Ross DeVol
When currency traders attacked the little-known baht of Thailand more than a year ago, few firms or households in California perceived any possible impact on their businesses or lives. Many had heard of “globalization,” but did not fully comprehend its implications.
Californians will soon find out just how much events across the Pacific affect them, for the financial earthquake in Asia is sending an economic tsunami toward California and the entire West Coast that is expected to arrive later this year.
When it arrives, economic growth will be significantly reduced throughout the state. The severe recessions unfolding in Asia, combined with the high value of the dollar against their currencies, will cause a decline in our exports to Asia and a rise in imports from Asia.
Up to now, globalization has been a largely positive force. It has fostered closer economic integration particularly with the Asian economies, in the case of California.
Growing trade with Asia has been a major impetus in Southern California’s economic recovery from its most severe recession since the 1930s. California’s trade with the outside world supports thousands of manufacturing, transportation, and wholesale jobs. Milken Institute research shows that foreign trade accounts for approximately one-quarter of California’s output.
Nevertheless, growing international linkages have made us more susceptible to economic and financial shocks originating offshore. And trade is now becoming a drag on the economy, courtesy of the evolving Asian crisis.
California and its metropolitan areas are primarily exposed to economic events in Asia through the trade of goods and services. Over the past decade, California’s trade with the Asian-10 countries (China, Hong Kong, Indonesia, Japan, Malaysia, Philippines, South Korea, Singapore, Taiwan, and Thailand) rose much faster than it did for the United States as a whole. In 1997, exports of goods to the Asian-10 accounted for 48 percent of California’s total exports.
Viewed by another measure, California’s exports to the Asian-10 represented 4.8 percent of Gross State Product (GSP). Adding in service-sector sales to the Asian-10 brings California’s total exports as a percentage of GSP to 7 percent.
Given that Asia has invested heavily in capital equipment and has aggressively sought technology, it is no surprise that California exports a disproportionate share of high-tech capital goods to Asia. Four high-tech categories electronic and electrical equipment; industrial machinery and computers; transportation equipment; and instruments and related products accounted for 75 percent of California’s total exports to the Asian-10 in 1997.
For the rest of the United States, these categories represented only 48 percent of total exports to the Asian-10.
Regions of the state will be disproportionately affected due to their varying degrees of economic integration with Asia. Especially hard hit will be the San Jose metropolitan area.
Most of San Jose’s exports are high-tech capital goods. Semiconductor capital equipment manufacturers, such as Applied Materials, reportedly receive up to 30 percent of their revenues from Asia. Asian firms have been aggressively purchasing cutting-edge foundry capacity, equipment that renders high profit margins for these Silicon Valley-based firms. Sales of wireless telecommunications equipment, much of it manufactured in the San Jose area, have been strong in Asia.
Oakland and San Francisco also have high export exposure to the Asian-10. The San Francisco Bay Area exported $22 billion worth of goods in 1996, representing 48.9 percent of its total exports and 11.7 percent of its personal income.
The Los Angeles-Long Beach metropolitan area ships 51.6 percent of its exports to the Asian-10, but the high-tech share is below the state average. Nevertheless, at 5.6 percent of personal income, Asian-10 exports make up a significant share of the local economy. When service-sector exports are included, Los Angeles’ exposure to Asia is even larger.
Goods exports dominate state and national trade with the Asian-10, but service-sector transactions are growing in importance.
Travel and tourism spending by visitors from these nations in California was $9.8 billion in 1996, more than 35 percent of their total spending in the United States. Japanese visitors to California spent the greatest amount: $2,000 per person while in the state. California had service-sector sales to the Asian-10 of $20.2 billion in 1996.
Receipts from Asia on some Hollywood films account for between 10 percent and 15 percent of their total. Other forms of California-produced entertainment, including multimedia, have witnessed strong sales growth in Asia. Asian purchases of business services, from engineering services to advertising, comprise large portions of California’s total wage disbursements in this sector.
California’s economy is resilient and may survive this Asian tsunami without serious damage. Even though Los Angeles-Long Beach has greater service-sector export exposure to Asia than Northern California, it benefits from higher imports from Asia coming through its ports, helping to mitigate the negative impact of weaker exports to Asia.
The Asian crisis, however, does alter the risk profile for our economy. By reviewing the close economic and financial interaction of California and its metro areas with Asia, we can conclude with a high level of confidence that economic growth in the state will be substantially lower than in the absence of an Asian crisis.
And despite the economic dexterity of Silicon Valley and the rest of the Bay Area, exposure to Asia will at a minimum cause a significant reduction in their economic growth over the next several years.
Ross DeVol is director of regional studies at the Milken Institute in Santa Monica.
