creates considerable economic benefits to the U.S. We estimate that IP supports more than 55 million American jobs, creates $5.8 trillion in gross output, pays workers 30.5 percent higher wages, and drives more than two-thirds of U.S. exports to global markets. In a time of persistently low economic growth, a TPP that strengthens IP rights would also considerably bolster the U.S. economy and job market through increased innovation. Innovation is the fundamental source of economic growth, and the benefits of IP have been demonstrated in the U.S., other developed countries, and developing countries.

But IP is only as robust as the laws that protect the copyrights, patents, regulatory data, trademarks, and trade secrets that safeguard a business’ intangibles. The economic incentive to spend billions of dollars and as long as a decade funding costly experimental trials rapidly disappears if the originality and novelty of the product can be freely copied as soon as the innovative product is introduced to the market. Thus, the goal of treaties such as the TPP is to protect these investments in IP, giving innovators the confidence to bring their products and services to market in developing countries.

A TPP agreement that upholds the highest standards of IP protection in each country and more closely harmonizes its legal and regulatory framework creates more efficient markets unencumbered by the uncertainty that ideas will be protected one way in one country and a different way in another.

The stronger the protection of IP rights under the TPP, the greater the value of trade and investment in IP-intensive industries, the engines of economic growth, higher wages and more jobs across all TPP member economies. We cannot invest in our future and grow our economies without them.

Dr. Nam D. Pham is Managing Partner of ndp | analytics, an economic research firm and an adjunct professor at George Washington University in Washington, D.C. This piece first appeared on Ideas Laboratory

MyRA Is Laudable, But Won't Produce Grand Returns

One of the more interesting policy proposals from President Obama’s sixth State of the Union address was the announcement of an executive order directing the Treasury Department to create MyRA—a government backed savings account. The details of MyRA are pretty straight forward: the plan offers American workers a savings account with low interest rates for whose employers do not offer traditional retirement savings plans.

Here’s the skinny via Nick Summers at Bloomberg Businessweek: "The accounts are intended for workers whose employers don’t offer 401(k) accounts, and they can be started with as little as $25; contributions after that can be as low as $5, withdrawn automatically from their paychecks; and earnings on the investments—U.S. government bonds—would be tax-free, like a Roth IRA."

And Lydia DePillis in the Washington Post notes, "The MyRA option would create an cheaper way for smaller employers to enroll their workers in some sort of plan, by taking an automatic payroll deduction that goes into a Roth IRA-style, government-backed account with the employee's name on it."

The plan has its advantages in encouraging meaningful long-term savings for retirement. The proposal is indeed ambitious and well-intentioned, but unlikely to significantly boost overall retirement savings of American workers. As a financial product targeted at lower- to moderate-income individuals, the incentives—other than retirement savings and protection of the principal balance—are weak. Since MyRA is a Roth plan, the contributions are not tax-deductible, which eliminates some incentives for savings.

Last year, we released a report detailing the contributions of the financial services industry to the U.S. retirement savings system. Overall, the current U.S. retirement savings system has proven to be successful, with participation and retirement assets both rising steadily over time. While the overall savings rate has dropped, more than two-thirds of American households have accumulated $19.2 trillion in retirement assets. Presently, the U.S. currently lags many OECD countries in terms of level of savings in private retirement savings plans (adjusted by country GDP):

Private Retirement Savings OECD 2011.png

President Obama’s plan may achieve success by helping ordinary Americans start a meaningful savings account, but it’s not going to produce a sea change of in the way that Americans plan for retirement. It may work in the short-run to prop up participation in general retirement savings, but over the long-term there must be meaningful policy changes to induce increases in general retirement savings rates. The U.S. retirement savings system has proven to work. Policymakers, plan sponsors, and service providers should work together to implement additional measures to strengthen this system beyond the small steps of myRA. These successes should be built upon with policies that further incentivize retirement savings for all economic and demographic groups. Ensuring America's small businesses are able to offer plans that are cost-effective is of great importance.

More Research About Cities and Economic Growth

The influential economist Alfred Marshall described urban economies and entrepreneurship as working in unison through parallel movements between localization and growth of the capitalist “undertakers”, or entrepreneurs.  Community is a form of currency in the global marketplace and cities matter more than ever. The most recent report from the Kauffman Foundation—authored by Yasuyuki Motoyama, Ph.D. and Jordan Bell-Masterson—measures the rate of business creation in 356 metropolitan areas across the United States. Using three sets of data for metro areas including the startup rate for all industries, high-tech sectors, and high-growth firms, the report assesses the regional factors are associated or unassociated with entrepreneurship. Specifically, the authors seek to understand what drives entrepreneurship at the regional level in high-growth sectors. 

