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Q2 2015 Earnings

July 28, 2015
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The Rough Road to an Export Economy


UPS Chairman and CEO Scott Davis said exports are the key to the U.S. economic recovery. In his remarks, he discussed barriers in the way of the President's Export Council goal to double U.S. exports in the next five years, and he urged business leaders to "defeat the tyranny of protectionism."

Over 300 years ago, in 1666, English Poet John Dryden said, "Trade, like blood, should circulate and flow freely." That is a concept I think most of you share.

Robust and open global trade drives the world's economic engine. Everyone wins when trade flows freely. Why? In my view, global trade is the quickest and surest way to accelerate global growth, create new jobs, and improve living standards.

Now, I freely admit UPS has an interest here. At any given moment, UPS handles 6 percent of the U.S. GDP, and we move 2 percent of global GDP in our trucks and planes.

But in view of its many benefits, I don't think the notion that trade is a good and valuable thing should be controversial. But it certainly has been lately.

In a recent Wall Street Journal/NBC News survey, more than half of Americans said that free trade agreements have hurt the United States. That's up from about a third in 1999. During the recent midterm elections in this country, global trade was political poison.

In attack ads and debates, politicians from both parties competed to blame our economic troubles on outsourcing, greedy global businesses, or trading partners out to steal our jobs.

Now that the election is behind us, I'm hoping that open season on trade is over, and free traders can safely come out of hiding

I'm not sure of that but I'm feeling lucky today so I'll take my chances.

Today, I want to address the global trade issue by first discussing where we are. Then, I would like to frankly address some of the challenges we face. And along the way I want to recommend some solutions.

As Francisco mentioned in my introduction, earlier this year I joined the President's Export Council, an advisory committee for helping to grow U.S. exports.

We met with President Obama in September, and he said he's pleased with our progress - at least at this early juncture.

Manufacturing activity in the United States expanded in October for the 15th straight month, according to the Institute for Supply Management. 

Exports in the first six months of this year were 18 percent higher than in the first half of 2009. We've seen the same trends in our business. But we're not where we need to be.

The President's Export Council wants to sustain this momentum by helping businesses find new customers around the world and to finance export sales.

I'm convinced that many U.S. businesses that don't export could compete successfully if they tried. Exports account for only about 11 percent of U.S. GDP.

That compares with about 28 percent for Mexico and a whopping 50 percent for Germany.

My view is that our economy is undergoing a necessary restructuring. One factor that could boost exports from the United States is the overhaul of export controls, which often have unintended consequences.

Years ago during the Cold War, the U.S. put in place restrictions to keep sensitive technologies out of enemy hands.

But, over the years, different agencies got involved, and enforcement of the rules became confusing - and in some cases, pointless.

For instance, U.S. businesses can't export a certain type of heavy brake pad because of fears that it could be used on enemy tanks.

The rule made no sense, however, because the same brake pad technology is widely used for fire trucks and other non-military purposes.

The Obama Administration has made this proposal: "Higher fences around fewer products" - a sensible change in my view.

The new rules are well-timed to boost exports toward some very ambitious goals. The President's Export Council wants to double U.S. exports in the next five years, from about $1.6 trillion to more than $3 trillion in 2015.

I'll say up front that I think we can meet these goals. But it won't be easy. 

The way I see it, we have a long way to go and a short time to get there. The transition to an export economy will be a hard journey and the road will be very  bumpy, with many potholes and hazards ahead. 

But, if we stay focused and determined  in the face of obstacles, we will make it to our destination. A few years from now if we get it right, we'll look back and be glad we arrived at an export economy.

That's a brief overview of where we are now.

So, what challenges do we face?

I think there are several. The first challenge is that U.S. companies are capital constrained and reluctant to export.

They may perceive going into a new  market as an unknown risk, financial and otherwise. In times of economic stress, there's a tendency to hunker down and stick to the status quo, rather than explore opportunities.

That is simply human nature but it may not be smart business.

As a consequence, U.S. businesses are too often paralyzed. Rather than keeping the economic engine in drive and their foot on the gas, they pull off the highway, place the car in park, and simply wait and wait and wait.

What's the catalyst for recovery?

Consumer spending will probably be too weak to pull the economy back to its potential. The driver will have to be more exports. In other words, we'll have to regain prosperity the old fashioned way not by household borrowing and spending but instead by earning it through innovation, increased production, and aggressive marketing in other countries.

Think about this fact: 95 percent of consumers are located outside the United States - 95 percent!

And in the future, most of them will be in today's emerging economies - not the developed nations of the United States, Western Europe, and Japan. 

Every minute, about 174 new consumers join the world economy. 

Think about what that means: In the 30 or so minutes I'm speaking to you, you'll have more than 5,000 potential new customers, somewhere on the planet.

Frankly, given the massive scale of this opportunity, I'm astonished that U.S. businesses are not more vocal in demanding better access to this huge wave of global consumers.

The U.S. is still the world's leading manufacturing country, representing nearly one quarter of the global manufacturing output. But in order for the United States to change direction we have to rethink some misguided policies.

At the top of my list is what I see as our second challenge...

The "Buy America" provisions that were added to the 2009 stimulus package. These rules say that only U.S. firms can bid on major contracts for the federal government.

Now, I'll concede that "Buy America" makes a good political bumper sticker. But it becomes a serious international problem when you try to enforce it.

