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Bring in Da Hype, Bring in Da Euro
By Jock O'Connell

jockoconnell@gmail.com

This is the author's text of an article that appeared in the Sunday Forum section of the Sacramento Bee on January 24, 1999.
The Bee's online version of the article can be accessed at:
"Bring in da hype, bring in da euro"

Obsession. It's more than the scent at the center of a slyly pretentious ad campaign or an illness visited on the emotionally at risk. It's also an affliction capable of causing otherwise sober and sensible business people to abandon prudence in favor of rash and risky behavior. In the world of commerce, its arrival is typically heralded by its gaudy henchmaiden -- hype.

Therefore, behold the euro, Europe's new continental (though still largely phantom) currency, born on Jan. 1 amidst media hysteria and rhetorical hyperbole normally reserved for the Super Bowl.

As important a development as the euro really is, the unspun truth is that much of what's being said these days about it can be classified as low-grade baloney (8500 lira or 4.25 euros in Bologna at today's prices). The simple fact is that nobody knows with any real certainty what is going to happen. Economic forecasting, especially on a transnational scale, is largely old-fashioned flim-flam done up in Armani suits, Burberry trench coats and Hermes scarves.

This isn't the first time something like this has happened.

Over the past two decades, the Golden State has been swept up in a succession of fads and, ultimately, obsessions in international trade. To be sure, the state has witnessed a truly impressive expansion of its overall export trade, which rose from $32 billion in 1987 to over $100 billion in 1997. Nevertheless, sound business practices (most notably those involving market diversity and risk management) have too frequently been cast aside as too many California firms have been persuaded to pursue foreign market opportunities which often prove ill-advised or just plain ephemeral. In the process, trade strategies have been distorted, leading to a dangerous over-reliance on certain regional markets as well as neglect of export markets in regions not blessed (or cursed) by hype.

During the '80s, when Pacific Mania blew through California, the state's business community -- as well as those political leaders and editorial writers who shape public opinion -- were treated to massive doses of buzz packaged in the form of conferences, symposia and workshops emphasizing two major themes.

The first, reflecting the then-popular zoological theory of international economics, told of a future in which a pride of hungry and fast-charging Asian tigers and dragons would devour America's industrial dinosaurs and collectively displace America as the global economy's top dog -- unless, of course, our smaller but quick-footed corporate gazelles had something to say about it.

The other dominant theme of those peddling spectacles to the economically myopic was that California should hitch its star to the Pacific Rim. After all, we're where East meets West.

As we know now (and as some of us observed even back then), Pacific Mania resulted in a serious distortion in the state's foreign trade. Companies that should have built a geographically diversified export trade chose instead to plunge exclusively across the Pacific. So when the fabled Asian juggernaut stalled last year, it was only a matter of time before California would feel Asia's pain.

California's trade with the Far East reached its highwater mark in 1996, when some 51.3 percent of the state's merchandise exports were shipped to the so-called Asian-10 countries (Japan, Korea, China, Taiwan, Hong Kong, Singapore, Thailand, Indonesia, the Philippines and Malaysia). The next year, as the Asian financial crisis began to unfold, the Asian-10 share of California's export trade slipped to 47.3 percent. Then the bottom dropped out. During the first three quarters of 1998, as California exports to the Far East plummeted, the Asian-10 share of California's worldwide export trade shrank to a meager 38.4 percent.

Of course, the economies of the Far East will not remain forever mired. Still, the sudden and wholly unexpected collapse of those dragons and tigers does underscore the dangers of exporter myopia and the resulting sin of banking too heavily on a single neighborhood.

Toward the end of the 1980s came another fit of hype with the interest in trade with former Soviet bloc countries occasioned by the collapse of the V.I. Lenin & Sons Iron Curtain Enterprise. (I like to think of this period as the Fort Ross Fever Epidemic.) As in the case of the Pacific Rim, our location was again said to be fortuitous, with California poised to serve as America's gateway to the fabled but woefully underdeveloped resource riches of Siberia.

The Vladivostok-San Francisco connection has yet to materialize and almost anyone with a stake in the former Soviet Union probably now wishes they had instead driven it through the hearts of some of those conference promoters several years ago. Russia, even before its economy finally imploded last August, never reached the Top 30 export destinations for California goods, and export shipments to other remnants of the former Evil Empire have been even more modest.

