September 2, 2010
Rebalancing and exports
Exports of goods and services have garnered much attention in recent months. For one reason, export growth has been leading the economic recovery in the United States. As several Asian and Latin American economies have begun to recover recently and strongly, they have begun to buy U.S. goods and services. The figure below shows annualized quarterly rates of export growth from the United States. The global recession of 2008–09 resulted in plunging U.S. exports to the rest of the world. However, the economic recovery during 2009–10 has been accompanied by robust export growth and world trade. Though currency swings may have contributed to U.S. export volatility, global swings in overall economic growth were the dominant force behind this volatility. The second figure below illustrates that world economic growth rates plunged by more than half in 2009. The turnaround in global growth was equally sharp, spurring the recovery of U.S. exports abroad. A similar trend can be seen (below) in goods exports from the Seventh District states of Illinois, Indiana, Iowa, Michigan and Wisconsin.
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Looking out over the longer term, many analysts foresee a fundamental reorientation of the U.S. economy toward production and exports—led by a shift in demand by developing nations for U.S. products and services. Over the past few decades, in the United States there has been strong growth in the consumption of goods and services, including imports from overseas, along with low household savings rates. Meanwhile, saving rates in nations such as China and other developing nations have been very high, while their consumption (and imports from the United States) have been relatively low. Given these fundamental misalignments, tomorrow’s realignments may include a U.S. economy that shifts its production capabilities toward serving overseas markets.
Assuming that these developments do materialize, how is the Seventh Federal Reserve District economy positioned to contribute to export growth? As it turns out, states of the Seventh District—Illinois, Indiana, Iowa, Michigan, and Wisconsin—are highly oriented toward goods production destined for overseas markets. In particular, the Seventh District economy is steeped in both manufactured goods and agricultural products that are sold abroad.
Before I illustrate the Seventh District’s export orientation, let me say a prior word about the available data. The U.S. Department of Commerce takes great effort in tracing manufactured exports back to their state of origin. In this way, an exported machine that is produced in Wisconsin, but shipped abroad from Seattle, will not be (mistakenly) attributed to the state of Washington. However, these procedures of tracing the origin of production can be somewhat misleading for raw agricultural exports from the Midwest. Agricultural products tend to be over-allocated to the port of shipment or last storage, rather than to their state of agricultural production. For this reason, the U.S. Department of Agriculture re-estimates the origin of agricultural commodities, assigning U.S. exports abroad back to the home state according to each state’s share of the commodity’s production. For example (and with simplification), total exports of corn from Iowa are estimated from Iowa’s share of U.S. corn production. Such adjustments can be very important for inland states, such as those of the Seventh District.
After making such state-of-origin adjustments for agricultural commodities, the Seventh District’s export orientation becomes more apparent[1]. Agricultural exports make up 9.1 percent of the nation’s exports; and they make up 14.4 percent of the District’s exports.
As a share of annual production, or gross state product, the figure below reveals that the Seventh District is marginally more export-oriented overall than the nation. For both the nation and the Seventh District, manufactured goods account for the lion’s share of exports, and this holds true for individual states. Still, Iowa is the exception such that agricultural exports rival manufactured goods exports for that state.
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Agricultural exports represent a larger share of output for each Seventh District state, save Michigan, relative to their share for the nation. For fiscal year 2008, the five states of the District accounted for 21 percent of the nation’s agricultural exports[2]. All five states were significant contributors. Overall, Iowa and Illinois ranked second and third in the nation—Iowa by virtue of leading the nation in soybean, feed grain, and livestock/meat exports. Illinois’s exports in these same categories also ranked very high, as did Indiana in soybeans and feed grains (table below).
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Agricultural exports from the District have expanded rapidly over the past decade. Continued economic growth in developing nations has led to richer diets in such countries, sharpening the demand for U.S. agricultural products (see table below). Because of the global recession, exports of agricultural products slowed in 2009, but they are now rising once again in 2010 as global economic recovery unfolds.
The Midwest and Seventh District manufacturing sectors are also major exporters. As set out in my previous blog entry, the District produces capital goods, heavy machinery, and transportation equipment needed by developing countries as they build their own economies. (See also the detailed tables at end of this article.) However, the data’s assignment of U.S. manufactured exports to individual states and localities should be viewed as suggestive only, rather than as definitive (with a high degree of accuracy). That is because exported goods are often composed of various components, which may be produced almost anywhere—their value often originates from many places. For example, a heavy truck exported from Wisconsin will contain manufactured parts and materials from other plants or production sites located in other states in the Midwest or in different regions of the country; such components for the truck may even originate from outside the United States. Moreover, the truck’s value is also composed of services such as research and development, design, and headquarters/administrative services—any of which may take place across a wide geography. For these reasons, the export orientation of the broad Seventh District (Midwest) economy, relative to that of any particular state, is the more important point to be taken from these data. Geoff Hewings and his co-authors have demonstrated that Midwest states (and their plants and businesses) trade intensively with one another in producing final output, such as global exports. Accordingly, we can be fairly sure that many of the manufactured exports from states in the region are made up of “value added” originating somewhere in the broader multistate region, if not the specific state to which its entire value is assigned.
The same point holds true for recent estimates that attribute exports to metropolitan areas. A current Brookings Institution study reports that ”metropolitan areas produce 84 percent of the nation’s exports, making them the points of leverage for scaling up trade with the wider world. The 100 largest metropolitan areas alone account for over 64 percent of the nation’s exports, including 75 percent of its service exports.” For Seventh District metropolitan areas, the table below extracts data from that report. According to these measures, four of the District’s metropolitan areas rank within the top 25 nationally: Chicago, Detroit, Indianapolis, and Milwaukee.
The ultimate destination of exports by metropolitan area is also reported (by the International Trade Administration). For example, in 2008, Canada remained Chicago’s and Indianapolis’s top export destination, but the number two and three destinations differed. For Indianapolis, France and Germany claimed the number two and three spots; for the Chicago area, Mexico and India claimed the next two spots.
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As the nation moves beyond the profound economic disruptions of the past few years, it seems likely that the emergent economy will differ in important ways. Throughout the past decade, the Seventh District’s economic production has been shifting toward goods destined for overseas markets. Currently, the District’s export orientation in manufactured goods is at least on par with that of the nation—and even more so with respect to agricultural production. An accelerated shift in the United States toward producing goods for overseas markets would likely have a large impact on much of the Seventh District’s economic base. In addition to its agricultural prowess, the District’s manufacturers produce important capital goods that are in high demand as world trade and developing economies expand.
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[1] We also adjust manufactured exports using the U.S. Department of Agriculture’s agricultural estimates. Many food products, such as milled grain and oils, are otherwise counted as manufactured. (Return to text)
[2] Chicago Fed Research Department staff estimates.
Posted by Testa at 1:06 PM | Comments (0)
January 26, 2009
Foreign Born, Educational Attainment, and Entrepreneurship
By Britton Lombardi and Bill Testa
Attracting immigrants to the Midwest may be an especially lucrative objective from a regional economic development standpoint. As discussed in previous blog entries, the growth performance of metropolitan regions has been strongly linked with the educational attainment of its work force, especially college level attainment.