I discovered the heated emotions  around "Buy America" last year at a conference in Detroit. Canadian business leaders buttonholed me and described these new rules as an unwarranted slap in the face.

They were passionate advocating their position and they used some language my mother would not approve of!

Canada accounts for about 19 percent of U.S. exports, and these leaders warned that Buy America provisions risked a very important economic partnership.

Surprised by the intensity of these leaders' position I looked more closely at this rule. It's designed to block foreign-made iron, steel, or other goods for U.S. public works projects. Some restrictions were later eased, but the rules place many foreign businesses at a disadvantage if they contract with the U.S. federal  government. 

What does this have to do with U.S. exports?

For one thing, reciprocity is at stake. U.S. businesses could face higher barriers when they bid for big projects in other countries.

So the Buy America backlash may have exactly the opposite effect from what was intended it may end up costing U.S. exports and related jobs. 

Also, with the improvement in global supply chains, Buy America rules are often unworkable and expensive.

My recommendation to this challenge is simple. The U.S. should abolish Buy America provisions and the sooner the better. 

A third hazard on the road to export growth concerns Mexico, the other U.S. partner in the North American Free Trade Agreement. Mexico accounts for about 11 percent U.S. exports. But this vital trading relationship is also being strained.

One problem is that the United States won't allow Mexican trucks into this country.

According to NAFTA, the United States is supposed to be open to Mexican trucks - just as U.S. trucks are supposed to have access into Mexico.

A coalition of unions and safety stakeholder groups claim that Mexican trucks are unsafe or that they could be used to transport illegal drugs.

I'll be blunt: There is little or no merit to the argument that Mexican trucks are unsafe. The U.S. Department of Transportation Inspector General has asserted that Mexican trucks are as safe as U.S. vehicles.

Today, Mexican trucks have to stop at the border unload then reload into U.S. trucks. With this unwieldy process, business and competition suffers, and the opportunity cost is huge.

We should have much stronger trade - and job growth - on both sides of the Rio Grande.

Last year, the United States stopped funding a pilot program which allowed a limited number of Mexican trucks into this country. 

Mexico responded by slapping a 20 percent tariff on 90 agricultural and industrial products.

The result is the loss of $2.4 billion  in U.S. exports to Mexico. The victims in this dispute are U.S. farmers and other producers who have nothing to do with  Mexican trucks. Absolutely nothing!

The Mexico trucking dispute started as a pothole and it's grown into a giant sinkhole. We need to patch it quickly.

We don't want this dispute to keep spreading and swallow up NAFTA. Yes, the United States has work to do mending ties with our neighbors to the north and south, and we also need to build  bridges to new trading partners.

Unfortunately, the United State is not budging on trade agreements. And that poses yet another challenge to free and open trade.

For years, the United States led the way on free trade. This country has trade agreements with 14 partners that boost U.S. output by $1 trillion each year.

In addition, the U.S. has negotiated trade agreements with South Korea, Colombia, and Panama. But Congress hasn't approved them and that could have serious consequences. And, we are clearly disappointed with the lack of progress in South Korea last week.

For example, according to the United States Chamber of Commerce, failure to pass the agreements now on the table would cost the United States some 380,000 jobs think about that - 380,000 jobs in a time of 9.6 percent unemployment.

Does that make sense?

Sadly, when it comes to trade, our elected leaders seem to be following their hearts more than their heads.

In the halls of Congress, compelling arguments for trade get overwhelmed by noisy and heated attacks on globalization. In the months ahead, however, I'm hopeful that cooler heads will prevail, and we'll have more trade deals.

And I see encouraging signs. Many emerging economies are still eager to strengthen economic ties to the United States.

They seek lower barriers into the largest economy in the world. And they want a strong and vibrant United States as a counterweight to China, which is pushing hard for trade deals in resource rich nations.

In my view, the solution is to stop the foot dragging and move quickly on these pending deals.

Then we should put new agreements on a fast track. The final challenge to boosting exports is centered in other countries.

For instance, shipments into Brazil, Latin America's largest economy, often bog down in a thicket of regulations and taxes to the point where trade resembles a one-way street going out.

Other countries resist agricultural imports, unfairly subsidize domestic businesses, or fail to honor copyright laws. Global obstacles to trade are complex and widespread.

All of these barriers - whether implemented by the United States or other countries - are a shame especially considering the improvements in logistics.

With improved capabilities and electronic customs, shipments can move seamlessly and swiftly around the globe and at lower cost.

But trade-friendly rules have to be in place. The bottom line is this: When global commerce suffers, we all suffer and we all end up paying a price.

So those are some of the challenges I see. I believe many of the solutions are really pretty simple - simple, but not easy. 

But I believe with the joint efforts of Sec. Locke, Francisco, and many of the people in this room, we have the vision and strength to make free and open global trade a reality.

So I would like to ask for your help. For the good of everyone in the  Americas and beyond, please join me with your full support  and active engagement in helping to knock down trade barriers, to defeat the tyranny of protectionism, and to clear the road  for more exports at this critical moment in our journey.

In closing, let me leave you with thought: John Dryden was right.

"Trade, like blood, should circulate and flow freely."

Global trade is, indeed, a critical element - in my view the most important element - on our road to global prosperity and growth.

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