Briefing Report: California's Reputation as a Leader in the Worldwide Economy Slips

It's Okay to Fall, Just Get Back Up
Wednesday, February 8, 2012


It’s one of life’s most important lessons: slip, fall, get back up, and move on to greater things.  Earlier this year, the Center for the Continuing Study of the California Economy announced that California has slipped from eighth to ninth place in worldwide economic rankings.  This fall down the list of the world's most competitive economies is not surprising given the instability in the state over the past several years.  However, now that California's unemployment rate is dropping, job generation is growing, and home sales are beginning to stabilize, it is time for California to embrace this life lesson as it attempts to get back on track and retain its place on the list of the World’s Top Economies.

An important piece to pulling the California economy out of its funk lies in global trade.  This briefing report will look at the important role trade and trade promotion activities within the state play in creating and sustaining jobs in California, establishing global relationships, and increasing the range of goods that are available to consumers.

The California Landscape

California is the ninth largest economy in the world, with a gross domestic product of over $1.9 trillion.

Top World Economies
Center for the Continuing Study of the California Economy.  2012.
“Top World Economies in 2010 [Chart].”

The state was once as high as seventh but was later surpassed by Italy, which remains seventh, just ahead of Brazil and just behind Great Britain.[1]   California's economy is the largest of any state, with Texas second at $1.2 trillion, based on data from the federal Bureau of Economic Analysis.  They're followed by New York, Florida, and Illinois.

California’s significance in the global marketplace results from a variety of factors: its strategic west coast location, providing direct access to growing markets in Asia; its diverse regional economies; its large, ethnically diverse population, representing both a ready workforce and significant consumer base; its access to a wide variety of venture and other private capital; its broad base of small and medium-sized businesses; and its culture of innovation and entrepreneurship, particularly in advanced technologies.

Moreover, the state's economy is not dominated by a single industry; rather it is comprised of a variety of industry clusters throughout the state.

CA Major Sector Jobs
Center for the Continuing Study of the California Economy.
September 13, 2011.  “Outlook for the California Economy.”

California is among the largest exporters in the U.S. and its largest industry sectors include government, retail and wholesale trade, manufacturing, educational and health services, professional, technical and scientific services, as well as leisure and hospitality.

While agriculture is no longer among the top three industry sectors in California, it is still a significant component of the state's economy.  In 2010, total cash receipts from California agricultural products totaled $37.5 billion.[2]

Mexico is California's top trading partner, receiving $21 billion in goods in 2010.  The state's second and third largest trading partners are Canada and China with $16.1 billion and $12.4 billion, respectively.  Other top-ranking export destinations include Japan, South Korea, Hong Kong, Taiwan, Germany, the United Kingdom, the Netherlands, Singapore, and India.[3]

International Trade Transformation Timeline

Like most of California's economic development policy and programs, international trade has gone through a variety of transformations since the first trade programs were created in 1977.  A brief timeline of California's trade programs is discussed below:

California's formal international trade programs commenced in 1977 with the creation of the Office of International Trade, within the newly formed Department of Economic and Business Development (DEBD).  The DEBD was the predecessor of California's Department of Commerce (DOC), which would later become the Trade and Commerce Agency (TCA), which was subsequently renamed the Technology, Trade and Commerce Agency (TTCA) prior to its dissolution in 2003.

In 1982, Governor Jerry Brown signed AB 3757 (Brown) creating the California World Trade Commission (CWTC).  The CWTC would, over time, become responsible for the California Export Finance Office, which provided export guarantees to banks as security for small businesses and the Office of Export Development, which organized trade shows and assisted in matching California firms with foreign trade partners.

In 1984, AB 3313 (Moore) required a study of the feasibility of opening foreign trade offices.  Mentor International received the contract for the feasibility study, which included an outline of site selection procedures for potential foreign trade offices.  In the same year, SB 1196 (Vuich) established California's Export Finance Program.  In 1986, the CWTC established a Trade Representative's Office in Washington D.C.

Amidst ongoing criticisms of disparate international trade programs, Governor Pete Wilson, in 1992, signed SB 1909 (Vuich) creating the TCA by merging the DOC, including the Office of Foreign Investment, with the CWTC.  The TCA became responsible for California's export finance and development offices, formerly located within the CWTC, and California's foreign trade offices, formerly located within the Governor's office.

