Reassessing State Government's Role in International Commerce


Jock O'Connell

(This article originally appeared in the Sacramento Bee Forum section on Sunday, February 24, 1991.)

Where Curzon Street turns north to meet Berkeley Square in the heart of London's elegant Mayfair district lies the headquarters of MI-5, the British counterintelligence agency made famous by innumerable espionage thrillers. As with so many other appurtenances of the Cold War, MI-5 now faces an uncertain future. Although for entirely different reasons, much the same may be said of the tenant of another building just a few hundred yards down Curzon Street in the direction of Hyde Park -- the State of California's European Trade and Investment Office.

Open for nearly four years now, California's outpost in the British capital, along with its sister facilities in Tokyo, Hong Kong, Mexico City and Frankfurt, have come to symbolize California's recognition of the growing importance of international commerce. When George Deukmejian became Governor in January 1983, the state was spending just $500,000 on trade promotion activities. Over the next eight years, this modest effort metastasized into a bureaucratic edifice encompassing no fewer than five state agencies and a financial commitment of $17.1 million in the current fiscal year.

But as Governor Wilson and the Legislature wrestle with the state's parlous financial condition, the future of California's international programs is by no means clear. To be sure, Wilson is proposing to raise the overall trade promotion budget, including a $407,000 augmentation for the overseas offices. Nevertheless, at a time when state spending on schools, social welfare, criminal justice, health care and a host of other essential government services face debilitating cuts, pointed questions are likely to be raised as to why programs designed to help profitable companies find new markets should remain unscathed.

There is no doubt that state government has a worthwhile role to play in asserting California's commercial interests beyond the water's edge. Once merely exotic, international trade has become an integral part of this state's economy. In just the last three years, the Golden State's export trade has risen by an astonishing 70 percent. Meanwhile, foreign direct investment in the state has surpassed the $50 billion level, and foreign-owned businesses employ about 350,000 Californians. All in all, some one in ten jobs in this state are directly linked to world trade.

As apparent as the rising significance of our international commerce is the fact that at no other juncture in recent history has the need for a coherent plan for advancing California's interests in the global economy been as manifest as it is today. Early December's breakdown of the General Agreement on Tariffs and Trade (GATT) negotiations and the blossoming of regional trading blocs threaten to undermine the multilateral trading system that has served as a powerful catalyst for economic expansion since World War II. At the same time, moves toward easing barriers to U.S.-Mexico trade and evidence of fresh skepticism within the Bush Administration's about the virtues of foreign investment in the United States pose new challenges for America's foremost trading state and its primary recipient of foreign investment capital.

Unfortunately, while the need for an aggressive state government role may be evident, it is not at all clear that state officials truly appreciate what this role should entail. Judging by their actions, most of them seem to assume that the best way to provide for the international competitiveness of the California economy is to fund bigger foreign trade programs and open more overseas offices.

This represents a regrettably myopic vision of what the state ought to be doing in this vital policy area. The undeniable fact is that state government's most important role in ensuring the ability of California industry to compete successfully in the global market has nothing to do with organizing trade fairs or alerting companies to export opportunities. For no matter how useful export promotion activities may be, they are no substitute for sustained public investment in schools, infrastructure, economic adjustment assistance programs and other projects geared to nurturing the strengths of the California economy.

As a recent study by the Federal Reserve Bank of Boston concluded: "Those states that have invested more in infrastructure tend to have greater output, more private investment, and more employment growth." Likewise, in his exhaustive 1990 work, The Competitive Advantage of Nations, the Harvard Business School's Michael Porter demonstrates how investments in education, worker training programs, and infrastructure far and away represent state government's most essential function in economic affairs.

Sadly, though, the basic factors underlying California's industrial prowess have uniformly deteriorated in the last decade. Public schools seem less able to produce graduates able to function in modern industry. A once vaunted transportation system is routinely strained beyond capacity, and other critical elements of the state's infrastructure have grown decrepit. Without question, public officials have flunked in their efforts to nourish the roots of California's economic dynamism, contriving instead to act as though the state had somehow gone broke amidst the longest period of uninterrupted economic growth in this century. Now that the need for austerity is finally real, the situation can hardly be expected to improve.

Still, the arrival of a new governor during a fiscal crisis of unprecedented magnitude presents a useful opportunity not just for reassessing the programs set up by previous administrations but for devising a bold, new strategy for ensuring that California industry will remain competitive in the new global market. Part of this strategy will require the implementation of comprehensive economic development policies that are often discussed but seldom adopted. Part of it will involve a dispassionate review of the various international programs the state has already deployed.

So what about these programs? What do they really achieve? Are they worth keeping?

