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Thursday, March 9, 2017

How Much Does Your State Need Foreign Trade?

Many US states depend on foreign trade for a large share of their state’s economic output and jobs.

Yesterday’s post on CD displayed two maps showing each US state’s largest country trading partner for exports and imports in 2016. In response to a comment on those state maps, the table below shows something that is potentially very interesting: the degree (importance) of international trade for each US state in 2015. The table shows GDP for each US state (data here), the total trade volume (exports + imports, data here),  and the volume of international trade activities as a share of each state’s GDP in 2015, ranked from highest to lowest. Ignoring the District of Columbia, the average trade share for US states in 2015 was 17.7%, and ranged from a low of 5.3% for South Dakota to a high of 38.0% for Michigan.

Following Michigan, the US states with the next highest trade shares in 2015 were Louisiana (35.1%), South Carolina (34.8%), Tennessee (34.7%), Kentucky (34.3%), Washington (30.9%) and Texas (30.7%). I’ll follow up on these data with a shaded map based on trade shares by state, update the data when 2016 state GDP data are available later this year, and possibly provide further analysis, but for now, here are my initial thoughts on the US states with the highest trade shares in 2015, and the policy implications of those trade shares:

1. Michigan. The auto industry clearly explains the importance of international trade to the US state economy that is the most highly globalized. Auto-related exports represented nine of the top 10 state export categories for Michigan in 2015, and all of the top 10 state imports. Michigan’s top import trade partner is Mexico and its top state export trade partner is Canada, reflecting the fact that Michigan automakers buy a lot of auto parts from Mexico and they then sell a lot of cars to Canada. Partly thanks to NAFTA, the North American auto industry relies increasingly on cross-border supply chains for parts, supplies, materials, and finished products. Exhibit A: For 2016 models, the average foreign content for GM’s fleet of vehicles sold in the US was 55.4% (not counting Canada according to government labeling rules, which counts the percentage of “U.S./Canada equipment content” together as “domestic content”) and the average foreign content was 53% for Ford vehicles. In contrast, the average foreign content for Honda vehicles sold in the US last year was less than 50%. The globalization of the auto industry blurs the distinction between “domestic” and “foreign” cars and makes that distinction increasingly irrelevant.

2. Louisiana. The state is “centrally located along the Gulf Coast with access to deep-water ports and railway lines, making it an ideal place for industry to flourish,” especially the oil and gas industries. In 2015, Louisiana’s top import was crude oil, its top import trading partner was Saudi Arabia, and its top export product was processed petroleum products, much of it going to the state’s top export trading partner — China. Now that the US is becoming a major exporter of natural gas (LNG), Louisiana’s energy exports are set for a major expansion in the coming years. The country’s first major LNG terminal opened about a year ago in Sabine Pass, LA, another terminal is under construction in Hackberry, LA and scheduled to start deliveries next year, and there are as many as seven other LNG facilities that could eventually operate in Southwest Louisiana.

3. South Carolina has a highly globalized state economy partly because of Boeing’s three commercial airplane building facilities in the state including the company’s Boeing 787 Dreamliner final assembly and delivery facility. In addition, the state has also become a major motor vehicle center, boasting more than 400 automotive manufacturing plants, parts suppliers and other auto-related companies including assembly plants for Mercedes-Benz and BMW, and a new Volvo facility under construction that will begin producing the new S60 sedans by the end of next year. Reflecting those two manufacturing industries, all of the state’s top ten export goods and nine of the top ten import goods were related to either airplane production or automobile production in 2015.

4. Tennessee has also emerged as a major automotive manufacturing center, with three major assembly plants (Nissan, GM and Volkswagen) and automotive operations in 86 of the state’s 95 counties. That helps explain the state’s highly globalized economy and why three of the state’s top export goods in 2015 were auto-related.

5. Kentucky is now the fourth-largest truck producer and fifth largest passenger car producer in the US, and home to four automotive assembly plants for GM, Ford (2) and Toyota. The state is also a global leader in aerospace manufacturing, and Kentucky’s No. 1 export category in 2015 consisted of aerospace products and parts, followed by motor vehicles and parts. Aircraft and automotive parts, supplies, and engines were also among the state’s top import goods in 2015.

6. Washington’s highly globalized economy is largely thanks to the extensive manufacturing operations in the state of Boeing, the world’s largest aerospace company and America’s largest manufacturing exporter. In 2015, the state exported more than $51 billion worth of civilian aircraft (mostly Boeing products) which represented almost 60% of the state’s total $86.4 billion in exports that year. Not surprisingly, airplane parts were the state’s largest import good in 2015, as Boeing sourced its inputs globally to get the best price and quality.

7. Texas is a highly globalized economy as a result of its proximity to Mexico and also because of its energy industry. In 2015, about one-third of Texas’s imports were from Mexico (more than double the 16.3% state share of imports from China) and more than one-third (37.3%) of the state’s export were to its southern neighbor. By category, the Lone Star State’s largest export category and largest import category in 2015 were energy related, reflecting the state’s booming oil and gas industries.

Punitive protectionist tariffs would increase the cost of imports for Boeing, Ford and GM, destroy more jobs than are saved, and impoverish America

Bottom Line: Many US states, especially those that are manufacturing- or enery-intensive, are highly globalized and depend on foreign trade for a large share of their state’s economic output and jobs. International trade activities (exports + imports) represent more than 20% of economic output (GDP) for almost one in three US states, more than 25% for nine states, and 30% or more for the seven states profiled above. Manufacturing activities in the US for automobiles, commercial airplanes, energy and other manufactured goods are increasingly dependent on intricate, cross-country, global supply and value chains for inputs, raw materials, parts, supplies, and final products that make international borders increasingly irrelevant.

The main beneficiaries of those complex global networks of sourcing, production, and distribution are the consumers in the US and elsewhere who get access to the best products at the lowest price and the greatest value. Ironically, that’s the one group you’ll never hear Trump talk about when he discusses trade issues — the US consumer and the US-based firms like Ford and Boeing that depend on imports for their competitiveness. The analysis above of trade shares by state also demonstrates how imports (inputs) and exports (final products) are inter-related. Imports and exports go together hand-in-hand, and restricting imports in any way (e.g. increasing their cost with tariffs) will necessarily adversely affect US exports. In Trump’s fantasy world of international trade, he somehow thinks he can penalize US companies with tariffs that will raise their import/input prices, but with no reductions in exports for companies like Boeing, GM, and Ford. In the real world, those increased costs for inputs from tariffs would reduce domestic and foreign sales (exports) for US-based firms, reduce their competitiveness, and reduce their staffing levels (jobs).

As I commented before on CD, if Trump imposes punitive protectionist tariffs, that would certainly help some import-competing domestic firms and their workers in the short-run, but would increase the cost of imports for Boeing, Ford and GM, hurt our most competitive firms, destroy more jobs than are saved, raise prices for US firms and consumers, and impoverish America, not make it great. To paraphrase Milton Friedman, “trade protectionism is a monument to the power of superficial thinking.” Superficial and short-sighted because it ignores the complexities and dynamics of world markets, and ignores all of the unseen, delayed and hidden costs of trade protectionism that would make many American states weak again, not great again.

Republished from AEI.

  • Mark J. Perry is a scholar at the American Enterprise Institute and a professor of economics and finance at the University of Michigan’s Flint campus.