Foreign trade boosts state’s economy

September 30, 2012

By Daniel Weintraub

In tough economic times, Americans tend to look inward. We see foreigners as competition — for business, for jobs, for all the things that underpin our livelihood. Combine tough economic times with a bitterly fought, hike-stakes presidential campaign, and globalism can really take a beating.

But the truth is that an increasingly interconnected global economy is more likely to save us than sack us. And right now, the biggest risk to the modest momentum we’ve got going is not that foreign countries will overwhelm us with their economic juggernauts, it is that the economies of China and Europe are slowing down.

Nowhere is that more true than in California, which has led the nation in a rebound of exports as we’ve begun to crawl out of the Great Recession.

Despite a modest hiccup in July, the value of goods exported from California is on pace this year to surpass the last peak, in 2008, even after adjusting for the effect of inflation.

California exported about $95 billion worth of goods through July, about 4 percent more than the value of the state’s exports from January through July in 2008, before the worldwide recession sent trade plummeting. Exports represent about 8 percent of California’s economy, according to a recent estimate by the Anderson School of Business at UCLA.

So far this year, our top trading partners are Mexico, Canada and China. Exports to Mexico, in fact, are up 25 percent from a year ago.

California’s biggest exports are mostly things that consumers don’t buy, but businesses and other institutions purchase from our companies. Aircraft engines and parts are the state’s top export product, and computers and electronic products are the top industry. Medical devices rank up there, as does agriculture, of course. California ships about $2 billion in almonds overseas every year. Hundreds of thousands of California jobs are connected to all of this trade.

And none of that recognizes the value of services – lawyers, accountants, architects, information technology consultants and others who sell their expertise to foreign buyers. Also: a lot of software downloaded over the Internet to overseas buyers is not counted as an exported good because it is considered a service, as is the online rental of Hollywood-produced movies. Finally, tourism, a booming California industry, involves selling our wares to foreigners, which many economists consider a form of foreign trade even if it is not counted as an export.

One recent estimate by the Brookings Institution concluded that the value of services sold to foreigners in California is approaching $100 billion a year. Add that to the value of goods made here and sold overseas and foreign trade rises to about 13 percent of California’s gross domestic product.

Still, some experts think California is just scratching the surface of our potential as an export economy. Gov. Jerry Brown earlier this month signed legislation to open a trade promotion office in China. The state closed its trade offices around the world about 10 years ago after legislators concluded that the offices weren’t really necessary, given the ability of businesses to market their own products and the fact that the federal government has offices that help the private sector make connections overseas.

Jim Wunderman is president and CEO of the Bay Area Business Council, which will operate the China office in a partnership with the state.

“Exports have been growing, it’s been one of the strong elements of our economy,” Wunderman told me in an interview. “But we don’t think we are maximizing the opportunity. We can do better. People want ‘Made in America.’ It’s a desirable brand, and ‘Made in California’ may be stronger. We think we can promote that better.”

Over the long term, it seems certain that China’s middle class will be growing, and as it does, millions if not billions of new customers will be demanding California products. But the latest estimates suggest that China’s growth rate is slowing, and that could mean a slowdown in exports from California.

China has its own problems internally, but another of its problems is the spillover from the implosion of the European Union nations. The debt crisis in Greece, Spain and other countries has led to a second wave of recession in several European countries. Europe is China’s biggest trading partner, so pinched incomes on the continent mean fewer goods going from China to Europe. That, in turn, means less income for China, and less money for them to buy California products.

UCLA’s latest economic forecast estimates that a deepening of the Euro-zone crisis could cost California about 1 percent of its gross domestic product and 165,000 jobs.

“California has considerable exposure to China and Europe,” the forecast says. “Together they make up one quarter of all direct exports from the state.”

Jock O’Connell, a trade expert with Beacon Economics, a consulting firm, agrees with that assessment.

“There are serious problems in Europe and they are affecting economies around the world,” he said.

O’Connell, who has studied California’s global trade for decades, says another risk to the state’s export business is transportation. The state’s ports are struggling to maintain their infrastructure, and California’s roads are famously pot-holed. Increases in the price of oil and jet fuel could also pose a problem.

“That drives up the cost of products, and at some point you have resistance to those price increases,” O’Connell says. “You see a diminution in the value of trade.”

It used to be said that in economics, when America sneezes, the rest of the world catches a cold. That may still be true. But it is also true now that economic illness elsewhere can spread quickly to the United States, and to California. For better or worse, we are all connected now.

In that light, it makes less sense to think of other countries as California’s competitors than to picture them as potential customers for our products and services. The growth of the global economy has been one of the engines of California’s own sputtering economic growth.

The better they do, the better we do. We should be wishing the rest of the world the best of economic health.

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  1. Pingback: Foreign trade bolsters California economy | 21st Century Border

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