LOS ANGELES, CA--(Marketwire - Sep 27, 2012) - Once the nation's top exporting state, California has been losing ground for a decade. California's export rank has fallen to fifth place, behind Texas, Alabama, Florida and Pennsylvania. Last year, Texas exported $249 billion in goods and services, compared the Golden State's $159 billion.
A new report from the Milken Institute, "Strategies for Expanding California's Exports," charts a path for how the state can reverse the trend.
California's export advantages are still considerable, including the largest economy of any state, the largest manufacturing base, robust agricultural production and its role in technology and design. But the lack of a coherent trade policy, combined with a lack of export growth in many of California's key sectors, has sent the state's economically crucial exports into a free fall. California's export growth rate since 1998 has been less than half the U.S. national average.
"By developing an effective strategy for coordinating and promoting exports, California has an opportunity to reinvigorate an important section of the state's economy and improve the competitiveness of state businesses," said Kevin Klowden, Milken Institute managing economist, director of its California Center and co-author of the report with research analyst Michael Wolfe. "With California opening its first foreign trade office since 2003 in China, an opportunity for action exists -- but first it's necessary to look at how California has fallen behind and what other states and countries can teach it."
Why Texas is Winning
California's declining export share is in stark contrast to states that have implemented strong export promotion strategies, such as Texas. Although the Lone Star State has benefited significantly from its geography in connection to Mexico and Latin America, especially after the implementation of the North American Free Trade Agreement (NAFTA), several other factors have come into play. One is the slowdown in semiconductor production in California and the rapid growth in petroleum products in Texas. Another of the most significant advantages Texas has vis-à-vis California is its status as a lower-cost, more business-friendly environment. Texas has also used its strong links to Latin America, and even Canada, to create new markets for its goods, and it has benefited from a more diversified set of export industries.
Crucial to Texas' success has been the role of maquiladoras, plants that receive materials and components from the U.S. (often Texas) and process or assemble them to be shipped back as finished products. The cost of labor in the maquiladoras is extremely low. Mexico's close proximity and the NAFTA accord have allowed U.S. firms, especially those in Texas, to take advantage of these lower costs. While California also shares a border with Mexico, it does not enjoy the same level of trade with Mexico as Texas, which has a longer border and transportation routes in the center of the nation. Importantly, California simply has not taken the steps Texas has to encourage cross-border trade.
Indeed, since the abolition of California's Technology, Trade, and Commerce Agency in 2003, the state has lacked any coordinated trade promotion efforts. Meanwhile, Florida, Alabama, and Pennsylvania have fostered partnerships with private industry, promoted overseas trade, and provided trade assistance. Each state's exports have grown twice as fast as California's since 1998.
Best Practices from Overseas
The report cited other noteworthy examples of effective trade promotion and coordination by governments overseas. In particular, Germany provided effective loan guarantees to even small and medium-sized enterprises engaged in exports, while South Korea identified growing export markets for specific goods, then helped its companies penetrate those markets. Taiwan and Hong Kong have been aggressive in promoting their goods in overseas markets and using their vast networks of overseas offices to help reach local markets.
Despite being especially hard hit by the great recession, California's export industry has quickly recovered, to become one of the few growth areas in the state -- underscoring the benefits the state could accrue from a synchronized system of export promotion.
California has many other advantages to build on. The state has the infrastructure to be the leading export center of the United States, with the nation's largest port, and, at Los Angeles International Airport, one of the busiest cargo airports in the world. In addition, the state is close to and has cultural connections with many rapidly growing Asian markets. Finally, California businesspeople possess tremendous expertise in exporting goods and services. The key will be to use this knowledge to revitalize export growth in the state.
"Cost is a competitive disadvantage for California, and the state will have to find creative ways to overcome this," said Klowden. "An export-promotion agency and targeted foreign trade offices can help with these challenges."
What California Should Do
"Strategies for Expanding California's Exports" makes a number of recommendations to boost the Golden State's exports:
1. Take advantage of existing export promotion resources.
2. Create a synchronized export promotion agency.
3. Leverage private-sector expertise.
4. Open more, but carefully selected, trade offices abroad.
5. Build a comprehensive performance measurement system for export-promotion efforts.
6. Take advantage of national and local programs supporting export promotion.
7. Develop an effective and comprehensive trade-promotion strategy.
Copies of the report are available for download at http://www.milkeninstitute.org/publications/publications.taf?function=detail&ID=38801367&cat=resrep.
About the Milken Institute
A nonprofit, nonpartisan think tank, the Milken Institute believes in the power of capital markets to solve urgent social and economic challenges. Its mission is to improve lives around the world by advancing innovative economic and policy solutions that create jobs, widen access to capital and enhance health.