Educational attainment of the immigrant population in the U.S. tends to be skewed toward the high end (though it is also bifurcated—skewing toward the lower end as well). The high educational attainment of immigrants owes much to the top-notch university system found in both the Midwest and the nation, which brings many of the world’s brightest to our doors. Afterward, our market-based economy provides ample opportunities and rewards to talent, hard work, and new ideas of immigrant workers and entrepreneurs.
So far, even as the nation has experienced an upswing in immigration, the foreign born population in the Midwest lags well behind that of the nation. As the chart below suggests, the region’s large metropolitan areas host a much smaller share of foreign born, with the exception of Chicago.
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A closer look below reveals that the Chicago metropolitan area has attracted both the highly educated and the less educated. The share of Chicago’s foreign born who hold a college degree is below the U.S. average. In contrast, in the remaining metropolitan areas of the Midwest, the foreign born population includes a greater share holding at least a bachelor’s degree in 2007. According to sample data from the U.S. Census Bureau, an incredible 50 percent of Pittsburgh’s working age population who were foreign born hold at least bachelor’s degree. Detroit, Cincinnati, St. Louis, and Columbus are not far behind.
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Overall, however, the foreign born tend to lift Chicago’s average college attainment due to the city’s high overall propensity to attract immigrants. The Detroit area also rates highly in this regard, coming close to the national average.
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Metropolitan areas in the region may also prize the foreign born for their tendency to start new businesses. The foreign born are, on average, business owners and self-employed at about the same rate as native born, though their experiences and bahaviors are quite varied. In a recent study, Maude Toussaint-Comeau finds that self-employment of immigrants varies by country of origin and by differences in personal and human capital characteristics. Immigrant-owned small businesses often contribute importantly to urban revitalization and community development.
Many more of the (immigrant) college educated concentrate their studies in technical and scientific fields than their native-born counterparts. A report estimates that in 2005, 41 percent of science PhD workers in computer, mathematical, architectural, engineering, and science occupations were foreign born. As a result, many fast-growing scientific and technical firms in IT and software have been founded by foreign born (and often U.S. educated) entrepreneurs. Another study estimated that between 1995 and 2005, 52.4 percent of the engineering and technology start-ups in Silicon Valley had one or more foreign born key founders. For our region’s foundering metropolitan economies, such firms would be truly welcome.
Our reading of the same data source above shows that entrepreneurship of the foreign born in the region’s metropolitan areas lies close to national averages. This is true of both college-educated foreign born and overall foreign born. Again, these tendencies vary across metropolitan areas.
However, the overall paucity of foreign born in the region tends to depress their importance as entrepreneurs. As the chart below suggests, again only Chicago manages to climb above the national average in this regard. The Detroit metropolitan area comes in a respectable second place.
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Competition in attracting technical and educated immigrants can be fierce. At a time when skilled and educated workers are most in demand in the U.S., our immigration policy focuses heavily on family re-unification rather than criteria related to occupation or skill. And, to the extent that we do allow immigration based on applicants’ job skills, we cap such visas at levels far below what employers require. In the past two years, the quota for H-1B (skill-based) visas was met quite quickly. For fiscal year 2007, the H-1B cap was met two months after the application process opened, and for fiscal 2008, the cap was met in just under one day.
Metropolitan areas in the region differ in their overt recruitment of the foreign born. One way involves enhancing the process of assimilation into the fabric of the area for recent immigrants and foreign born residents. Pittsburgh has created the Welcome Center for Immigrants and Internationals to create a welcoming environment and to provide necessary resources and information, such as advice for small business owners and career counseling services. Indianapolis organized the International Center of Indianapolis to provide relocation and training services to both attract and retain well-educated immigrants. Indianapolis, too, has developed a Welcoming Center that connects recent immigrants with well-established immigrants to facilitate community integration. In the Chicago area, the Chicago Council on Global Affairs organizes events, speakers, and task forces to raise international awareness and to expand Chicago’s perception as a top tier global city. One such program in the past included a Mexican American Task Force that provided recommendations to businesses, governments, and other interested parties of ways to utilize the strong Mexican community as an economic asset.
Metropolitan areas have also taken to outwardly promoting their international diversity and available opportunities. Many cities participate in “Sister Cities” programs to build relationships with foreign cities to increase their international profile and potentially attract foreign investment, as well as visitors. Just to list a few: Chicago has 27 sister cities spread out across the world, while Detroit has 7, Columbus 8, St. Louis 14, and Milwaukee 5. Additionally, metropolitan areas promote their diversity and opportunities through cultural festivals and events. For example, Pittsburgh held “Global Pittsburgh Celebration,” a month-long celebration that worked to raise awareness about Pittsburgh’s global assets and technology, as well as showcasing the abundant opportunities for foreign-born entrepreneurship and innovation in the area.
Posted by Testa at 2:10 PM | Comments (1)
December 3, 2008
Exports and the 2008 Economic Slowdown
Back in the 1930s, policy makers perhaps contributed to the economic downturn by sharply lifting tariffs on imports into the U.S.—the infamous Smoot-Hawley legislation passed on June 17, 1930 that raised import tariffs on over 20,000 goods. In response to these policy actions, our trading partners raised tariffs (and nontariff barriers) on U.S. exports. If the U.S. intention was to keep jobs at home, the effect was probably to aggravate unemployment here and abroad.
In recent years, trading activity with other nations has been a definite engine of growth for the U.S. Exports are contributing much to an otherwise faltering pace of economic growth. Though exports comprise only 12.4 percent of U.S. output, export growth accounted for one-half of the nation’s (2.0) percent GDP growth in 2007; exports accounted for one-third of GDP growth over 2006 and 2007. Indeed, in every year since 2002, the growth of exports has added at least one-half percentage point to national output growth.
Per the graph below, export growth has similarly lifted incomes and output in the Seventh District. Overall, nominal export value climbed by $54.7 billion, or 58.7 percent, from 2003 through 2007, with every District state joining in the expansion. Per the table below, our NAFTA partners, Canada and Mexico continue to be our largest export destinations, with China growing rapidly over the 1997-2007 period.
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The strong role of our NAFTA partners as an export destination reminds us that growth in trade often comes about from the hard policy work involved in negotiating trade agreements with other countries. The graph below illustrates the growing number of countries that now receive exports from producers in Seventh District states. Each District state has added a fair number of trading partners since 1997.
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Aside from avoiding the (past) mistake of squelching international trade, the U.S. also has the opportunity to expand its export opportunities in the years ahead. Awaiting enabling legislation from the U.S. Congress, bilateral or two-nation agreements have been negotiated with Panama, Columbia and South Korea. To learn more about these agreements and those that have preceded it, one source of information is TradeAgreements.gov (this web site is a joint effort between the Departments of Agriculture, Commerce, State, Treasury and the Office of the United States Trade Representative).
Note: Vanessa Haleco-Meyer contributed to this weblog.
Posted by Testa at 1:32 PM | Comments (0)
May 15, 2008
Foreign Direct Investment in the Midwest--Update
Americans sometimes harbor mixed feelings about investment in enterprises on U.S. soil that are owned and directed by companies domiciled abroad. Yet for the most part, investment from overseas represents a validation of the productive business climate in the domestic economy. Here, our system of law and contracts, along with productive workers and well-conceived public infrastructure, offer conditions that are conducive to value creation. In turn, foreign direct investment (FDI) activities can benefit our workers and households. New investment and ownership often bring new technology and ideas to American shores, thereby boosting our own growth, wages, and standards of living.
