Category: Economics Essay
Foreign Trade Issues in California’s Economic Growth

Global trade is definitely of utmost significance to any country’s economy let alone that of California. Estimates point out that California exports, as a share of all goods and services produced and exported from the USA have decreased from 11.4% in 2009 to11.2% in 2010. This translates to a total decline from 144,806 Million dollars in 2008 to 143,269 Million during the year 2010. In addition, trade through California's ports has dropped dramatically during the last few years. High-technology sectors such as aircraft, computers, instruments, and electronics represent more than 70% of all products exported by California producers. Processed foods together with agricultural products take second place with about 10% share. Foreign trade is also fundamental to some of California’s main service sectors, like the film industry and tourism. Very scanty data is reported on the state’s imports but the overall U.S. data indicates that California’s import record spans widely from computer and electronic hardware to textiles. This research paper analyses the different causes and effects of foreign trade on California's economy. Conceptually, it is expected that declining exports would hurt California’s economy since trade exports generally increase the output and employment in the manufacturing industries. The paper also investigates beyond the direct effects (such as job creation) and focuses on some collateral effects such as indirect consequences of foreign trade in sectors like the computer and food processing industries.

Problem Statement

Foreign trade plays a very crucial role in the U.S. economic welfare and an even greater role in California's state economy. The state government employs quite a number of trade-related programs aimed at the betterment of California's economy. Moreover, there are state policies in place that should safeguard the improvement or rather the rise in international trade. However, foreign trade especially exports from major California ports is lately on the decline. The state policymakers have overlooked some crucial emerging trends and have failed to develop a more impregnable vision of how to tackle the more dynamic and changing needs brought into existence by the growth in globalization while addressing other challenges confronting the state's economy. This research probes in detail the issues of the decline in the expansion of foreign trade at the output (all goods and services) level and the resulting employment implications in California. It is based on a common understanding of the complexities emanating from rapid globalization and seeks to address several common misinterpretations.

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The main objective of this research paper is to investigate how significant the global trade factor is in the overall growth of California's state economy. The paper seeks to outline how trade impacts on the employment levels and how its variance may shift employment and output rates among a state’s industrial sector. In addition to this, the research also looks into the options that the local firms and policymakers have in the face of very competitive global markets and how trade affects their occupational segmentation and the statistical distribution of their wages and employment modalities. Other specific objectives of this study are:

  • To investigate whether trade flows and fluctuations affect a state’s decisions on production processes and locations.
  • To investigates on the effects of foreign trade on the growth if the general inequality in relative wages and the demand for alternative types of labor.
  • To find out how the state government can assist in the revival of foreign trade and what options policymakers may indulge in for the general good of California’s economy.

Literature Review

The increment of California’s exports in the near past is closely attributed to the economic expansion of a few countries namely China, Canada, and Mexico which is California's main export beneficiary accounting for about a half of the state’s exports. Trade agreements like the NAFTA and the GATT (General Agreement on Tariffs and Trade) have continued to boost both the export prospects for California’s producers and the overall import competition opportunities. The Proposed Asia-Pacific Economic Cooperation Forum (APEC) also envisions a further increase in foreign trade between California and its main trade partners. As a result of the recent decline in aggregate trade (mainly exports) from California, there is an emergence of an impressing transition in the entire trade industry. Some particular industrial sectors are clearly feeling the impact as they have begun experiencing serious job displacements as a result of trade decline, while other fields go through significant shifts in their labor force mix. Due to the expansive nature of the production industry in California, this research seeks to indulge in the role played by foreign trade in economic growth within two major sectors namely the computer and electronics industry and the wider food processing sector. California’s manufacturing industries are sub-segmented into two categories; high-trade-flow and low-trade-flow sectors, depending on whether their respective trade accounts for a significant share of the whole of the U.S.A’s shipments and domestic sales. Industries are further divided into sectors with trade surpluses and those with trade deficits. On the manufacturing side, the computer and electronics industry depicts a high-trade-flow sector that displays a current trade deficit, while the food processing and general agricultural sector depicts of a low-trade-flow sector producing an overall trade surplus.

Computer and Electronics Sector

This sector exhibits a high level of global linkages dependency coupled together with the geographic location of production which plays an integral part of the rates and characteristics of trade growth. Both international sales and imported inputs are fundamental to this area's growth. Most of the key firms in this sector reported a sale decline in their abroad dealings which reduced from two thirds to just a third of their total sales with the majority of products manufactured in the areas where they are sold. Imports also play a vital role in production with computer hardware firms importing about a fifth of their inputs directly from their international suppliers and assembly done in their California premises. The Hardware firms facing little or minimal competition and producing customized products are less likely to produce outside California since global production negatively influences the characteristics of the firm’s labor force. The technical, professional and administrative staff is very reserved to the idea of overseas production.