The early 1990s saw a great deal of political and editorial interest -- not to mention a brisk business in conferences -- in the North America Free Trade Agreement and, specifically, the prospects of ferreting out new trading opportunities in the far north and the near south.

Today, Mexico ranks behind Japan as California's second largest export market, and Canada is right behind. Together, they buy approximately one- fourth of all California exports.

Yet Mexico was not always (or even recently) seen as a particularly important market for California companies. When challenged at a 1985 meeting of the California World Trade Commission to explain why he had not recommended a state trade office in Mexico City, the San Francisco-based consultant the commission had hired to study the feasibility and desirability of overseas trade offices testily replied: "The [export trade] figures don't justify it."

That was a common impression back then, before statistics tracing export shipments from their state-of-origin to their destination abroad became available. When these figures were first published, for 1987, they revealed just how wrong most people had been about Mexico's value as an export market for California. Far from being inconsequential, it ranked among the state's top customers.

The prospects for even higher volumes of commerce between California and Mexico were dulled by Proposition 187 and Pete Wilson's virtual demonization of all things Mexican. Fortunately, the political climate for increased trade between California and Mexico should improve next month when Gov. Gray Davis and Lt. Gov. Cruz Bustamante travel to Mexico City for an official visit with President Zedillo.

But the tough job for both Davis and Bustamante lies on this side of the border where the most concrete impediment to increased cross-border trade lies directly under the tires of vehicles clogging the roadways of San Diego and Imperial counties. Despite the strenuous pleadings of state Sens. Steve Peace (a San Diego County Democrat) and David Kelley (a Republican whose district encompasses Imperial County), the Wilson administration failed to address the traffic bottlenecks that predictably ensued with the enactment of NAFTA.

And it did not seem to be solely a matter of funding or determining whether CalTrans or private engineers would draw the plans. For CalTrans seemed absolutely paralyzed during Wilson's second term by a fear that any steps it might take to build new thoroughfares or increase the carrying capacity of existing roadways in San Diego and Imperial counties might be interpreted by the Governor's Office as a further inducement to illegal immigration.

Now comes the euro with all its attendant attention. Will this be another case of hype run amok?

Not exactly. With all due respect to Europe, it has been the Rodney Dangerfield of California trade. Even a report on California's overseas markets issued earlier this month by the Federal Reserve Bank of San Francisco opted to divide the world into East Asia, Latin America and Other.

The reality is somewhat different. That part of Other that comprises Europe is a formidable customer. At its heart is the 15-member European Union with a consumer base of 370 million people and a combined gross domestic product of $8.4 trillion. (By comparison, the U.S. has a population of 263 million and a GDP of $8.1 trillion.)

More to the point, seven European countries rank among California's top 20 export destinations. In 1997, California's exports to Europe roughly equaled our exports to the entire Western Hemisphere. Both regions accounted for about $22 billion in export sales or just over one-fifth of the state's worldwide export trade. And whereas California exports to the Far East fell by more than 22 percent during the first nine months of 1998, our exports to the EU rose by 10.6 percent.

Europe is undergoing a remarkable political and economic makeover, of which the introduction of a common currency is an essential ingredient. Quite apart from the introduction of a continental currency, a massive wave of corporate mergers and acquisitions in Europe is knitting together a new economy for the old world. As one popular, if wildly optimistic metaphor has it, the historical pieces of the European jigsaw puzzle are at last coming together into a coherent whole.

Not all EU nations are joining the currency bloc, known colloquially -- and over understandably intense French objections -- as Euroland. Still, the 11 EU countries that have formally adopted the euro alone enjoyed a combined GDP of $6.5 trillion in 1997.

But by any measure, what is taking place in Europe these days is worth getting a little worked up over. Indeed, it would be irresponsible for Californians not to pay close attention to European economic developments, both because we have a lot at stake and because there is so much room for misconstruing trends and entertaining untenable expectations. To some extent, our continuing fixation with the Pacific Rim and NAFTA tends to inoculate us against the virulent strain of Eurohype now engulfing the Eastern seaboard.

But, as recent history has shown, California's international business community is not entirely immune to a beguiling development in some faraway place with a strange-sounding name. This time around, though, business and government leaders -- instead of succumbing to hype -- could do us all a favor by touting the old-fashioned virtues of perspective and patience.

Copyright 1999 By J. A. O'Connell