CHAPTER FIVE
The Lessons of the U.S. Export Boom
THE MOST IMPORTANT EVENT in the world economy during the 1980s was surely the boom in U.S. manufacturing exports. In just five years, from 1986 to 1991, these exports almost doubled, with the biggest increases in sales in our major competitors, Japan and West Germany.
This came as a surprise to businessmen, economists, and government forecasters. When the overvaluation of the dollar, especially against the yen, was corrected in the fall of 1985, everyone was absolutely certain that imports into the U.S. would fall sharply. Instead they have risen steadily, thanks mainly to our unquenchable thirst for oil and to the continuing decline of the American automobile industry. But exports? No one then thought seriously that they could do more than hold their own at best.
The U.S. export boom was also unprecedented, in U.S. history, and in economic history altogether. Never before have the manufactured-goods exports of a fully developed country risen so fast; and the U.S. was of course already the world’s number-one exporter. This performance is all the more impressive as most of Latin America—traditionally the best U.S. manufactured-goods customer—is still deeply depressed; only Mexico—and then only during the last two years—has come to life again as a big buyer. The export boom fueled the continuing U.S. economic expansion during the second Reagan term. It kept the recent recession from turning into full-blown depression with double-digit unemployment. And U.S. manufactured-goods exports are likely to continue to do well unless the world economy slumps. But their explosive growth has slowed down sharply. The export boom has clearly peaked. What then are its lessons for U.S. business and for world business altogether?
At first glance there seems to be no pattern. The list of goods whose exports jumped contains high-tech stuff such as jet engines, heart valves, and sophisticated software to program paper machines and engineering work stations. It also includes goods normally not considered “tech” at all: movies and rock recording, running shoes, blue jeans, and office furniture—and everything in between. The star performers among companies came in all sizes: giants such as Boeing selling airplanes and GE selling body scanners and aircraft engines; any number of middle-sized companies; and, amazingly, many small and even tiny firms such as the machine shop with 35 employees making a specialized control instrument for the pharmaceutical industry or the equally small shop making hospital paging systems. Among the star performers are firms that have been active in the world economy for a long time, including many who for decades have had big plans abroad, e.g., 3M. The list also includes quite a few firms that never before had filled a foreign order.
Yet, for all their diversity, the winning products and their makers have some features in common. And it is these that explain their success. Indeed, these features may altogether be the keys to success in today’s world economy.
All the successful export products have clear product differentiation. They are distinct. Not one is a “commodity.” They are priced competitively; but not one is sold primarily on price. The successful export products are all high “value added” goods. And what adds high value to them is knowledge, or, at least ingenuity, as in the case of 3M’s “Post-its.”
Most of the export successes also have clearly defined markets, have, indeed, clearly known customers. “I never before shipped anything overseas,” says the maker of the control instrument for the pharmaceutical industry. “But I’ve known every one of my overseas customers for any number of years from trade shows and industry conventions. As customers they were new, but as people they weren’t “foreigners” but “old friends.” Boeing knows every single airline in the world and Hollywood equally knows every single major movie distributor anywhere. The Japanese engineers buying U.S.-made word processors or the East German teenagers queuing up for U.S.-made rock tapes are not, of course, known personally to the U.S. producers. But they too are not “foreigners.” They have the same tastes, the same values, the same buying habits as American engineers or American teenagers. “I do not sell on the world market,” says the heart-valve manufacturer. “I sell to cardiac surgeons.”
This then is probably the most important lesson of the export boom: the world market is a “foreign” market only in terms of trade statistics. As to doing business in it, it is a congeries of “familiar” markets, at least for knowledge-intensive products. And these are the products that increasingly dominate world trade in manufactured goods.
Another important lesson: bigness is not an advantage, let alone a prerequisite to world-market success (as we believed 30 years ago and as the Japanese still seem to believe). The “winners” in the U.S. export boom have been middle-sized companies with high expertise in a given field, whether in making movies or in designing heart valves. And all successful companies in the export boom have been highly concentrated. They are all single-product or single-technology businesses. Boeing is very big, but all it makes are airplanes. General Electric is engaged in a multitude of different businesses. But its medical-electronics division makes and sells only medical electronics, its jet-engine division only aircraft engines. The world market does not pay for what is still fashionable among financial people and still taught in the business schools: running a company as a “portfolio” of businesses; “balancing” businesses with different cyclical characteristics; or keeping old products as “milch cows” to offset the cash demands of new technologies and new products.
One more lesson: there is one additional skill needed to be a successful exporter in today’s world market—to manage foreign exchange exposure and thus to avoid foreign-exchange losses. During the Carter and early Reagan years U.S. exporters took huge foreign-exchange losses. European and Japanese exporters still do. But for American firms such losses are now quite rare even though the last five years saw extreme currency fluctuations. Compared to the Europeans—especially the Germans—the Americans are still babes in the woods when it comes to taxes. Small exporters rarely know that they can get substantial tax savings under American law (though as a rule only with professional help). But even the small American exporter now knows how to minimize foreign-currency exposure. This newly acquired skill has become a major competitive advantage for U.S. business in today’s world markets.
Exporting and manufacturing abroad, the U.S. export boom shows, complement each other. Once an exporter of a knowledge-intensive product holds a substantial share of a foreign market, he has to produce there. Otherwise he simply creates market opportunity for a domestic competitor. This holds true even for the small exporter. When he had gained 35 percent of the market in Western Europe and Japan, the maker of hospital-pagers had to start operations there; “local imitators were beginning to sell around us,” the owner reports. “We began with assembly operations. Within two years we had to put in small but fully equipped machine shops.” But far from “exporting American jobs,” manufacturing overseas for overseas markets creates U.S. jobs. Within two years the hospital-pager firm had to hire an additional 15 Americans to supply parts and machinery to its new overseas operations.
Finally, the export boom of the last five years provides strong support for the contention of Harvard economist Robert Reich (in his recent book The Work of Nations) that knowledge rather than national boundaries defines today’s developed markets. But it also supports the opposite thesis of the importance of a national economy and of the structure of the home market—the thesis recently put forth by another Harvard professor, Michael Porter (in his book, The Competitive Advantage of Nations): that America’s manufacturing industry responded so fast and so successfully to the export opportunities opened by the dollar-devaluation of 1985 because the structure of the U.S. home market, with its vigorous competition, makes it opportunity-driven and market-driven.
[1991]