The presidential race has become something of a referendum on free trade, with candidates on both sides proposing tariffs and turning away from trade agreements.
While America is mired in a debate about the trade policies of a more industrial era, we need a new agenda for increasing U.S. exports. Lost in the rhetoric is the realization that globalization has gone digital, and it now represents an outsized market opportunity for US small businesses.
In much of our collective recent memory, globalization was driven by Fortune 500 corporations. Small businesses lacked the reach or resources to pursue international customers. But today digital platforms like eBay (EBAY), Amazon (AMZN), or Facebook (FB) connect them to customers, suppliers, and investors around the world.
A new breed of startups, built on digital technologies, is already showing how it’s done. A joint McKinsey Global Institute/1776 survey of worldwide startups found that 86% engaged in some form of foreign business activity from inception. These tech-savvy entrepreneurs are seeking out venture capital from Europe, hiring tech talent from South Asia, and selling into markets around the world. They’re changing the model for how to do business across borders—and some of them could turn out to be job-creating “gazelles.” Equally important, they could inspire more of America’s small firms to look abroad for much-needed growth opportunities.
Becoming an exporter was once daunting for small businesses that couldn’t spare the manpower to cultivate international prospects or navigate complex government assistance programs. But today borders are less formidable barriers on the Internet. The availability of huge public Internet platforms, enterprise software, and cheap computing power on the cloud has changed the economics of working with collaborators, suppliers, and customers in different countries.
By joining e-commerce marketplaces, companies can reach a critical mass of global customers and find logistical support, payment infrastructure, and step-by-step guides. Facebook reports that some 50 million small and medium-size enterprises worldwide market on its platform, a number that has doubled in just two years. Even though fewer than 1% of U.S. companies export goods and services (a far lower share than in any other advanced economy), small business owners’ ability to connect directly with customers over the Internet has eliminated the need to find foreign distributors.
These new capabilities could unleash a boom in small business exporting, although most U.S. exporters, 98%, are already companies with fewer than 500 employees that have collectively doubled exports from 26% in 1977 to about 50% today. Exports from firms with fewer than 50 employees have grown most rapidly.
The current administration has taken some positive steps to help would-be exporters. The newly signed Trade Facilitation and Trade Enforcement Act contains a critical provision for microbusinesses, raising the customs and duties exemption from $200 to $800 for US goods sold overseas. But there is more to do, including making existing programs easier for the smallest firms to navigate.
The first step is building basic awareness and digital capabilities among small businesses. Thirty-seven percent of firms surveyed by the National Small Business Association in 2016 cited a lack of knowledge about international markets as their reason for not exporting. And many still have only a rudimentary digital presence. America’s small businesses need more mentorship and strategic guidance to understand the market opportunities at stake.
Customs requirements were originally established for big corporations to export vast quantities of goods. Procedures and requirements need to be retooled so the multitude of small businesses handling small purchases from individual customers overseas can thrive. The US customs system will need to be modernized in a way that balances the need for speed and dexterity against the imperative of secure borders.
Unlocking small business growth is not just a US goal. It’s shared by countries everywhere, and it will take deeper international cooperation and follow-through on multilateral agreements to achieve it. The WTO Trade Facilitation Agreement adopted in November 2014 is designed to harmonize border procedures to expedite the movement of goods. More countries are signing on, but so far not enough to bring it into full force.
Market protectionism was part of the old industrial economy, but many countries are bringing that mindset into cyberspace—and it stands in the way of creating a more seamless digital global marketplace. Regulations that inhibit the free flow of data or require companies to have a physical presence in order to do business in a given country can stifle digital entrepreneurs. Creating digital trade agreements could be more important to future growth than hammering out treaties on tariffs.
The Internet can be a great equalizer. Today’s more digital form of globalization opens the door for businesses of any size to participate. The most digitally sophisticated entrepreneurs are already going head to head with bigger players. With the right frameworks in place, thousands of additional Main Street businesses can be empowered to do the same. After all, despite the campaign rhetoric, most of the world’s customers are beyond America’s borders.
Susan Lund is a partner at the McKinsey Global Institute, McKinsey’s business and economics research arm. Donna Harris is Cofounder & Co-CEO of 1776, a global incubator and venture fund dedicated to accelerating innovation in areas of essential human need.