In January 2001, TCA was renamed Technology, Trade and Commerce Agency to reflect the growing importance of technology to the California economy.  Soon after, in the Budget Act of 2003-2004, TTCA was dissolved and many of its duties and programs were assigned to other agencies.  All 12 of California's foreign trade and investment offices were eliminated.

Federal Trade Agreements

In addition to the state programs, there are also trade efforts occurring on the federal level.  Created in 1962 by Executive Order as an agency within the Executive Office of the President, the United States Trade Representative (USTR) negotiates directly with foreign governments on internal trade agreements.  The USTR consults states on provisions of a trade agreement through direct consultation with a state Governor, a state point of contact and Intergovernmental Policy Advisory Committee.

The U.S. has trade agreements in force with 17 countries including Australia, Bahrain, Canada, Chile, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Jordan, Mexico, Morocco, Nicaragua, Oman, Peru, and Singapore.  President Obama signed free trade agreements with Colombia, Korea, and Panama on October 21, 2011, but the agreements have not been implemented.[4]

In addition to trade agreements, the U.S. has a number of trade preference programs that allow special access to U.S. markets for countries that are considered developing markets and/or where the U.S. wants to develop a stronger relationship.  Panama and Peru currently have trade promotion agreements with the U.S.  The U.S. is also in negotiations for a regional, Asia-Pacific trade agreement, known as the Trans-Pacific Partnership Agreement with the objective of shaping a high-standard, broad-based regional pact. [5]

Moving California Forward

Trade is critical to California's prosperity - fueling economic growth, supporting and creating jobs, raising living standards for the poor, and providing Californians with affordable goods and services.  For further proof, take a look at the numbers provided by the USTR:

Exports Support Jobs for California Workers: Export-supported jobs linked to manufacturing account for an estimated 5.2 percent of California's total private-sector employment.  Nearly one-quarter (22.9 percent) of all manufacturing workers in California depend on exports for their jobs (2009 data, latest available).

Exports Sustain Thousands of California Businesses: A total of 59,998 companies exported goods from California locations in 2008.  Of those, 57,461 (96 percent) were small and medium-sized enterprises with fewer than 500 employees.  Small and medium-sized firms generated more than two-fifths (44 percent) of California's total exports of merchandise in 2008.  This was the seventh highest percentage among the states.

Foreign Investment Creates Jobs in California: In 2008, foreign-controlled companies employed 594,100 California workers.  Major sources of foreign investment in California in 2008 included Japan, the United Kingdom, France, and Germany.  Foreign investment in California was responsible for 4.6 percent of the state's total private-industry employment in 2008. [6]

Trade policy will not be effective without broad support from elected officials and industry leaders.  For years California Republicans have introduced measures urging Congress to ratify free trade agreements with Korea and Colombia (AJR 55- Villines, 2008; SJR 29- Ackerman, 2008; and SJR 4- Harman, 2011) only to have the measures get stuck in policy committee.  In each case, despite being heavily supported by the business community, California Democrats sided with labor organizers who expressed concerns over violence in the countries.  Fortunately, Congressional Democrats and President Obama realized that eliminating tariffs and other trade barriers will provide a major boost to our exports and to the economy, and they approved both trade agreements.

In addition, Republicans continue to stand behind efforts to coordinate international trade marketing and promotion efforts, and to establish a comprehensive state economic strategy.  At the same time, Republicans have been trying to balance the notion that there is no "one size fits all" set of economic policies for this state because the California economy is a collection of distinct industries and regions.  The policies to support agriculture are different from the needs of the entertainment/tourism sector or the ports.  State government leaders need to engage with leaders in each sector as part of developing a state economic strategy to make California competitive in the global market.  The less competitive California is, the less able it will be to benefit from trade, and the more likely the California economy will continue down the path of falling like Lucifer, never to hope again.[7]

For more information on this report or other Business & Professions issues, contact Amber Alexander, Senate Republican Office of Policy at 916/651-1501.

[1] “California slips to No. 9 in worldwide economic rankings.”  Sacramento Bee.  January 11, 2012.
[2] California Department of Food and Agriculture.  “California Agricultural Production Statistics.”
[3] California Chamber of Commerce.  “Trade Statistics.”
[4] Office of the United States Trade Representative.  “Free Trade Agreements”
[5] ibid.
[6] Office of the United States Trade Representative.  “State Specific Benefits of Trade”
[7] Shakespeare, William.  Henry VIII, act 3, scene 2, line35072.