In recent decades, FDI has grown rapidly to comprise a larger share of the U.S. economy. As documented in our recent article, the share of employees working for all companies that are U.S. affiliates (those in which a foreign investor owns at least 10%) grew from 1.8% in 1979 to 4.7% in 2000. According to more recent data, this share has remained fairly constant through the middle of the current decade—now 3.9% by that estimate.
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Much of recent growth in inbound FDI has resulted from accelerated globalization and rapid world economic growth. Due to a greater ease of communication and lower cost of personal travel and goods shipment, global breadth of enterprises has expanded. General Electric employs 316,000 worldwide, 155,000 outside of the U.S. General Motors employs 335,000 worldwide, 193,000 abroad.
In addition, although the U.S. has maintained its economic prominence in the world economy, the U.S. economy now comprises a smaller share of global production (27% as of 2006). And so, without any countervailing forces, this simple arithmetic would suggest more inbound FDI as a share of the U.S. economy. By one estimate, the U.S. share of global outbound FDI outflows have in fact declined from its 1970 value of 54% of global FDI to 18% in 2006.
While global economic growth is the largest generator of inbound FDI to the U.S., the exchange value of the U.S. dollar versus other currencies can also be influential. The value of the dollar has fallen by 25% since 2002, measured against a basket of currencies weighted by our trade with other countries. For this reason, investment in productive capacity on U.S. soil may look increasingly attractive to foreign-domiciled companies. For one, for those foreign companies that hold their earnings and assets in foreign currencies, the purchase price of physical capital in the U.S. such as real estate, intellectual property, and factories will be cheaper. For companies that now sell into the U.S. market from production facilities abroad, the shifting of production to the U.S. may be advantageous in generating production costs in the same currency as their sales.
Further, for those companies that use their U.S. facilities as a platform from which to export to markets outside of the U.S., earnings on sales will likely be denominated in foreign currency rather than in U.S. dollars. Recent developments in FDI in the U.S. automotive sector may be reflective of these considerations. Several European carmakers are currently considering setting up production in North America, among them Volkswagen and Audi. And exports of U.S.-produced light vehicles have been rising, according to Chicago Fed economist Thomas Klier. From 2002 to 2007, the share of U.S. production that is exported to non-NAFTA countries alone has risen from 3.0% to 11.6%.
In recent years, the state of Indiana has done well by FDI in automotive and other (mostly manufacturing) investments from abroad. The Business Research Center at Indiana University (BRC) has recently issued an extensive report that reviews the global environment for FDI with an emphasis on Indiana and surrounding Midwest states. According to U.S. government data as of 2005, Indiana’s economy ranks 8th in the nation and first in the region as measured by the ratio of FDI to state economic output. (Michigan also exceeds the U.S. average.) As measured by jobs, the United Kingdom and Japan were virtually tied as the number one source of FDI into Indiana, each accounting for 32,000 jobs.
The U.S. government data on FDI for states does not necessarily reflect new investment or added jobs. Rather, most FDI transactions are mergers and acquisitions. For this reason, and because government data are not very timely, the BRC also gathered information from a private vendor on announcements of FDI expansions and new facilities. Since these are announcements rather than completed transactions, we cannot be certain these investments will actually take place. But according to BRC estimates, Indiana will gain nearly 5,000 jobs from 2007 announcements, mostly in the automotive industry. The implication is that Indiana will widen its lead among Midwestern states in the FDI category. An appendix to the BRC report proudly maps the specific FDI projects in which Indiana’s state development agency has completed or participated.
Competing state and local development agencies throughout the Midwest will surely take note.
Posted by Testa at 2:15 PM | Comments (0)
March 17, 2008
Metropolitan area exports
Expanding export activity has taken on added importance in recent years. For example, the newly released Economic Report of the President (ERP) reports that export growth accounted for one-third of U.S. economic growth in 2006 and 2007. Looking ahead to 2008, this export importance will continue as the U.S. economy slows even while economic growth in many developing regions continues to be robust. Rising incomes abroad stimulate appetites for U.S.-made goods and services alike.
It is timely, then, that new information on goods exports for individual metropolitan areas has just been released by the International Trade Administration (ITA), based on U.S. Census Bureau data. Exports figure prominently in regional economies such as ours that are steeped in manufacturing and agricultural production. On a national scale, the ERP describes the many benefits of export activity. In addition to high-paying jobs and incomes, exports spur U.S. producers to innovate to compete with in global markets. So too, as U.S. producers expand to serve global markets, they can often achieve low-cost economies of scale, thereby reducing prices for consumers.
The new data series on metropolitan exports covers goods only. This means the importance of exports to metropolitan economies is understated in the data because exports of services such as medical, tourism, banking/finance, and transportation now account for 28% of U.S. exports. Moreover, metropolitan areas typically specialize in such services, with ongoing shifts toward service concentration now underway.
Despite our lack of data on service exports, a metropolitan area's rank order in goods exports very likely reflects its local service exports as well. In the production process, manufacturing companies purchase many services ranging from finance to management consulting, transportation, design, law, R&D, and advertising. The value of these services become part of the value of the final goods for export, and many of these services are purchased locally. Accordingly, in many instances, a host of value added products from surrounding service companies lies behind a metro area’s goods exports.
Given the Midwest region’s prowess in durable goods manufacturing, it comes as no surprise that metropolitan areas in the Seventh District originate considerable goods exports. The chart below shows export values for several metropolitan areas. The Detroit area leads with a reported $43.3 billion in exports in 2006, comprising 74 percent of Michigan’s exports abroad (see right axis). Detroit’s automotive trade with Canada remains considerable. Currently, the rising value of the Canadian dollar is pressuring production towards the U.S. side of the Michigan–Ontario corridor.
The Chicago area’s total goods exports approached $30 billion in 2006. In addition to traditional heavy manufacturing and food products, Chicago exports medical supplies and equipment and pharmaceuticals.
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In order to gauge the relative importance of exports to metropolitan areas, we make use of recent BEA (Bureau of Economic Analysis) estimates of total metropolitan area product. Dividing a metropolitan area’s exports by its gross product yields a rough measure of each region’s income share that is earned by producing goods for export abroad. By this measure, we see in the chart below that Peoria, Illinois, home of construction equipment manufacturer Caterpillar, derives over 50% of its income from producing goods for export. While this is a useful indicator, it does overstate Peoria’s share somewhat because Caterpillar and other Peoria manufacturers assemble final goods using component parts and services from other parts of the Midwest, the nation, and the world. So part of the measured value of Peoria’s exports reflects the embedded value added of goods and services produced elsewhere. For larger regions, such measures tend to be more accurate since the intermediate components are more likely to be produced within the region.
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The next chart shows export intensity for all of the Seventh District metro areas. Most lie above the U.S. average in export intensity. Open markets abroad are an important part of the economic vitality of these communities.
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Where do District metro areas export? The ITA provides the destination by both country and general region of the world. Canada and Mexico—our NAFTA partners—predominate as export destinations for metro areas (chart below). Europe also remains important, especially Germany, France, and the U.K. In Asia, Japan figures prominently, with China as the fastest growing export destination.
