International Trade and Regional Economies

The Impacts of European Integration on the United States

David J. Hayward

• Publisher: Taylor & Francis
• Year: 2019
• eBook ISBN: 9780429723360
• Edition: 1
• Topic: Politics & International Relations
• Subtopic: Politics
• Index: Politics & International Relations

This book considers the issue of regional exposure to external economic events, exploring the role of trade in the performance of American states. It focuses on the case of trade with the European Community, analyzing the potential impacts of its integration on trade with individual states..

1
Introduction: International Trade and Regional Economies

Recent years have witnessed a growing concern among state policymakers and scholars of regional economic development with the external dimensions of regional economies. The increasing globalization of the U.S. economy and its constituent regional economies has caused state governments to "go international" in their industrial development promotion programs. These efforts have caught the attention of researchers concerned with external trade's implications for regional economies, particularly such aspects as the foreign trade component of state economies (Coughlin and Cartwright 1987a, 1987b, Fieleke 1986, Gillespie 1982, and Griffin 1989), states' relative export performance (Erickson and Hayward 1992), or the states' export promotion policies themselves (Archer and Maser 1989). The concern, however, has generally been for the exports side of the trade equation. These are seen as exogenous sources of demand for the states' products and, hence, unambiguous boosts to the states' economies. It is apparent from a review of the literature that exports dominate the regional economic development agenda, and that state-level policies for international trade are almost exclusively export-oriented. Concern for imports on the other hand, is most often exhibited at the federal level or in respect to their impact on particular industrial sectors. Nevertheless, both imports and exports have significant and direct implications for individual states.

The Globalization of the U.S. Economy

The increasing importance of international trade in the United States economy is indicated by the growth in the size of exports as a proportion of gross national product: from 4.2 percent in 1970 to 7.3 percent in 1990 (U.S. Bureau of Economic Analysis 1990, p. 804). During the same period, however, the U.S.'s external trade balance has worsened as the growth of imports has out-paced that of exports. This has heightened the concern for international trade in the political realm as well as the academic. The Omnibus Trade and Competitiveness Act of 1988 exemplified the twin thrusts of the policy response at the Federal level. The first has been to regain a balance in bilateral trade relationships through the greater use, in particular, of anti-dumping measures-these being one of the few protectionist options allowed under the General Agreement on Tariffs and Trade (GATT). The second has been to coordinate the resources of various Federal agencies in an effort to provide greater assistance to both current and potential exporters.¹ A notable feature of the persistent U.S. trade deficit—especially with Japan and other East Asian partners—is the dominance of trade issues in U.S. foreign relations, which is increasingly evident in the post-Cold War era as former East-West tensions subside.

Both academic and commercial concerns for the U.S. external trade imbalance have dwelt on its causes.² That foreign trade is an increasingly important factor in the U.S. economy is generally taken as axiomatic, and the primary issue has centered on whether the problem lies with an over-propensity to import (ie, demand) or a comparative inability to export (supply). In the political arena it is often claimed that the U.S. market is "too open", or that its partners-read "Japan"--don't "play fair". Most research, however, tends to suggest that, in fact, the fault lies with the U.S.'s poor export performance. Hanink (1987) concludes that American firms in aggregate have failed to provide products that meet foreign demand patterns. By this assertion, the problem is effectively relocated from the realm of international diplomacy to one of domestic industrial policy, and hence into the domain of the individual states and regions.

The States as the Primary Actors in Regional Development Policy

The involvement of state agencies in international trade concerns amounts to an additional dimension to regional development planning that has itself been largely transplanted in recent years from the federal to the state level. States have increasingly acted independently or in regional groupings to advance their own economic agendas. This has been partly a result of successive federal administrations having followed their ideological convictions that renounce interventionist regional and industrial policy. As the states have responded to the local dimensions of industrial restructuring, particularly in areas experiencing deindustrialization, they have employed a variety of development policies and have thereby been at the vanguard of development planning. Export promotion programs pursued by the states, therefore, should be viewed alongside other programs such as enterprise zones (Erickson and Friedman 1990), the promotion of entrepreneurship (Allen and Hayward 1990), or research parks (Goldstein and Luger 1990).

Exports and Economic Development

The relationship between exporting and state economic growth is rather ambiguous, although much of the general public and many state policymakers seem to regard it as axiomatic (Erickson 1992)

The prevailing view holds that exports are an unambiguous positive contribution to regional economic growth, amounting to an increase in demand for domestically-produced (local) products. This largely unchallenged presumption of the regional economic value of exports owes much to the powerful concepts derived from export base theory. The topic was of great concern to regional economists and planners as long ago as the 1950s when it flourished as an offshoot of economic base theory with the seminal debate between North (1955, 1956) and Tiebout (1956a, 1956b). It is intuitively satisfying to conceive of exports as an exogenous impact on a regional economy, introducing external economic value into the regional system. Export base theory identifies industries that generate exports as being key to the regional development process, precisely because they produce "basic" goods that earn these exogenous revenues. North and Tiebout's dispute concerned the relative importance of these basic industries, but essentially centered on whether the remaining "non-basic" sectors could also generate economic development. They were, however, united in agreement on the positive economic benefit of the former.