The unvarnished truth is that the "international" bureaucracy which was cobbled together during George Deukmejian's eight years in office is no model of administrative excellence. Instead, responsibility is fragmented and authority compartmentalized in a system which lacks clear direction and a unifying plan of action.

Although state law designates the California State World Trade Commission as the lead agency in dealing with international trade matters, the Commission has had little, if any, influence over the international programs run by the Department of Commerce, the Department of Food and Agriculture, the Office of California-Mexico Relations and the California Energy Commission. After nearly four years of ignoring the need for an administrative framework to bring coherence to the growing number of disparate international programs being created through legislation or bureaucratic initiative, the Governor's Office in late 1986 belatedly assumed responsibility for orchestrating the activities of the state-based programs and the overseas offices. But in an act of almost malicious indifference to the need for effective management, Deukmejian assigned the task of overseeing all of these activities to one of his speech writers. (By contrast, Pete Wilson has propitiously entrusted this job to someone with previous trade policy experience.)

From a macroeconomic viewpoint, adoption of the "Zero Option" -- termination of the state's export promotion programs -- would not have a statistically significant effect on California's $45 billion a year merchandise export trade. Even accepting the most generous estimates of program managers, the value of overseas shipments stimulated by these programs represent shares of only one-tenth of one percent of our total export trade. Half-penny shifts in the value of the dollar have a much more dramatic impact. Similarly, state government's efforts to lure foreign investors have had no statistically appreciable impact on the hundreds of millions of dollars in foreign capital flowing into California each year.

To be fair, though, it is not entirely reasonable to expect the state's relatively modest overseas programs to have a substantial influence on the international commerce of the world's eighth largest economy. A more appropriate question for the Wilson Administration and the Legislature may be whether these programs pay their own way, so to speak, by spurring enough new economic activity to provide taxpayers a reasonable return on their investment. Unhappily, there is no straightforward answer since the economic benefits imparted by these programs generally resist measurement.

To what extent, for example, did an appointment arranged by the state's London office result in an export sale? How much did a briefing by an Office of Foreign Investment staffer figure into a Canadian company's decision to build a factory here? To what degree was a French couple persuaded to holiday in California by the Office of Tourism brochure they read? How critical was the trade lead provided by the World Trade Commission's Export Development Office in landing a new export contract?

As these questions suggest, the problem of gauging the results of such "interventions" is really one of apportioning credit for positive outcomes. There are no ready formulas for doing so. There is one notable exception, however. The state's Export Finance Office makes a convincing case that, since 1985, it has supported an average of $50 million a year in export sales by guaranteeing commercial loans to exporters. Absent such guarantees, most of these foreign sales would arguably not have been made. Similar claims on behalf of other programs are generally much less convincing. Some are based on surveys characterized by outlandish assumptions, ambiguous questions and untenable conclusions, while others rely on testimonial letters that typically gush with insincerity.

Nonetheless, a pronounced shift in the export behavior of U.S. industry provides a new and particularly compelling rationale for aggressive export promotion activities by state agencies. Historically, our largest corporations accounted for the vast bulk of our export shipments and export-related jobs. Of late, though, a number of considerations, including fears that more invidious types of trade barriers may be erected in Western Europe and parts of Asia, have driven many such firms to establish manufacturing capabilities nearer to their overseas markets.

What this implies, of course, is that more of the burden for generating export-related jobs will likely pass to those smaller domestic firms now looking to establish foreign markets for their goods and services. Assistance to smaller companies in industries with high export potential could thus have a salutary effect on the state's daunting job creation needs. With a population that continues to grow by 2,200 people per day, the modest goal of keeping the state's unemployment rate under 6 percent will require that California industry spawn no less than 320,000 net new jobs annually for the foreseeable future.

Given the enormity of this challenge, most existing trade programs should be retained. The way they do business, however, needs to be altered dramatically.

In evaluating current export promotion efforts, budget writers should insist that the programs be more accountable to the changing needs of the state's international business community. One means for achieving this would be to charge fees for certain services. Apart from defraying some costs, fees would certainly help identify those services that are actually valued by exporters.

Gross anomalies in program budgeting should also be reviewed. For example, is there any reason other than the farm community's political clout in Sacramento to explain why the state's Agricultural Export Program receives approximately 40 percent of all state funds available for export promotion, even though farm exports account for little more than 10 percent of California's total export trade?

Beyond that, serious consideration should be given to instituting a payback scheme whereby the state treasury would reap a share of any profits earned as a result of overseas marketing programs taxpayers have helped fund. Farmers, high-tech entrepreneurs and other vocal advocates of the free enterprise system have long griped that government should be run in a more business-like manner. Perhaps now it is time to test the sincerity of their sentiments.