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Finally, the ITA data offer a finer breakdown, indicating both the specific industry categories of exported goods and their destination. As one example, the next chart displays export patterns for the Milwaukee metro area. True to its industry structure, the Milwaukee area exports durable goods such as electrical equipment (e.g., medical scanners and electronic controls) and nonelectrical machinery (e.g., small engines and construction equipment). All major regions of the world (and trading blocs) are destinations for Milwaukee exports.
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The outlook for Midwest exports remains strong. As the 2008 ERP suggests, foreign income growth is likely the strongest impetus to U.S. export growth. As developing nations raise their standards of living, their appetite for manufactured goods rises sharply, as does their demand for food products.
The 2008 ERP also indicates that U.S. exports are very sensitive to income growth abroad. In part, that is because developing countries are investing heavily at home both to produce goods for export and to serve rising domestic demands. For that reason, they purchase capital goods—those that are needed to expand production capacity such as machinery and equipment. Since capital goods are needed to expand production capacity, a slowing economy ratchets down purchases of capital goods and an accelerating economy ratchets up purchases. The U.S. economy specializes in capital goods, such as those produced in Milwaukee and Peoria.
But what generates the income growth in developing countries that, in turn, propels their demand for U.S. exports of capital goods? In part, trade agreements allow developing countries to generate income (from sales abroad) and thereby raise living standards by lowering tariff and nontariff barriers to export sales abroad.
The ERP reports export sales from the U.S. to regions of the world with which the U.S. has recently signed trade agreements. In almost every instance, subsequent export growth to the trade agreement nations well exceeded overall export growth.
Of course, these agreements also make it easier for foreign nations to sell into U.S. markets. In many instances, such foreign competition displaces firms employing domestic workers. Though the overall process of expanding trade is vital to raising living standards both here and abroad, the related labor market upheaval often gives rise to anti-trade sentiment.
Estimates of import sensitivity by individual metropolitan area are problematic. Imports are counted and tracked at the U.S. border and no further. But in a 2003 article, I constructed some rough estimates of import sensitivity by examining a metro area’s industry mix and then weighting a metro area’s industry mix by the degree to which imports had penetrated U.S. markets. I found that large metropolitan areas were not experiencing growth in trade sensitivity to the same degree as smaller and medium-sized metro areas. However, this may be explained by the growing service orientation of large metro areas. Since many of these services do become embedded in the value of manufactured goods, the trade orientation of large metropolitan areas may be understated by my (goods-based) estimates.
Vanessa Haleco-Meyer contributed to this entry.
Posted by Testa at 8:10 AM | Comments (0)
January 7, 2008
Exports: A Source of Strength
Public sentiment for trade between the U.S. and other countries has seemingly eroded in recent years because of concerns about domestic job upheaval from international trade. While some of these concerns about job displacement have validity, it is also true that U.S. exports abroad continue to pull along economic growth in the nation and in the Midwest, where manufacturing plays a large role. Globalization has helped boost economic growth rates and lift the standards of living in developing nations. In turn, peoples of the world are demanding U.S. and Midwest-produced goods such as food products and advanced machinery.
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As seen in the chart above, exports have generally grown over the past few years and at an especially strong pace since 2004. Since then, exports for the western Seventh District states—Illinois, Iowa, and Wisconsin—have grown on average at a faster pace than those for the nation; the eastern Seventh District states—Indiana and Michigan—have had on average positive growth in exports, although at a slightly lower pace than the national average (see chart below). (A ranking of the Seventh District exporting industries can be found in a previous blog.) Exports from Michigan in particular are dominated by automotive trade in parts and vehicles with Canada. Such trade has grown slowly, in large part because of flat vehicle sales in North America.
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In contrast to Indiana and Michigan, each western Seventh District state hosts companies in particular sectors that have a strong export component. While export sales can be volatile, especially when observed at a specific state-industry level, these industries’ exports have been growing consistently over the past few years. Illinois’ electrical equipment (including machinery and computers), chemicals, transportation equipment, and food industries make up most of the manufacturing and exportable goods of the state—about three-quarters of Illinois’ exports. Chemical, machinery, and computer industries in Illinois have grown, on average, over 10% for the past three years, while the transportation equipment industry has grown about 40% over the same period. The transportation equipment industry’s major manufacturers in the state include Navistar and Tenneco Automotive—two companies listed in Industry Week's U.S. 500 top manufacturers. Other large companies in Illinois’ electrical, chemical, and food industries include Caterpillar, John Deere, Abbott, and, ADM (Archer Daniels Midland Company).
Similar to those of Illinois, Iowa’s food and machinery industries and Wisconsin’s machinery, computer, and transportation industries represent about 50% and 60% of each state’s exports, respectively. Iowa's top commodity exports are corn (except seed corn), pork, and tractors. Wisconsin has many major manufacturing companies, including Manitowoc, Briggs and Stratton, Plexus, Harley-Davidson, and Oshkosh Truck, that help boost exports.
As forecasts of U.S. economic growth for the year ahead are weakening, world economic growth is expected to remain robust. Although advanced economies have GDP projected growth of approximately 2% to 3%, this weakness is bolstered by the other developing regions with projected growth of more than 5% for the coming years. Accordingly, export growth will continue to be an important part of overall U.S. and Midwest growth in 2008.
Note: Vanessa Haleco-Meyer contributed to this blog.
Posted by Testa at 8:52 AM | Comments (0)
March 5, 2007
Manufacturing exports continue to excel
Even as much of the Midwest’s automotive industry remains troubled, the region’s overall manufacturing exports continue to impress. In the Seventh District, manufactured exports make up around 7% of gross state product; this is on par with the nation’s economy (also discussed in a previous blog). While this share is not huge, the manufacturing sector’s rapid growth of exports in recent years translates into an outsized contribution to the region’s growth. Export growth of manufactured products will exceed 11% in 2006, which marks the third consecutive year of similar growth. By our reckoning, strong export growth from manufacturing made up roughly one-sixth of the Seventh District's overall output growth in 2006.
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What’s propelling these exports? For the most part, it’s been due to continued strong global economic recovery and expansion. Following two years of weak growth in 2001 and 2002, the global economy began to recover. According to estimates gathered and reported by the IMF, the global economy grew by 5.1% in 2006. This followed three years of similarly strong expansion. As of early 2007, forecasts and expectations for this year are equally robust.
Among our major trading partners, Mainland China has exhibited the strongest growth; it has been reporting growth rates of 8% to10% over the past seven years. Accordingly, Seventh District manufacturing exports to China have been growing rapidly at an average annual pace of 9.3% per year since 1997.
The chart below illustrates that Midwestern exports to China have come to represent an increasing share of the region's overall exports to Asia. In 1997, overall goods exports to China, including agriculuture, mining, and manufacturing, accounted for only 13.7% of the Seventh District’s exports to Asia. By last year, however, China’s share almost reached 20 percent. (See black line).
Manufactured goods exports accounted for most of this expansion. Moreover, expanding manufactured exports were widespread across broad industry sectors including transportation equipment, machinery and metals.
The second chart below ranks manufactured exports to destination nations in 1997 and 2006. While Canada remains far and away the region’s predominant export destination, China now ranks fifth, behind Canada, Mexico, the U.K., and Japan. The Seventh District states exported $4.9 billion of manufactured goods to China-Hong Kong last year.
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The Seventh District’s manufacturing sector continues to be large and export oriented. This means that global economic growth will continue to figure prominently in the region’s growth. However, this assumes that U.S. policies of open world trade and investment will continue to be expanded. Agreements to open our trade across the globe help develop and stimulate the economies of our trading partners. In response, our trading partners turn to the industrial Midwest for many of their purchases.
