Rebuilding California's Trade Policy Infrastructure Iii
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Rebuilding California’s Trade Policy Infrastructure MICHAEL JARAND AND KEVIN KLOWDEN ABOUT US About the Milken Institute The Milken Institute is a nonprofit, nonpartisan think tank that mobilizes actionable solutions to persistent global problems. We are guided by a belief that financial incentives can be one of the strongest catalysts for good and that the best ideas—unfunded—often go nowhere. About the Center for Regional Economics The Milken Institute Center for Regional Economics promotes prosperity and sustainable growth by increasing understanding of the dynamics that drive job creation and promote industry expansion. Our research, programming, and convening develop and disseminate innovative, actionable economic and policy solutions that provide change makers with the tools to create jobs and improve access to capital. CONTENTS 1 Executive Summary 5 Introduction 11 Background 20 California Trade Policy History and Current Status 32 Identifying California's Challenges 36 Objectives and Best Practices 57 Recommendations MILKEN INSTITUTE REBUILDING CALIFORNIA'S TRADE POLICY INFRASTRUCTURE III REBUILDING CALIFORNIA’S TRADE POLICY INFRASTRUCTURE Michael Jarand and Kevin Klowden California is home to one of the largest and most vibrant economies in the world, with a gross domestic product in excess of $2.8 trillion, and is one of the top exporters in the United States. In 2018, the state exported $178 billion worth of merchandise, was a major destination for foreign investment in the US, and was a leader in services trade in industries like software, entertainment, and education. California benefits from its ties to international trade in numerous ways. This trade and investment, the jobs they support, and the ways they improve California’s competitiveness in the global economy are deeply important to California’s economic well-being. However, over the past 15 years, California’s state government has not shown a level of commitment to trade commensurate with its impact on the state economy. California can and should be doing more to defend its position as a top exporter. MILKEN INSTITUTE REBUILDING CALIFORNIA'S TRADE POLICY INFRASTRUCTURE 1 Beyond the headline numbers, California lacks the trade policy infrastructure to lead on international trade and investment and is falling behind in some measures. Many, including the Milken Institute, have previously stressed the need for a more comprehensive approach to international trade and foreign direct investment. Since 2012, California has begun reestablishing its role in export promotion and foreign direct investment attraction, but these efforts are not resourced appropriately, not only for international engagement but also for the regions of the state that benefit from trade but cannot engage globally on their own. The current programs lack a statewide and global reach, and do not tie into the state’s broader economic development platform. The current national trade environment underscores the importance of trade for California’s economy, and the timing is right to make progress. Governor Gavin Newsom’s administration has an opportunity to modernize and lead in this area in a way not seen since 2004, when the California Technology, Trade, and Commerce Agency was eliminated. It has already taken steps to organize a new International Affairs and Trade Development Interagency Committee, but the success of the new effort will depend on the commitment from both the governor and the state legislature. The major failure of past iterations of these programs has been their transitory nature, falling into and out of political favor and facing budget cuts or outright elimination. Whereas other best-in-class states have professional bureaucracies built up to perform the expert work around trade and investment, California has been forced to reinvent these programs time and again. There is no “one size fits all” trade and investment strategy California can utilize. California’s strategy needs to reconcile the state’s unique challenges and opportunities, and policymakers will need to make hard decisions about what they can and cannot accomplish. This report not only examines key challenges facing the state, but also utilizes past research, stakeholder engagement, and current best practices from other states to offer concrete recommendations that can be acted on immediately by the incoming administration. This is an evolving policy framework intended to keep California moving forward. Our recommendations are designed to make this possible, but dialogue is needed to determine concrete steps for implementation. Our recommendations, expanded upon in detail later, include: 1. Expand California's trade and investment footprint 2. Secure funding sources 3. Deliver services and measure outcomes 4. Coordinate private-sector and federal and local government partners 5. Improve California's trade and investment marketing and awareness MILKEN INSTITUTE REBUILDING CALIFORNIA'S TRADE POLICY INFRASTRUCTURE 2 There needs to be a coalition of support among the governor, the state legislature, local government, and private stakeholders to build up a trade and investment platform that creates a return on investment for California taxpayers and has a dedicated funding source. By doing so, California will create a more effective and more permanent framework that does the most good for the California economy. MILKEN INSTITUTE REBUILDING CALIFORNIA'S TRADE POLICY INFRASTRUCTURE 3 INTRODUCTION California has a vibrant economy and is frequently lauded as the fifth largest economy in the world. The state’s gross domestic product is greater than $2.8 trillion. By virtue of its role as a gateway to the Pacific, California is one of the top exporters in the United States. In 2018, the state exported $178 billion worth of merchandise, was a major destination for foreign investment in the US, and was a leader in services trade in industries like software, entertainment, and education. California benefits from these ties to international trade in numerous ways. This trade and investment, the jobs they support, and the ways they improve California’s competitiveness in the global economy are deeply important to California’s economic well-being and should not be taken for granted. However, California can and should be doing more to defend its position as a top exporter and leader in international trade and business. California’s history of state government support for international trade and investment is mixed. The state has been a leader in this area, but it has abdicated this role entirely at times. While discussed in greater detail below, this is mostly a byproduct of poor state planning elsewhere. California has endured major cuts to its trade and investment programs throughout the years due to MILKEN INSTITUTE REBUILDING CALIFORNIA'S TRADE POLICY INFRASTRUCTURE 5 budget shortfalls and cost-cutting. The elimination of the Technology, Trade, and Commerce Agency (TTCA) in 2004 is the most recent example. The direct benefit of this work has also been called into question at times, prompted by poor management and a lack of accountability for results. This is a discussion not only of necessary resources, but also of the political will, foresight, and management needed to modernize and overhaul the status quo and create a trade policy infrastructure that works better for California. These conversations existed even when California did have a Commerce Agency, which was a constant target for state auditor investigations.1 Legislative reports,2 academics, and nonprofits have also regularly weighed in on California’s lack of trade and investment programs. These reports and their suggestions, while well researched, have not been widely adopted. The state still lacks leadership, from both the governor and legislature, to overcome its challenges. Pursuant to the California International Trade and Investment Act of 2006, the California Business, Transportation & Housing Agency released a report, “Toward a California Trade and Investment Strategy: Potential Roles for the State in Global Market Development,” which comprehensively examined California’s programs and identified numerous gaps in international trade and investment services the state could provide. It brought together many authors, government partners, and focus groups and serves as a useful list of potential state activities, though many of its recommendations were never implemented. The result was a significant void following the elimination of the Technology, Trade, and Commerce Agency in 2004. 1 The Trade and Commerce Agency and its successor, the Technology, Trade, and Commerce Agency, were the subject of California State Auditor reports in 1995 (Report 93109), 1996 (Report 95118), 1999 (Report 99025), and 2001 (Report 2001-115). These reports highlighted a failure to measure the return on the state’s economic development programs (including trade promotion) and a lack of strategic planning and coordination with other entities. 2 The California Assembly Committee on Jobs, Economic Development, and the Economy has released periodic reports weighing in on the state strategy. California’s Proposed International Trade and Investment Strategy: Legislative Review by the Assembly Policy and Fiscal Committees in 2008 and the 2016 Oversight Hearing on Programs of the Governor’s Office of Business and Economic Development are two examples. MILKEN INSTITUTE REBUILDING CALIFORNIA'S TRADE POLICY INFRASTRUCTURE 6 Since 2012, the state has been re-engaging in some areas of trade