Food-Processing Industry

Contrast to the computer sector, global linkages offer much less significant incentives to California’s food processing industry. Most of the key players in this sector have been in business for over half a century or longer, and possess quite a number of overseas production facilities and affiliates. Generally, the sales of processed foods have grown slower in the recent past and most of these firms exported only10% or less of their total outputs in 2010 with the exception of citrus and almond producers. Many of these producers faced stiff competition from overseas markets since this industry is highly geographically segmented. Because of California’s food processing peculiar nature of diversifying into local production at international geographical locations, the workforce is limited only to administrative workers, unlike the computer industry. These two major trade industries demonstrate that foreign trade has more potent effects in some industries more than on others. In high-trade-flow sectors, trade elaboration affects both the location of production and the labor force mix. Trade expansion impacts less in low-trade-flow industries either directly or in the short term.

California’s economic-development policy

Foreign trade directly implies on California's economy through five main ways; the exploitation of overseas markets, import competition, importation of raw materials, direct investment to foreign markets by California firms, and foreign firm’s investment in economic activities within California. However, none of these means possesses a simple, one-way positive or negative impact. Expansion of exports generally translates to the addition of jobs and relative tax income to California, but this trend may also lead to firms ultimately outsourcing their production lines abroad to countries where consumption is taking place. Production abroad, in turn, allows for rapid growth which may be inconceivable under the current domestic cost structure. This emerging trend may also provoke the growth of California-based support industries. Imported goods tend to compete with their California produced counterparts since they allow for lower-cost items expenditure by California consumers and lower-cost investments for California producers. Thus the state policymakers respond to these facts and trade opportunities with an understanding of the close correlation of the two. Furthermore, the overall export and import dynamics are among many other elements contributing to the growth of California’s foreign trade. Firms may consider established state programs as mechanisms that address their concerns over exports or imports as a single part of a larger economic and development machinery offered by the state government.

California's trade-related programs

California's trade-related programs are chiefly split into three types: programs directly related to foreign trade, competitiveness, and firm retention. The state programs directly related to foreign trade focus entirely on exports with trade missions, marketing, and foreign-trade offices taking the largest constituent of all export-related activities carried out by the Trade and Commerce Agency. Many of these programs concentrate on education and employment training. The state also tries to tackle competitiveness using the California Economic Strategy Panel which main mandate is to establish a statewide economic-development policy that oversees the support for the evolution of new technologies, and technical support programs to California firms. Finally, California maintains a firm-retention strategy. The core use of this program otherwise known as the "Red Team" or "Team California" is to provide targeted assistance or intervention that encourages intra-state relocation for California firms that are looking at expansion or shifting out of the state.

Conclusion and Recommendations

Issues arising from foreign trade relate widely with issues of the broader economic-development for the state. For example, how to help workers if their work moves overseas, how to train the labor force, and how to keep a portion of production due to the expansion of existing firms. These needs can be addressed from a base of existing programs that are provided by the state. The major priority of setting these programs should be different implications used for expanding global linkage. There has not been an evaluation of effectiveness in foreign trade and related programs even with state documentation of their services, our evaluation through these programs; California is developing a set of tools to use in the context of change related to trade change and economic development goals. The state policymakers should come up with a vision that is strong on how to cope with the needs of growing globalization and challenges of state economy noted earlier. For such a vision, policymakers will be required to implement a multidimensional view of issues related to trade To strengthen the impact of present programs, the following guidelines are recommended;

1. Identify needs and set priorities. The demands facing California are as a result of needs from globalization. The developing of Programs to promote exports, increase competition of firms, preserve California firms, and keep displaced workers should be the state needs for the broader development of the economy.

2. Recognize the complex effects of global linkages. In California, exporters may become producers abroad and foreign investors may become competitors in the markets served by California firms as a result of economic transformation due to global pressure. Companies and workers should be trained and have adequate resources to help them in changing the economy.

3. Anticipate the effects of change and the needs of industries. Expansion of foreign trade by the state and broadening economic development is the most effective if proactive. Long term concerns i.e. constraints in Silicon Valley, growing sites search for agricultural sector expansion such as wine should involve monitoring and analysis of industries success by state agencies.

4. Identify and nurture new locations for expanding California industrial clusters. The state should work with communities and individuals to locate alternative regions in California for expansion, for instance, to expand the new University of California in central valley and emphasis on information technology for coordination of high-tech businesses.

5. Target programs and share the costs of trade assistance. The most costly program of economic development in the state is overseas of foreign-trade offices and Missions. To monitor and evaluate is particularly important for these programs. Information absence from such analysis would lead to the suggestion that resources of the state will push ahead if programs concentrate with businesses which have a history of production that is successful to the market and if a portion of costs is recouped from clients who are assisted by the state programs and are successful. California is privileged in having very many economic development related resources at the state level, an economy that shows resiliency inability to recover out of severe structural changes. In the case of foreign trade, what left is for policymakers to aim at balancing and augmenting resources and also coordinating with the federal and the local programs to meet the needs created by increasing trade.

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