Presently, the perceived importance of exports to regional economies persists although it is not usually invoked as part of an explicit export base strategy. Webster et al. (1990) evaluate the difference in the U.S. state employment multipliers for foreign and domestic-ie, intra-U.S.exports. They find that the foreign export employment multiplier was almost five times greater. Such findings lend support to export promotion as an increasingly important component of regional development policy. Here again, however, there is a leap of faith as it remains to be determined whether the additional economic benefits from increased foreign exports are sufficient to offset the additional costs of promotion activities overseas.

The alternative international trade theory founded upon the work of Linder (1961) and Krugman (1979; 1980) among others also supports state-level concern for international trade. This theory contradicts orthodox trade theory with its emphasis on comparative advantage and attention to the resource endowments of regions. Instead, the alternative theory contends that the driving force for trade is overlapping demand patterns in different regions. Similarity, rather than dissimilarity, is therefore the key, and so states have much to gain from trade even with other similarly-endowed regional entities. International trade is hence an extension of interregional trade, and, as such, takes place between regions of a larger economic entity; and that may be the United States economy, the Western industrial economy, or the global economy as a whole. Subnational political entities, therefore, are appropriately viewed as distinct economic units, and this is especially so with the increasing interdependence of the global economy.

A great deal of attention has been given to the contribution of international trade, and especially exports, to state and regional economies. McConnell (1987) identifies industrial sectors as the primary units for assessing the economic contributions of exports. However, given that states have unique industrial mixes, each will experience a different interrelationship with the global economy. Erickson and Hayward (1992) also showed that the differential export performance of industrial sectors produced a highly varied export contribution across the states. Coughlin and Cartwright (1987b) developed a time-series model that illustrates the relationship between exports and employment, suggesting it is both direct and substantial. Erickson (1989) also established a direct relationship between the states' industrial growth and their export performance, while Markusen et al. (1991) measured the contribution of exports in the industrial employment growth of nine U.S. regions using a shift-share analysis.

The contribution of exports to state and regional economies has often been reported for individual states and regions. In California (Griffen 1989), the Midwest (Gillespie 1982), and New England (Fieleke 1986) the export share of regional economies has been measured and inferences made about the dependence and, hence, prospects of these economies with respect to the global economy. The concern, as has been noted above, has almost exclusively been for exports, but both Fieleke (1986) and Gillespie (1982) introduce an import dimension. In particular, Gillespie (1982, p. 208) includes import-related employment in accounting for the regional economic dimensions of international trade.

State and Regional Factors Affecting International Trade

A number of studies have addressed the factors underlying differential export performances among the states. Erickson and Hayward's (1991) analysis of the bilateral trade patterns of nine U.S. regions indicated the importance of location in the orientation of regions' exports and hence, indirectly, of their relative performance. Coughlin and Cartwright (1987a), Coughlin and Fabel (1988), and Erickson and Hay ward (1992) all developed models which confirmed the importance of state endowments of physical and human capital in contributing to state export performance. Additionally, it has been shown that patterns of foreign direct investment (Erickson and Hay ward 1991) as well as particularly active state export promotion programs also contribute to patterns of export performance.

Considerable attention has been devoted at the level of the individual firms, identifying both behavioral and environmental factors as instruments of exporting activity. Hirsch (1971) asserted that a key feature in a firm's propensity to export is its size such that there is a certain capacity threshold for exporting activity. McConnell (1979, p. 178) analyzed the characteristics of exporting firms and was able to develop a mean profile of a firm as having a risk-taking management, a competitive market strategy, and a medium level of sales. Namiki (1988) further identified successful exporting strategies from a survey of almost 400 computer manufacturers, identifying product differentiation strategies as being particularly important in successful export operations. The identification of corporate-behavioral factors itself suggests an opportunity for state-level action that could be directed towards encouraging appropriate business strategies. These may be complemented by other programs to address the environmental side as states attempt to create suitable export-oriented, local business climates through extensive export promotion programs.

Erickson (1992) asserts that state export promotion activities have "...become more formalized and, in many respects, came of age during the 1980s." State expenditures on international programs, of which export promotion is a major component, have grown well ahead of inflation in this period. Activities include information services, marketing support, establishing export trading companies, financial aid, or changes in regulations (Archer and Maser 1990). These programs have subsequently been analyzed for their effectiveness. Kudrle and Kite (1989) discuss the problems of accountability and assessment in evaluating state programs; according to Erickson, "empirically-based research evaluating the effectiveness of state export promotion programs is practically nonexistent (1992). Coughlin and Cartwright (1987a) include the states' levels of export promotion activity in their model of trade performance, and show that it has a significant impact on levels of state exports.