Posted by Testa at 1:13 PM | Comments (0)
June 7, 2006
Foreign born
The recent influx of foreign born into the United States has drawn attention on several public policy fronts. The U.S. Congress is currently considering a tighter border policy with Mexico, in part due to concerns of national security and the rule of law. In addition, the surge in foreign born (and their offspring) figures into debates over the sources of the widening wage and income disparities in the U.S. and in the slow growth of wage rates and income at the bottom of the income distribution.
On a more positive note, the foreign-born population is accounting for approximately one-third of U.S. population growth, somewhat more if the newborn children of recent immigrants are counted. The possible benefit of a more rapid population growth stems from the fact that the U.S. labor force market is already tightening rapidly and promises to tighten further as the “baby boom” generation retires. Slow growth of the work force can ultimately slow the overall pace of economic growth, especially if accompanied by slow growth of workers with specific skills. Indeed, for many regions, one key economic challenge and opportunity is to facilitate education and skills acquisition of the foreign born. As of 2005, the U.S. Department of Labor reports that 28 percent of the foreign born aged 25 years and older had not completed high school versus 7 percent for the native-born.
Prior to the 1990s, as shown by the chart below, the Seventh District region, which includes much or all of Illinois, Indiana, Iowa, Michigan and Wisconsin, had not attracted immigrants to the same extent as many other U.S. regions. Still, as shown by the second chart below, strong growth in immigration has taken place here in recent years. So too, the Chicago metropolitan statistical area (MSA) has remained an exceptionally strong magnet among metropolitan areas. Chicago ranked 5th in foreign-born population according to the 2000 Census of Population, with 17 percent to 18 percent of its population foreign born. And since that time, the Chicago metro area has ranked among the top 10 metro area gainers in numbers of both Asian and Hispanic population.
Recent immigrants (as well as members of other ethnic and minority groups) are, to a greater extent, relocating to new areas of opportunity and high growth. According to recent report by demographer William Frey, “Hispanic and Asian populations are spreading out from their traditional metropolitan centers” and expanding their presence in new destinations, including suburbs and rural areas. In part, this dispersion may be an added impetus to current public policy attention concerning U.S. immigration and border control policies.
The chart below confirms for the Seventh District the dispersion of immigrants and foreign born. All Seventh District states experienced healthy growth of foreign-born population. However, the two states with the lowest proportions of foreign-born population—Iowa and Indiana—experienced the largest population growth rates over the decade of the 1990s at 110 and 98 percent respectively.
The Seventh District experience also confirms that immigrants are now following opportunities in employment and housing to a greater extent rather than simply following their historic well-worn path to the largest U.S. metropolitan areas and their central cities.
The final chart (below) distinguishes the growth in foreign born in each state’s largest metropolitan area from the rest of the state. In those large metropolitan areas where economic growth has been leading state economic growth and where unemployment is generally low, growth in the foreign-born population has exceeded the remainder of the state. This experience has particularly characterized the picture in Des Moines, Iowa, Indianapolis, Indiana, and Chicago, Illinois. In contrast, the Milwaukee, Wisconsin, and Detroit, Michigan metro area economies have both lagged their respective states and so have their respective growth rates of foreign born population.
In choosing their nation of destination, immigrants have in the past, “voted with their feet” in search of greater freedom and economic opportunity. Within that destination, immigrants often tended to follow well-worn paths, disembarking in cities and communities where their fellow immigrants had preceded them. In contrast, immigrants to the U.S. are today choosing to disembark directly where economic opportunities are greatest. For this reason, the growth rate of the foreign-born population has become yet another indicator in gauging the success of metropolitan areas.
How well immigrants adapt to their new communities, and how well communities adapt to them, will be part of the future equation of success or failure of many U.S. regions.
Posted by Testa at 1:31 PM | Comments (0)
May 5, 2006
Immigration and Chicago's Growth
In preparing for a presentation to be delivered before the ARS National Forum on Regional Stewardship this week, I was prepared to expound on the superior economic performance of Chicago in comparison to neighboring cities. After all, John Grimond’s recent review of Chicago for Economist magazine recently stated that “Chicago has come through deindustrialization looking shiny and confident.” I must admit that I, too, often characterize Chicago’s performance as robust, and I have observed that both Chicagoans and other Midwesterners believe this to be the case. Much to my surprise, however, in examining total payroll employment trends, I discovered that Chicago’s growth fell short of the neighboring East North Central (U.S. Census division) states region during the 1990s and since that time as well! And in comparison to the nation, Chicago’s per capita income has been flat to slightly declining. What gives?
I believe that part of the answer can be explained by the robust influx of immigrants to the Chicago area, along with the high birth rates of recent immigrants, which have made for a more complex story than the payroll employment and income trends suggest.
Owing to immigration, the Chicago area’s population growth has exceeded the surrounding region since the 1990s, as the chart below suggests. The Chicago metro area is now ranked fifth nationally in proportion of foreign-born population, adding 537,000 between 1990 and 2000—an expansion by over one-half. As of the 2000 U.S. Census, 17.5% of Chicago’s population were foreign born, many of them young families with children. And so, the rapid expansion of the region’s housing stock, revitalization of many older neighborhoods, and home appreciation have not been simply the figments of imagination or the heady boosterism by residents and observers of the Chicago region.
The growing immigrant composition of Chicago's work force, and the way we measure it, may also explain part of its tepid payroll employment growth. Owing partly to language barriers, immigrants are more likely to be self-employed rather than work for a firm as a "payroll" employee. So too, to some extent, immigrant payroll employment may also tend to be casual or uncounted by government payroll employment surveys. An alternative way to estimate employment is conducted by the U.S. Bureau of Economic Analysis (BEA) which takes some account of self-employed workers. In contrast to payroll employment, trends using BEA data (below) suggest that the Chicago area’s employment growth exceeded the East North Central states of Ohio, Indiana, Michigan, Illinois, and Wisconsin in the early years of this decade, and its performance during the 1990s also converges somewhat with the national average.
A moment’s reflection on the measurement of per capita income may also shed light on Chicago’s seeming lack of per capita income expansion during this period. Immigrant groups vary greatly by educational attainment. A recent paper prepared by Sapna Gupta prepared for Chicago Metropolis 2020 reports that almost two-thirds of working age adult immigrants to Chicago from India have college degrees versus only 3% to 4% of Mexican immigrants. Yet, Mexicans are the dominant immigrant group to Chicago in recent years. Accordingly, since education increasingly determines wage and salary income in our economy, Chicago’s immigrant influx has tended to pull down average income. Of course, immigrant household income, even of the least educated, is likely much higher for them than it would be had they remained in their home country. Accordingly, the attendant diminishment of average per capita income in Chicago does not really reflect falling standards of living of Chicago residents.
So, too, as illustrated below, the age of Chicago’s immigrant households, especially Hispanics, is much younger than the pre-existing population. This will also tend to diminish per capita income, since immigrant households will tend to have many more members who are too young to be earning income. Figures reported by the U.S. Census do show that the share of the Chicago area’s population younger than 25 years of age is greater than the U.S. for the year 2000. This gap between the area and the nation has widened since 1990. In contrast, the surrounding East North Central region reports an older population share than the nation, a gap which developed during the 1990s.