The authors find that population size and the rate of population growth within a metro area are the two most important factors in determining start-up rates. Simply put, cities have a more diverse set of sectors and bringing in a greater number of businesses and startup opportunities. Of course, this is firmly supported in the literature on urban economies through studies on agglomeration in cities (i.e., firms benefit when locating near one another). For example, an important study comparing New York City and Pittsburgh, Benjamin Chinitz (1961) found the measure of inputs, such as independent suppliers and capital, have linked to a stronger “suppler schedule of entrepreneurship.” In short, New York City was a better place for starting and operating a business due to its size, diversity, and network of suppliers.

The most interesting finding from the report, and contrary to multiple previous studies, the authors find few significant factors for the public sector to influence entrepreneurship. The presence of government- and university-funded research and patents has no correlation to startup rates, even within high-tech sectors. The one public sector factor that is associated with higher startup rates is education, namely high school and college completion. However, the authors note that their previous findings have shown 52.6 percent of entrepreneurs having less higher education than a college degree, and thus an exclusive focus on college education and completion suggests a linear relationship between education and entrepreneurship is not likely to be true.

The authors conclude by noting the presence of high-tech sectors leads to higher rates of high-tech startups, but not for all kinds of new firm. While the authors’ research shows that higher start-up rates for high-tech sectors does not necessarily induce greater overall rates of entrepreneurship, their conclusion comes with the recommendation that policymakers shouldn’t promote high-tech companies. This is an odd recommendation, especially when comparing the results of this research to the Milken Institute's annual Best Performing Cities report. The most recent iteration finds that cities known for their technology hubs take more than half of the top-25 best performing cities. In addition, technology growth propelled a number of other metros to improve their rankings compared to the previous year. Talk to the mayor of a major U.S. city and ask what they want: it’s high-growth companies and job creation.

Larger cities are able to support a more diverse set of start-ups across all sectors. However, drawing upon the authors’ conclusions about high-tech start-ups, further study should examine what factors lead to greater start-ups in different sectors and industries. These findings go against research that shows government- and university-funded research and patents are correlated with greater innovation more generally in industries such as pharmaceuticals.

Start-up companies and small businesses look to cities to start their businesses because access to the market is more immediate and demand is greater. Cities are best suited in attracting the diverse skills, abilities, materials, and processes that are required for the birth and growth of entrepreneurial small firms. Growth, new business formation, and free enterprise will do more for a city’s economy than any economic development policy can induce on its own.

Intellectual Property Critical to Maximizing Trans Pacific Partnership

New Report Reveals Enormous Benefits of TPP Only Realized if Strong Protections in Place to Protect Innovation, Spur Job Creation in all Member Countries.

Washington, D.C. (December 17, 2013) – NDP Analytics today released a new study analyzing the substantial economic boost that countries participating in the Trans Pacific Partnership (TPP) stand to achieve from one of the most ambitious free trade agreements in history. The report, titled “The Economic Benefits of Intellectual Property Rights in the Trans-Pacific Partnership,” finds that two-thirds of the total economic benefits of the TPP would come from intellectual property (IP)-related manufacturing industries. The authors argue that stronger protection of IP rights in the TPP leads to greater economic growth and development across all participating countries.

“There is no question that strong intellectual property protections benefit all TPP nations, and that IP is the linchpin to maximizing the full potential of the TPP,” said Nam D. Pham, PhD, Managing Partner of NDP Analytics. “As our latest research shows, critics of IP rights in the TPP both at home and abroad are far off base. Indeed, an agreement that weakens IP rights will significantly dilute any economic benefits for all participating countries, and could cause a backslide in future innovation across all TPP partners.”

The study finds that a TPP agreement including IP protections at least as strong as current U.S. law would have the following effects:

  • Boost U.S. manufacturing exports by $26 billion and increase U.S. GDP by $11 billion, two-thirds of which would be derived from IP-intensive industries

  • Create up to 48,000 new jobs in the U.S. economy

  • U.S. companies’ exports to their foreign affiliates in the TPP result in $6.4 billion combined additional increase in local GDP and over 68,000 new jobs created in those nations

To read the full report, please click here. For media inquiries or additional information, please contact Justin Badlam at (202) 450-1369 or justinbadlam@ndpanalytics.com.