If you really want to close the US trade deficit, try boosting innovation in rural manufacturing

President Donald Trump has long been preoccupied by the trade deficit^[1] — the gap between what the U.S. sells to the rest of the world and what it buys from it. He recently declared the issue a national emergency^[2] and used trade deficit data^[3] to calculate so-called “reciprocal tariffs” targeting nearly 100 countries. Although those specific tariffs are now on pause^[4], Trump’s concern with the trade deficit persists.

As an economist^[5], I know there are two basic ways for a country to reduce a trade deficit: import less or export more. While Trump has focused on the former strategy^[6], a more productive path may lie in the latter – especially by looking at untapped opportunities in rural America.

Economists have long studied the differences between rural and urban^[7] regions. But while research shows^[8] that urban areas tend to be more technologically advanced, fast-growing and economically dynamic, economists have historically paid less attention to how regional differences affect export performance^[9].

New research^[10] is starting to fill that gap. Economists recently found that urban businesses export significantly more than rural ones – a difference with significant implications for national trade.

The urban-rural export gap

Looking at data from the Census Bureau’s Annual Business Survey^[11] as well as trade statistics^[12] from 2017 to 2020, researchers used econometric techniques to measure the urban-rural export gap. They also examined two categories of potential causes – “explained” and “unexplained.”

The first is due to differences in what economists call “endowments^[13]” – for example, a region’s digital infrastructure, its access to renewable energy and its opportunities for high-tech employment. These endowments can be observed and therefore explained.

The second is due to what economists call “structural advantage^[14].” This refers to attributes of a region that matter for export performance but can’t be observed and, as a result, remain unexplained.

They found that most of the urban-rural export gap is due to explained differences. That means rural businesses could close the export gap if they were provided with similar endowments – meaning comparable access to renewable energy, similar digital infrastructure and analogous opportunities for high-tech employment – to their urban counterparts.

Even more strikingly, the unexplained component was negative – which means rural businesses outperform expectations given their characteristics. That suggests rural regions have significant untapped export potential.

Several factors collectively account for the urban export advantage. First, urban regions have a greater concentration^[15] of highly educated science and technology workers. Urban businesses also tend to be larger and more tech-savvy, and because they have better access to broadband^[16], they use cloud technology more frequently^[17]. Urban areas also have more foreign-born business owners^[18] who may leverage their international networks.

However, many of these differences suggest possible policy solutions. For instance, since cloud adoption depends on broadband availability, it follows that investing in digital infrastructure could boost rural exports. Also, rural manufacturers, especially in sectors like metals manufacturing^[19], show comparable or higher export intensity per worker than their urban counterparts. So encouraging rural manufacturing would be one way to reduce the urban-rural export gap.

Rethinking trade and rural development

I think this research has important policy implications.

First, it shifts some of the focus away from other countries as the root cause of the trade deficit. And second, it bolsters the case for what economists call “place-based policies^[20]” targeting specific geographic areas – as opposed to “people-based policies^[21],” which provide support directly to individuals.

Even though many economists dislike place-based policies^[22], they are increasingly attracting both academic^[23] and governmental attention^[24].

During the Biden administration, three major laws – the Inflation Reduction Act^[25], the CHIPS and Science Act^[26] and the Infrastructure Investment and Jobs Act^[27] – directed significant federal funds to rural areas. About 43% of funds from those laws – or US$440 billion – was designated^[28] as either “rural relevant” or as “rural stipulated,” meaning the funds were either geographically targeted or designed to address disproportionately rural challenges.

Such massive investments in rural regions have led researchers and policymakers^[29] to question whether rural export underperformance stems from differences in observable endowments – in other words, things like access to broadband – or from inherent disadvantages that are much harder to deal with.

In my view, this research provides compelling evidence that much of the urban-rural export gap is due to unequal distribution of productive assets, rather than inherent rural disadvantages. With appropriate investments in digital infrastructure^[30], human capital^[31] and support for export-capable industries, America’s rural regions could play a much larger role in global trade. These findings also suggest the value of continued federal support for rural development efforts.

In other words, if the U.S. wants to shrink its trade deficit, one answer could be more innovation in rural manufacturing.

References

1. ^{^} preoccupied by the trade deficit (www.nytimes.com)
2. ^{^} national emergency (www.whitehouse.gov)
3. ^{^} trade deficit data (ustr.gov)
4. ^{^} now on pause (edition.cnn.com)
5. ^{^} an economist (people.rit.edu)
6. ^{^} focused on the former strategy (apnews.com)
7. ^{^} rural and urban (www.census.gov)
8. ^{^} research shows (dx.doi.org)
9. ^{^} how regional differences affect export performance (doi.org)
10. ^{^} New research (doi.org)
11. ^{^} Annual Business Survey (www.census.gov)
12. ^{^} trade statistics (www.census.gov)
13. ^{^} endowments (doi.org)
14. ^{^} structural advantage (doi.org)
15. ^{^} greater concentration (www.nber.org)
16. ^{^} access to broadband (www.ntia.gov)
17. ^{^} cloud technology more frequently (www.psu.edu)
18. ^{^} foreign-born business owners (www.americanimmigrationcouncil.org)
19. ^{^} metals manufacturing (www.bls.gov)
20. ^{^} place-based policies (doi.org)
21. ^{^} people-based policies (www.lincolninst.edu)
22. ^{^} dislike place-based policies (www.hachettebookgroup.com)
23. ^{^} academic (theconversation.com)
24. ^{^} governmental attention (doi.org)
25. ^{^} Inflation Reduction Act (www.irs.gov)
26. ^{^} CHIPS and Science Act (www.congress.gov)
27. ^{^} Infrastructure Investment and Jobs Act (www.congress.gov)
28. ^{^} was designated (doi.org)
29. ^{^} policymakers (www.brookings.edu)
30. ^{^} digital infrastructure (neosnetworks.com)
31. ^{^} human capital (www.investopedia.com)