Population by Hispanic Origin, Age, and Gender, Chicago MSA, 2000
The Chicago area has become a different place in many respects over the past 20 years as the foreign-born population has expanded. Not everyone has benefited economically from change, but it is quite likely that, on average, Chicago area households have experienced climbing economic well-being. So, too, Chicago’s economic growth has likely exceeded what it otherwise would have been in the absence of immigration.
While the nation currently debates immigration and southern border reform in the U.S. Congress, Chicago’s primary challenges are of a different order. Many recent immigrants face the typical historic barriers to financial and economic assimilation into the Chicago mainstream: lower beginning levels of income, lesser work force skills, lesser knowledge of customs and procedures, and lower education and school readiness. At a time when much of the Midwest region’s existing population is shifting to Sun Belt locales, many foreign born continue to see opportunity here. To bolster the Chicago economy’s prospects, what actions can Chicago pursue to make the most of these immigrants’ energy, ambitions, ties to their countries of origin, and differing skills and culture?
One arena in which the Chicago area and other immigrant centers has been quite active is in facilitating immigrant access to financial channels. On May 4, the Federal Reserve Bank of Chicago and Brookings Institution issued a major study on enhancing the ability of the foreign born to access financial institutions for savings, wealth building and homeownership, payments transactions, and business creation. The study documents the state and progress of immigrant financial practices and access in the United States, along with many lessons learned from diverse perspectives.
Posted by Testa at 1:07 PM | Comments (0)
April 10, 2006
Export Growth Propelling Seventh District
Some of the Seventh District’s slow economic growth earlier in this decade originated with softness in U.S. exports abroad. The manufacturing sector continues to account for the lion’s share of U.S. exports, especially capital goods such as high-tech electronics and computing machinery, as well as industrial machinery and equipment. As global economic growth has recovered, so have U.S. exports abroad. In turn, parts of the manufacturing-intensive Seventh District economy are being carried along.
Nominal U.S. exports abroad experienced rates of decline of 6.3% and 5.2% for 2001 and 2002. Since then, as the economic growth of our major trading partners has generally accelerated, U.S. export growth has responded, averaging 7.7% over the past three calendar years.
As a group, the Seventh District states of Illinois, Indiana, Iowa, Michigan, and Wisconsin are on par to slightly above the nation in export intensity. The chart below measures relative export intensity as the value of exports originating in Seventh District states as a share of total product.
Source: WISER/HAVER Analytics
Michigan and Indiana lead the group due to their sharp industry concentration in automotive activity. Automotive production in North America stretches from Ontario through the Midwest into the mid-South and Mexico, with extensive cross-shipment among NAFTA partners Canada, U.S., and Mexico in both auto parts and finished vehicles.
The table below ranks the principal export industries in each state. Transportation equipment ranks number one in Indiana and Michigan. Moving westward, however, Illinois, Iowa, and Wisconsin all have nonelectrical machinery as their number one export category. Here, products such as industrial equipment and machinery for farming, construction, and mining are dominant.
Source: WISER/HAVER Analytics
Strong export growth has led overall economic growth in the Seventh District over the past two years. As a whole, nominal exports rose 15.2% from 2003 to 2005, exceeding overall U.S. export growth of 10.5%.
Source: WISER/HAVER Analytics
The relative export performance of individual District states from 2003 through 2005 aligns with each state’s particular industry mix. As Thomas Klier indicated in a recent Chicago Fed Letter, weak performance by domestic auto companies is being reflected by flat automotive trade among NAFTA countries. Accordingly, the chart above shows that exports from Michigan have grown at only one-half the pace of the nation and at less than one-third the pace of the remainder of the Seventh District. At the same time, the more capital-goods intensive states of Illinois, Iowa, and Wisconsin are experiencing rapid export growth.
Posted by Testa at 10:06 AM | Comments (0)
March 14, 2006
Global Chicago: Da Bulls, Da Bears, Diversity
Chicago United is a 38-year old group devoted to “Enriching the economic fabric of the Chicago region by building sustainable diversity in business leadership.” On March 10, I participated as a panelist at the first of a three-part series titled “Chicago: A Global City, A Global Perspective on Diversity.” Together with my co-panelists Paul O’Connor and Saskia Sassen, we addressed whether Chicago had become a global city and, more importantly to the Chicago United audience, whether Chicago was working effectively from the standpoint of diversity as a business imperative in the global marketplace.
Here are my thoughts, though I’d like to hear yours as well!
The Chicago metropolitan area (Chicago) lies on the razor’s edge with respect to its future. So-called globalization lies at the heart of what has brought Chicago to its critical crossroads. To put it simply, depending on both its own actions and on the fates, Chicago can possibly become a backwater business capital city of a shrinking and largely unimportant region of the United States. Alternatively, Chicago can become an independent city of global importance, a city that attracts the world’s most talent business makers, artists, policy makers, and idea-creators. As such, Chicago could even become the portal that helps revive a surrounding Midwest region which is sorely in need of revival and re-invention.
Globalization means that the world’s economy has become more integrated and intertwined, and its regions more subject to frequent and profound shifts and changes. This is so because communication costs and transportation costs have fallen dramatically. For example, costs of shipping a ton of cargo dropped by three-fold from 1920 to 1960, and containerization and transport by larger and larger ocean-going ships continue to pressure prices downward today. Air shipping costs have dropped by 80% since the mid-1950s. And while many of us complain about airline deregulation and recent security procedures, personal air travel is now much more affordable to average Americans.
Communications cost declines are even more dramatic. The cost of a three-minute phone call from New York to London was once the equivalent of $350 in 1930 in today’s terms. These same communications facilitate both cargo and personal logistics, as well as propelling traded services, information, and capital around the world.
On top of this, most of the world’s nations have agreed to lower barriers to the flow of goods, capital, intellectual property, and sometimes travel and immigration.
How has globalization impacted Chicago? The pressures and challenges are great. Chicago can be characterized as the business capital city of a shrinking economic region. Chicago was borne of the gathering of farm products and natural resources, the sorting and shipping of these products, the financing of these products, and the supply of business and legal services to farms and agri-businesses throughout the Midwest.
In parallel, Chicago became a great manufacturing city as result of its transportation/hauling capability and facilities. Chicago gathered Midwest resources and transformed them more productively than any place on earth. So did other Midwest cities, but Chicago also became the business capital of these lesser cities in supplying them business, financial, and legal services.
Without belaboring the point, these same activities are today shrinking as sources of household income and jobs for both Chicago and its surrounding Midwest. For the most part, technical progress has diminished the need for workers here in Chicago in these activities, even while the attendant productivity gains have raised standards of living both here and around the nation. Growing world trade and import competition have contributed to local pressures and shrinkage. Prices for commodities and routine manufactured goods have declined, too, as both farming and manufacturing have become hugely productive—victims of their own success. And so, income and job growth generated from these activities are now weaker.
Does Chicago have a bright future? Its future likely rests with its ability to grow and develop linkages beyond its immediate region. It must produce services—high valued and sophisticated services-- that are valued in markets far from the Midwest. In the process, it can possibly lead the surrounding region to new markets as well. This is Chicago’s vision of becoming a successful global city.
In re-inventing itself as a global city, Chicago must attract (and also grow locally) the world’s business makers and highly skilled occupations and entrepreneurs.
