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April 5, 2013
Jock O'Connell: On the eve of Brown's trip to China: Revaluing California's export trade

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(April 5 -- By Jock O'Connell, Special to The Bee)

Last year, according to the U.S. Census Bureau's Foreign Trade Division, California's merchandise export trade was valued at somewhere between $124.6 billion and $164.4 billion. It was either up 1.8 percent over the preceding year or down by 6.2 percent.

Close enough for government work?

With Gov. Jerry Brown embarking on a trade mission to China on Monday, there's likely to be a flurry of official announcements over the next few days attesting to how vital exporting is to California's economy.

So it seems a propitious time to parse the latest foreign trade numbers to see how well or, as it turns out, how poorly California is actually doing.

Let's start with the most commonly cited state export number, the one embraced by the California Chamber of Commerce and routinely reported in newspapers. For 2012, that number was $161.7 billion.

It's derived from the Census Bureau's Origin of Movement export data series, and there are two irksome things you should know about it.

First, it isn't a very reliable indicator of which state actually produced the goods being exported. Too often, the point-of-origin reported on export documents turns out to be a warehouse near a major port or border crossing. So gateway states such as California, Texas and New York tend to get credit for exports made elsewhere. Exactly how much extra credit they receive is open to conjecture since the movement of goods within the United States goes largely unmonitored.

The other thing to know about state export data is that they include goods that weren't even made in this country. Nationally, almost 13 percent of all merchandise exports are classified as "re-exports" or goods that were earlier imported and then shipped abroad without, by official definition, any material change. But in California's case, re-exports have been the fastest growing segment of the state's merchandise export trade for several years. In 1996, they represented more than 11 percent of total exports. Last year, they accounted for nearly 23 percent.

What's important is that re-exports have a virtually negligible economic impact, especially in terms of employment. They may support a tiny number of jobs in the transportation and warehousing sectors and they may amply reward the traders who arrange these deals, but that is about it.

So to get a more accurate sense of the role exports actually play in our economy, we should subtract re-exports from the state's export totals and focus on what's left, the so-called "domestic" exports.

Alas, doing so reveals a couple of distressing facts.

First, in real (i.e., inflation-adjusted) terms we're currently exporting about 8 percent less now than we were in 2000.

Even worse, the value of our exports of manufactured goods last year was 16 percent lower in real terms than it was a dozen years earlier. In light of the fact that U.S.-manufactured exports have risen by 35 percent over that same period, that falloff in exports of goods manufactured here is especially disconcerting.

So what happened to California's manufacturing sector?

The popular story is that it imploded following the collapse of the dot.com bubble in late 2000. A lot of California manufacturers went out of business. Many of those that survived shifted production overseas or to other states. Manufacturing employment levels plummeted rapidly so that today there are about 650,000 fewer manufacturing jobs in California than there were at the end of 2000.

But there's a paradox. Far from declining, the value of manufacturing output in California has expanded nearly 50 percent in real terms since 2000, according to the U.S. Bureau of Economic Analysis. So it would appear that the past decade or so hasn't really seen the demise of manufacturing in California as many have argued. Presumably, we have just gotten very good at churning things out with fewer workers.

But if the manufacturing sector is evidently doing so well, why have manufactured exports declined?

One partial explanation is leakage. California manufacturers have moved away from making consumer goods shipped directly to market. More of what we produce today are arcane components that are eventually integrated into finished products assembled somewhere else. Think of the sophisticated navigation equipment that goes into passenger aircraft assembled at Boeing plants in Washington or South Carolina.

Another explanation is that many of the things we now produce are no longer goods but have been digitized into services. Take computer programs. In days of yore (i.e., the 1990s), computer programs designed by Adobe or other California software firms were sold on CDs. Now they are routinely "shipped" to customers via Internet downloads. The same with musical recordings, videos, books and newspapers. All now classified as services.

But probably the main reason for the paradox between a thriving manufacturing sector and a diminished export trade in manufactured goods is the way government statisticians count manufacturing's contribution to gross domestic product. Consider the case of California's foremost manufacturer, Apple. The maker of iPhones, iPads and iPods earns billions of dollars and employs thousands of Californians. But it no longer actually makes its products here, as it once did in Elk Grove.

The same is true for Santa Clara-based Intel, which closed its last California plant in 2009.

Yet, for statistical purposes, both companies are categorized as manufacturers. Both contribute mightily to California's economy - except when it comes to exporting California-made goods.

As our non-manufacturing manufacturers, Apple and Intel are not alone in this category. And that's apt to remain so as long as the state remains inhospitable to factories.

Is there any good news on the export front?

Probably, but it would be hard to quantify it. So far we've been talking about exports of goods, but California also exports a wide variety of services. When a San Francisco law firm advises a Canadian client, or a Chinese student enrolls at UC Davis, or a tourist from South Africa visits Yosemite, or even when a Sacramento lobbyist represents a Japanese corporation, these are all counted as service exports.

The numbers can be considerable. State tourism officials report that 459,000 Chinese tourists visited here last year, spending an average of $2,932. That works out to $1.35 billion, and that's just the Chinese.

The problem is that there are no reasonably solid statistics on service exports by state. Last year, U.S. service exports totaled $632 billion, or about 40 percent of the nation's total merchandise export trade of $1.56 billion. California likely does much better than average, but how much better is open to surmise.

Economists used trade data, squishy as they sometimes are, to identify and calibrate trends, such as the decline in California's exports to China since last summer. Perhaps that's something the governor might want to look into while visiting there next week.

Jock O'Connell is a Sacramento-based international trade economist.

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