Pacific Rim Trade: Is There a There There?

By Jock O'Connell

(This article was originally published in the Oakland Tribune on January 22, 1988. Slightly different versions subsequently appeared in the Los Angeles Times on July 10, 1988; the Sacramento Bee on August 14, 1988; the San Jose Mercury News on September 20, 1988; the Los Angeles Herald Examiner on September 22, 1988; and the San Diego Tribune on October 17, 1988.)

Gertrude Stein once referred to her hometown as a place where "there's no there there". Perhaps it's time to entertain the same thought about the Pacific Rim as a market for our goods and services.

Before posing some critical questions about the prospects for further growth in U.S. exports to the Far East, let's first examine the rather more optimistic phenomenon of Pacific Mania. We've all seen its manifestations. Newspapers and business magazines now devote entire sections to the Pacific Rim, public officials routinely invoke the commercial bonanzas supposedly at hand in the region, and scarcely a week passes without yet another conference celebrating the advent of the Pacific Century. And nowhere is this enthusiasm more unbridled than here in California, where we seem positively absorbed in congratulating ourselves on being the nation's principal gateway to the Pacific, a region evidently regarded by many as the promised land -- or at least that part of it zoned for commercial use.

Unfortunately, much of the allure of the Pacific is based on an odd faith in ambiguous historical trends and a flagrant misuse of official trade statistics.

For example, Pacific Rimmers, anxious to demonstrate the latest, ineluctable stage of the world's westward progression, are wont to emphasize that more U.S. two-way trade now crosses the Pacific than the Atlantic. But given the continued preponderance of imports over exports, that bit of news is nothing to applaud. The irritating fact that more U.S. exports are still shipped across the Atlantic typically goes unacknowledged. Why then do we remain so enthralled with the Pacific Rim? And why do we in California seem particularly susceptible to the Orient's lure?

Part of the blame can be attributed to a widespread misreading of U.S. government trade figures. As a recent study I co-authored for the state World Trade Commission pointed out, there are no export data which trace the movement of goods from the state in which they were produced to their final destination abroad. Federal officials do, however, publish statistics on exports leaving the U.S. through each of the nation's 42 customs districts, three of which encompass California. Regrettably, the crucial distinction between exports departing the U.S. via California's customs districts and exports by California firms is often blurred, with the former being incorrectly passed off as the latter.

Since geography and the logistics of transportation make California the nation's chief gateway to the Pacific, it is hardly surprising that most of the merchandise shipped through California's air and sea ports are bound for the Far East. The casual observer, though, is frequently left with the impression that the Far East is the only significant export market for California industry.

For example, it's commonly reported that more than two-thirds of California's merchandise exports go to the Far East. In fact, the Far East is the destination of two-thirds of all U.S. exports shipped through California, not just goods that were manufactured or grown here in the Golden State. By contrast, the World Trade Commission study found that no more than 46% of shipments handled by California's exporters in 1986 crossed the Pacific. Europe, cavalierly dismissed by most Pacific Rimmers, absorbed over 31% of the state's exports, while Canada took nearly 9%.

Recently compiled export data for 1987 confirm these findings. Indeed, in what probably constitutes a very rude surprise for Pacific Rim enthusiasts, only one Asian nation ranked among the top five importers of California goods in 1987. That was Japan. The others, in order of importance, were Canada, the United Kingdom, Mexico and West Germany. Equally intriguing is that California exporters seem to do a greater share of their business with Europe than do U.S. exporters as a whole. While European nations took 31.9% of all California exports in 1987, they bought only 28.7% of all U.S. exports.

Felonious misuse of export statistics is not the only reason for being skeptical about glowing forecasts for expanded exports to the Pacific Rim. First of all, the Pacific is hardly a hunting preserve for American firms; it's clearly the most competitive marketplace in the world. Yet, the Pacific is still popularly seen as America's mare nostrum, with California as the frontline state. For reasons normally left unclear, it is widely assumed that American businesses will automatically reap enormous benefits in the markets of the Far East. That's why most Pacific Rim conferences tend to resemble nothing so much as the reading of a rich uncle's will, with all the heirs righteously expecting to be rewarded with a pile of loot, not for reasons of merit but merely out of some claim of kinship.

Reality is less encouraging. If, as Governor Deukmejian said in his State of the State speech last January, "the sun is now rising in the West", then the day is dawning over a region not generally praised for its hospitality to American goods and services. Perhaps more importantly, though, near-term economic and political trends do not support optimistic forecasts for U.S. exports to the region. The principal nations of the Far East have export-driven economies that have relied heavily on strong U.S. demand. In their efforts to moderate this dependency, Japan and the region's Newly Industrialized Countries (NICs) are busily diversifying their export markets and stimulating their domestic economies to absorb more of their industrial output.

Whether more U.S. firms will benefit from such shifts is uncertain. Nations undergoing the economic adjustments involved in such massive economic restructuring have ample incentives to discourage imports, something many Far East nations already do quite skillfully. Moreover, the emergence of democratic institutions in Taiwan and South Korea, by giving greater voice to domestic interests, will certainly make it more difficult for their governments to accede readily to American demands for greater access to domestic markets. To a large extent, growing domestic demand is likely to be met by redeploying the industrial capacity formerly devoted to exports. There is also apt to be a substantial increase in the volume of intra-Asian trade.

Some may object that, while the short term is clouded, long term prospects for increased U.S. exports to the Far East are excellent. Unfortunately, the truth is we may never be in a position to know. Absent the willingness to sustain a potentially lengthy commitment needed to forge lasting commercial relationships, U.S. firms may not be there in the long term to reap the harvest of opportunities in Pacific Rim commerce.

There are other, more generic constraints on our potential for exploiting emerging markets in the Far East as well as elsewhere, constraints which serve to counteract the benefits of a cheaper dollar. For example, many U.S. exporters are now producing at or near capacity and therefore are in no position to expand their export business. This is especially true in the areas of paper products and chemicals which have been among our export leaders lately.

Somewhat less evident is the fact that our ability to unleash the hitherto untapped export capabilities of small and medium-sized American firms is being stymied by an overall decline in support services. Federal budget cuts have replaced experienced personnel with buoyant slogans, and despite innovative programs instituted by the Export-Import Bank and the State of California, there is a dreadful lack of export financing for small and medium-sized businesses.

In any case, those who anticipate vastly increased export opportunities may be dismayed. Given generally cheaper manufacturing costs and generally less restrictive regulatory environments abroad, large U.S. companies are likely to service new Asian markets from Asian manufacturing bases.

I do not want to suggest that the Pacific Rim does not offer profitable possibilities for American companies. My point is that we should approach Pacific Rim trade with a more reasonable set of expectations. Rhetoric notwithstanding, this is not manifest destiny with water wings.

The danger of fostering inordinately optimistic hopes on the part of U.S. businesses is that the inevitable disappointments may well spur a backlash resulting in a new and more virulent wave of protectionism. At the same time, Pacific Mania does a profound disservice to potential exporters by implying there are no important markets beyond the Pacific Rim. Given the European Community's push toward full economic integration and the impending Free Trade Agreement with Canada, export opportunities outside of the Pacific appear more attractive than ever.

Copyright (c) 1988 by J. A. O'Connell

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