Thankfully, super large cities such as Chicago are favored in recruiting skilled workers and entrepreneurs, and developing them locally. That is because learning and the networking necessary for career advancment is more attractive in places with many and diverse skilled work force activities. So too, the U.S. work force has become more composed of two-earner families, mostly due to rising labor force participation of women over the past 35 years. Because large cities such as Chicago offer large and diverse work force opportunities, employers can more easily attract highly skilled and specialized workers. Urban amenities are also attractive to many highly skilled or educated workers, perhaps blunting the pull of warmer climates elsewhere.
Within the Midwest, Chicago and the Twin cities are the magnets for highly skilled young workers, ranking 11th and 5th respectively among U.S. metropolitan areas in the proportion of its population aged 25-34 having college degrees.
Chicago also continues to attract immigrant population. Arguably, the single most important indicator of a region’s future and prospects for success is whether people are “voting with their feet” in choosing it as a place of promise. Within the Midwest, thanks to ongoing in-migration of Hispanic, Asian, East European, and other peoples, Chicago’s 17 percent foreign born population far outdistances other Midwest metro areas in its proportion of foreign born. These are people who bring new ideas and new ambitions to the Chicago area.
What signs are there Chicago’s industry base is well-poised for the emerging global economy? Chicago’s economy can look at several promising aspects. Business and legal services were the growth engines of Chicago’s economy in the 1980s and 1990s, outdistancing the growth of such jobs in every other U.S. metropolitan area. Management consulting, accounting, public relations, and the like represent services that Chicago is now selling around the nation and the world. The combined number of jobs in finance, legal, and business services in Chicago surpassed those in manufacturing by the early 1990s.
So too, Chicago’s financial exchanges have shaken off their competitors in many regards along with their institutional sclerosis. They are once again healthy and growing, seeking global partners and markets.
Chicago’s world class universities can count among them the leading business, medical, and professional schools.
In bringing in customers for these businesses, and in sending out its agents, Chicago’s O’Hare airport has been a critical vehicle, replacing what the rail hub once was to Chicago. The early innovation of McCormick Place (and later expansions to it) has made the region a global meeting place for business, commerce, and culture. Rising tourism has followed from around the nation and the world.
But, what must Chicago do if it is to continue to re-invent itself for a global economy? Among other things, Chicago cannot attract the world’s most ambitious and talented people, it cannot grow the world’s innovative and globally expansive businesses, unless it works well on the inside. Part of this working well as a city requires key infrastructure such as highways and land use planning that allows circulation of people in getting around, as well as providing public services and goods to Chicago’s residents. Metropolis2020 and other efforts and trying to lead Chicago into successful resolution of these challenges. It also involves creating the type of amenities that are world class, such as Millennium Park and Lakefront park improvements.
But perhaps more importantly, Chicago must be recognized as an oasis of opportunity for persons of every color, culture, and sex to realize their dreams and ambitions. Otherwise, business builders such as John Johnson and Oprah Winfrey will emerge elsewhere. The new generation of idea makers such as those who were pre-cursors of Genetech and Netscape will continue to move elsewhere, as will the rising stars of sports and culture such as Daniel Barenboim and Donald Young.
How can we nurture a culture of openness and opportunity here? Recognizing and understanding the threats and opportunities are half the battle. Organizational initiatives such as those of Chicago United are helpful.
We might also do well to focus on our opportunities rather than on our problems. As President Eisenhower has been quoted as saying, “If a problem cannot be solved, enlarge it.” In this instance, it is perhaps easier for us to join together when we are all going forward, when we are growing economically, intellectually, and spiritually. Accordingly, ambitious economic growth agendas and initiatives for Chicago going forward should be considered.
At the same time, as we participate in Chicago’s life and economic growth, we must all stretch ourselves personally so that we include those of us who may not live next door, or who may not look or talk or act as we do. Growth and success will make it easier for us to do so.
Walt Disney once said “Change is inevitable, growth is optional.” In the context of greater diversity and inclusion, a corollary is that neither change nor growth are inevitable. Rather, we must push ourselves to make them both happen. In doing so, however, we will find that inclusion and growth are mutually re-enforcing.
Posted by Testa at 2:25 PM | Comments (1)
February 7, 2006
Foreign Direct Investment in the Midwest
Recently, companies from China have begun to explore direct investments in the Midwest and elsewhere around the world(link). Direct investment differs from portfolio investment, such as investment in U.S. Treasuries, in that direct investors have an equity interest that allows them to have some hand in the operation of the enterprise and its assets. Though direct investment from China is miniscule so far, past experiences with other emerging nations, such as Japan, suggest that the growth prospects may be large. Beginning in the 1980s, Japanese companies began to heavily invest in the Midwest, especially in automotive assembly and parts operations. Many of these ventures brought new capital and new ideas to the region’s economy, thereby easing the region’s adjustment to competitive decline and import competition. Such investments continue today as in the case of Toyota, which is scouring the nation—including Michigan—in siting a planned engine production facility. Can investors and partners from China and other emerging countries play a similar role in the Midwest in the years ahead?
Part of the globalization phenomenon has occurred through the integration of capital markets, including direct ownership of companies by overseas parents. Data from the U.S. Bureau of Economic Analysis records foreign direct investment (FDI) transactions, along with characteristics by location of foreign-owned companies and their affiliated establishments in the United States. As a result, FDI in the U.S. may be either an acquisition of existing operations or a new investment, such as the building of a new manufacturing plant. The figure below displays wage and salary employment of FDI affiliates as a share of total employment in both the Midwest and in the rest of the U.S. It is telling us that this share has doubled in both the Midwest and the U.S. over the past 25 years.
Click to enlarge.
By this measure, the Midwest has kept pace with the U.S. In one respect, this is surprising since the Midwest is far way from the coastal economies, where one might think that access to and linkage with global companies would be more intensive. On the other hand, most FDI takes place in the manufacturing sector, which is more concentrated in the Midwest relative to the rest of the U.S.
From which countries does our FDI originate? Inbound FDI has been taking place for a long, long time, back to our country’s founding when you stop to think about it. For this reason, it may not be surprising that most of our FDI is today domiciled in Europe (table below). As of 2000, Europe made up two-thirds of FDI employment at foreign-affiliated establishments in the Midwest, with over one-half of these domiciled in Germany or in the United Kingdom. The remaining one-third of FDI employment is equally split between Asia and the Americas. Almost all of the Americas’ FDI originates with Canadian companies, while almost all of Asia’s FDI originates with Japanese companies.
Click to enlarge.
Over time, Japan’s FDI has been replacing Europe’s and Canada’s in the Midwest (table below). From 1980 to 2000, FDI employment at Japanese affiliates grew from 14,000 to 190,000 in number, thereby boosting Japan's share of the region's FDI from 3.4% to 15%. With this growth, Japan’s FDI displaced Canada’s for the number three spot behind those of Germany and the United Kingdom.
Click to enlarge.
By now, the origin and legacy of Japanese FDI in the Midwest is well known. Japanese automotive assembly and parts plants in the U.S., such as Denso, Honda, and Toyota, demonstrated that their successful production and distribution technologies were not derived from location or cost advantages abroad. Rather, their affiliates' success proved that the quality and cost efficiencies of their products could be duplicated in the U.S. This lesson was not lost on other manufacturers in the U.S. or worldwide. Japanese methods were copied and often improved across many industries. For many companies based outside of Japan, successful imitation and adaptation, along with investment from Japanese companies themselves, eased the transition to global competition and helped revive local production activity.