In deciding the fate of the various existing programs, a key question ought to be whether government has any right operating programs best left to the private sector. The unique virtue of the Export Finance Program is that it addresses a real deficiency in the market place -- the reluctance of banks to make loans to cover export sales by smaller companies. By comparison, the widely applauded Export Development Office, which disseminates trade leads and coordinates the participation of California firms in overseas trade shows, is an excellent candidate for privatization. After all, the companies this program aids are by no means needy.

As for the overseas offices, it would be prudent to overhaul the mandate under which these facilities function.

Since the first one was opened in Tokyo in January 1987, the overseas offices have been expected to aid any and all California businesses in finding new markets overseas. In a sense, they are run largely as retail establishments serving the needs of an overwhelming number of customers. The problem, however, is that assistance to individual firms requires more than a passing familiarity with both the exporter's product line and foreign market conditions.

With major staffing increases out of the question, the Wilson Administration has a simple choice. It can continue with an inherently wasteful catch-as-catch-can approach or it can elect to run these facilities more as wholesale establishments, purveying a narrower range of services to carefully targeted industrial sectors rather than individual firms. Freed of the obligation of being nanny to our export community's every waif and wanderer, these outposts could be transformed into superb facilities for gathering valuable commercial intelligence for California industry. With a combined staff of just eighteen state employees dispersed in five locations on three continents, is there any real choice?

Regardless of the improvements that may be made to the state's current programs, the truly major issues of world trade can be addressed only at the federal level. Despite their growing powers, states cannot negotiate agreements with other nations or enter into formal treaties. And even mega-states like California lack the federal government's power to influence trade flows and foreign investment behavior. Accordingly, states wishing to safeguard their sometimes distinctive interests in international trade must aggressively argue their positions in the nation's capital.

How well does California fare in this regard?

The state's congressional delegation rarely displays any talent for forging a common California position on vital issues, trade or otherwise. So the responsibility for articulating California's views on trade policy questions has fallen largely to the California State World Trade Commission, which maintains a staffer in Washington, D.C. to lobby Congress and federal agencies on behalf of California's trade community.

Whether the Commission will continue to play this policy advocacy role is an open question, however. During a visit to Washington earlier this month, Gov. Wilson announced that he and the ranking members of the state's congressional delegation will establish a bipartisan, privately-funded California Institute to work for California's interests at the federal level. The idea of having such an organization to promote California's objectives in the face of considerable anti-California sentiment in Congress has been kicking around Capitol Hill for some time. Although there is no reason to expect that a California Institute will be anymore successful in finding common ground than the congressional delegation itself, the scheme evidently appeals to Wilson.

Yet, although the California Institute will reportedly be expressing California's concerns about the pending free trade negotiations with Mexico, no one at the World Trade Commission seems to know how the Commission will coordinate with the Institute in developing California's position on the talks with Mexico or any other trade matters. Given its "federal" charter, it is difficult to believe that the Institute will take policy direction from a state agency, even though the Commission possesses the authority under state law to define California's position on trade issues.

While the relationship between the California Institute and the World Trade Commission is being sorted out, officials may also want to examine how California's official views on major trade questions are formulated. The current, semi-secretive method by which the World Trade Commission drafts its policy papers needs to be made more transparent and more broadly participatory. Otherwise, "special interests" may be able to supplement their own direct lobbying efforts by hijacking this rather potent channel for influencing federal policy. For the fact is that, even though the Commission's policy statements are presented as the official position of the State of California, a host of interested parties, including the Legislature, may never have been consulted.

Nowhere is the power of special interests more evident than when it comes to farm trade issues. In this area, the Commission's views are decisively shaped by a select group of agribusiness executives who attend a by-invitation-only retreat convened early each year under the Commission's auspices in the foothill town of Murphys. Conspicuously uninvited from this meeting are representatives of farm labor groups, environmental organizations, food retailers, consumer advocates or other parties with potentially divergent views on agricultural trade issues.

Clarifying and democratizing the policy-making process would be a major improvement. But California needs to do much more if it is to ensure that its experience with international commerce remains a happy one.

New and largely ominous developments in the world trading system emphasize the need for a comprehensive state role in advancing California's interests in the global economy. Simply fielding a few ill-coordinated programs will hardly suffice. California's trade promotion programs must be run less as government bureaucracies and more as businesses. More fundamentally, though, public officials must understand that the horizon of policy-making in state government does not end at the water's edge. As Pete Wilson acknowledged in his inaugural address last month: "No longer are national boundaries to be considered as natural barriers to the flow of commerce and culture." Whether his Administration and the Legislature will act accordingly in giving California the tools it requires to respond to the challenges of the new global economy remains to be seen.

Copyright (c) 1991 by J. A. O'Connell

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