The individual U.S. states, therefore, are more aware than ever of their place in the global economy, and of the power at their disposal to influence their own involvement in international trade. Consequently, states are increasingly sensitive to international trading events such as the GATT, the U.S.-Canada Free Trade Agreement, the forthcoming North American Free Trade Agreement, and even the European Union's EC-92 program. The international dimension to state level economies is more widely acknowledged and there is much need for detailed analyses of the states' exposure to such events.

The EC-92 Program

On December 31, 1992, the 12 nations of the European Community (EC) became a single, unified economic area; indeed, the largest single economy in the world with a population of approximately 320 million, mostly affluent consumers. The ramifications of this event--EC-92~are still being felt both within and outside the EC. One year later, with the passage of the Maastricht Treaty on European Union, the Community formally became the European Union (EU) and the level of integration deepened. These most recent changes largely affect political and macroeconomic structures as the former event effected a true common market in respect to trade.

The transformation of the separate western European economies into a monolithic market was not a climactic event-it is a process that has been under way since 1987 and continues as European industries restructure in its wake. Nevertheless, its progress by late 1992 has been impressive. Its epithet, the "largest single market," has subsequently been challenged by other international integration events: notably the North American Free Trade Area³ (NAFTA) comprising the United States, Canada and Mexico, and more recently still, by the European Economic Area⁴ (EEA) which merges the EU with the European Free Trade Association (EFTA). These factors have conspired to reduce some of its lustre but its importance is, nevertheless, undiminished and history may well regard it as the harbinger of a new global era of regional economic integration.

In the post-Cold War era, foreign relations, particularly among the industrialized countries, are concerned primarily with trade relations. The European Community's announcement of the 1992 (or, EC-92) program to remove the remaining non-tariff barriers to trade among its members in 1987, sent alarm bells ringing throughout its trading partners, and especially in North America. The fear of being excluded from a "Fortress Europe" neatly highlighted the ambiguous nature of America's position with respect to European unification. While supporting, indeed even nurturing, the goal of European integration in the post-war period, there remained the fear of creating a "Frankenstein's monster." European unity was a geopolitical imperative: to prohibit the possibility of another ruinous European war and to serve as a bulwark against Soviet imperialism. However, by the same token, an economically strong Europe necessarily threatens American post-war economic hegemony; particularly as it coincides with the ascension of America's other economic protege, Japan, to economic preeminence.

Although EC-92 is merely a stage in the process of European economic renewal, and will not be experienced as a climactic event-indeed, at the time it passed largely unnoticed as the Maastricht Treaty debate was in full flow—it is nonetheless a defining moment in global economic relations. Not only does it underscore the re-emergence of a European economy with a global importance not seen since before First World War but it also probably marks the end of an era of U.S. global patronage which began informally following the First War and formally with the Marshall Plan (1947).

EC-92 is, therefore, one of several contemporary events that signify a shift not only in global economic power, but also in the U.S.'s place in the global system. Paradoxically, as the U.S. leads its western partners as "victors" in the Cold War, it is becoming increasingly evident that economic relations are moving to the forefront and with them, American hegemony is diminishing. In many arenas, such as the economic regeneration of the former Soviet bloc, the industrialization of East and Southeast Asia, and even the re-industrialization of parts of the U.S. itself, notably the Midwest, it is foreign rather than U.S. capital that is most prominent.

While such geopolitical arid strategic issues fuel much debate at the Federal level, and in the editorial pages of influential national newspapers such as the New York Times or Washington Post, recent experience at the level of the individual states has engendered a reevaluation of the bounds of their legitimate economic interests. No longer does the purview of state-level economic planners extend only to the borders of the U.S., as individual states themselves, are giving attention to their own places in the global arena. Most have intern...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Dedication
• Contents
• Tables and Figures
• Preface
• Acknowledgments
• 1 Introduction: International Trade and Regional Economies
• 2 The States' Exposure to Trade with the European Union
• 3 The Trade Component of Regional Economic Growth
• 4 The Regional Economic Impact of European Integration
• 5 Summary: International Trade and Regional Policy
• Appendix 1: Constructing the Data Set
• Appendix 2: The European Union: Evolution and Integration
• Bibliography
• Index
• About the Book and Author
• 2.1 The States' Manufacturing Production, Trade and Exposure, 1990
• 3.1a The International Trade Shift-Share Model (all values in millions of dollars)
• 4.1 Possible Scenarios from International Economic Integration
• 2.1 The 38 Contiguous States and Regions
• 3.1 Incorporating International Trade Effects in the Shift-Share Model
• 4.1 The EC-92 Regional Impact Model
• Al.l The Construction of the U.S.-EU Trade Database