The map below displays the location and number of foreign-affiliated automotive parts plants in the eastern United States. Clearly, the Midwest has held its own in attracting these plants, which in turn suggests that the Midwest continues to be a desirable location for manufacturing production.
(courtesy of Thomas Klier)
Click to enlarge.
Can inbound FDI from China serve the same purpose as FDI from Japan? To date, Chinese inbound FDI has been miniscule. As of the most recent tally, only 4,000 payroll workers in the entire U.S. were employees of Chinese affiliates versus almost 6 million from FDI affiliates from all nations combined.
So, too, the source of China’s emergence as a global producer differs greatly from those of Japanese and many European manufacturing companies. Although China is rapidly evolving its economy to integrate more sophisticated technology (link), China’s initial strength is as the low-cost producer for the world, not as the innovator. Unlike Japan, China’s rapid rise owes much to its openness to a huge influx of FDI into China by other Asian nations and the U.S. in search of low cost production there. Accordingly, Chinese companies’ interest in Midwest locales will probably be less focussed on production. Rather, these firms will more likely be interested in activities such as local product research and design for distribution to U.S. markets, with most of the production remaining in low-cost China.
A recent story by journalist Michael Oneal (link) documented one such instance, that of Chinese affiliate Wanxiang, which is headquartered in Elgin, Illinois. Wanxiang’s originator is reported to be scouring the Midwest for troubled manufacturing operations, including auto parts suppliers, to acquire or with which to partner. One such partnership has resulted in Wanxiang taking an equity interest in Rockford Powertrain Inc., a supplier of heavy-duty driveline components to U.S. off-road equipment makers. Thanks partly to the partnership, the operation is now on a sounder financial footing. However, as part of its restructuring, its nonassembly production has been outsourced to China, while the U.S. operation concentrates on design, engineering, customer relations, assembly, and distribution. Overall employment has declined so far, especially in production, although the company is looking to grow.
What are we to make of China’s initial (and thus far miniscule) FDI overtures in the Midwest? First, China’s character as low-cost producer rather than as innovator likely means that the volume of China’s overseas FDI interest will be limited, at least for a while. Second, much like all potential FDI opportunities, partnering with Chinese companies on operations in the U.S. can sometimes be a successful strategy for domestic companies in preserving or expanding jobs and income. However, in China’s instance, the resulting production employment prospects in the Midwest are not likely to be as expansive as they have been from FDI partnerships with Japanese and European companies.
If Midwest manufacturing companies are to succeed, they will need to find their own best pathways. In some instances, success will be achieved by partnering with foreign companies on U.S. soil; in others, it will mean investing abroad to serve emerging market opportunities (link). Above all, innovation will be key to the success of their organizational structure, management, process technology, distribution, and new products.
Posted by Testa at 4:00 PM | Comments (1)
January 6, 2006
Midwest and the Global Economy Part I
From the slow progress being made on the Doha round of global trade liberalization, it would seem that globalization is slowing down. Yet, this is not the case at all. As the 2002 Economic Report of the President articulated, globalization continues to be enhanced by ever-falling costs and technical advancements in communication and transportation. Such developments are magnifying trade flows of merchandise and commodities and, more recently, services such as software, R&D, call services, and data processing. Springing from these developments in information technology and communication, global capital markets are deepening, which in turn further heightens trade in goods and services.
Regional economies, especially that of the Midwest, are being affected by globalization. Tradable goods such as manufacturing and agriculture products play a significant role in the upheavals of globalization. And so, Midwestern households and business would benefit from timely and appropriate adaptation to the globally induced upheavals taking place in industries, companies, and occupations in the region.
Since households continue to learn about globalization from the print media, The Global Chicago Center of the Chicago Council on Foreign Relations and the Ford Foundation are fashioning a project called the Midwest Media Project. The project intends to assist journalists throughout the region to help put local interests in the broader context of global economic developments and events. In this way, Midwesterners can become more attuned to globalization, especially as it relates to the region.
At the first meeting of the project on January 10, researchers and policy leaders are being asked to present globalization topics and information to the attending journalists. In turn, several senior journalists will lead discussions on ways in which global events and trends can be linked to local stories in engaging ways.
I was asked to deliver the overview on the Midwest economy, highlighting the linkages between our region and the world economy. And when I stop to think of the linkages, there are many. For one, given our sharp manufacturing concentration, the Midwest economy is about on par with the nation in terms of exports, and our region’s exports to the world are large and growing. Not surprisingly, it is our “capital goods” that stand out as prominent exports—construction and farm machinery, medical equipment, engines, and electrical equipment. Automotive exports are also prominent, with most of them destined for nearby Canada rather than for far-away locales. As Thomas Klier, automotive expert here at the Chicago Fed has said, “the binational region’s auto industry knows no boundaries.” (Chicago Fed Letter on border conference) Close to 40% of the considerable U.S.–Canada merchandise trade crosses the border in Michigan through the Detroit–Windsor corridor or over the bridge at nearby Huron-Sarnia, much of it being automotive parts and finished vehicles.
Partly owing to this tight automotive production integration, Great Lakes exports to Canada represent 50.4% of the region’s exports versus only 18.2% for the overall U.S. If we were to deduct U.S. exports to Canada from both the Great Lakes region and the U.S., the pattern of export destination by country would be nearly identical for both the region and the overall U.S., with a slight tilt of Midwestern exports to Europe rather than toward Asia.
So, too, without our outsized trade with Canada, the Midwest export propensity is significantly smaller in relation to the rest of the U.S. In addition to the region’s proximity to Ontario, landmark agreements to lower tariff barriers to trade between the U.S. and Canada, such as the AutoPact of 1965 and the Free Trade Agreement of 1989, have maintained the close trade linkages between Ontario and the Great Lakes states.
In assessing a region’s (or a nation’s) propensity to trade, should trade with nearby countries be counted equally as trade with faraway ones? In comparing trading intensities across countries or regions, it seems reasonable to at least keep in mind that national boundaries can be somewhat arbitrary. For example, if the boundaries separating states in the Midwest were national boundaries, the trade intensity between the Midwest states would be enormous (link link), easily dwarfing current international trade flows into and out of each state.
What do such trends suggest for the region’s economic development policy focus? Growing international trade would seem to support trade missions from the region to foreign countries, many of which are sponsored by state governments. However, the Hewings and Israilevich statistics (above) on the larger volume of intra-regional trade flows might alternatively suggest that public policies to enhance or support local commerce might deserve more emphasis. I see no conflict here; these policy arenas are complementary rather than in competition. We can metaphorically think of the highly integrated binational Great Lakes region as a single factory or service company. Our efforts to encourage free flowing and efficient commerce within the region will serve to strengthen our ability to produce goods and services for trade with the world, which in turn will result in more income for the region’s households and businesses.
One example of local policy of this nature is surely the continued attention to keeping our border-crossing infrastructure and procedures with Canada safe—but also fast and efficient (link). On the U.S. side, the Great Lakes economy will be more likely to prosper if it is the center and nexus of commercial trade flows rather than a peripheral player in the national economy.
Posted by Testa at 10:42 PM | Comments (0)