Going Global: The Future of Metro Economies

Editor’s Note: During the opening breakfast event for Los Angeles’ 86th Annual World Trade Week, Amy Liu delivered a presentation and remarks describing how the region can build on its local assets to boost exports.

It is a real honor to be asked to help you kick off your 86th Annual World Trade Week. After 86 years, it is not a surprise that this is a region that is quite globally aware and globally engaged, thanks to the leadership of the L.A. Area Chamber, the L.A. and Long Beach ports, the city, and many, many others. 

Recent speakers have come before you reinforcing the importance of the trade economy and the critical need to modernize the trade infrastructure here in the region and the state, building a truly effective freight/logistics and supply chain management system. That is no doubt imperative if we are to keep the L.A. region a trade hub of choice in an increasingly competitive global environment.

“The winners in the next economy will be those who strengthen global assets and tap new sources of aggregate demand.”

This morning, I want to build on those messages. First, it is important to recognize that it is metro areas that are the true economic units of the global economy so they must act with intention to maximize the opportunities presented by expanding markets abroad. Yet, to act regionally, we need strong civic infrastructures — of business, political, civic, university, nonprofit leaders who must work effectively together to leverage and integrate all of the assets that will help the L.A. region prosper.  The good news is that the new Los Angeles Regional Export Council and its regional export plan embody that kind of proactive, cross-sector partnership that will position this region well for success. And Brookings is pleased to have been advisor of that effort.

It is often said that collaboration is an unnatural act. Yet, those regional export partnerships and initiatives must succeed and not just be plans on paper.  There are new rules of economic growth post-recession. To be clear: the regions that adapt well … with focus, intention and collective action … will be those who will excel in the new global economic order.

Times have changed. The U.S. economy is undergoing a major economic restructuring which demands a structural response. The Great Recession was not the same as its predecessors. The job loss this time was steeper, the impact deeper, and the recovery slower because this was a structural recession.

The core structural problem: Nearly all of the incremental job growth over the last two decades came from non-tradable sectors, such as real estate, retail, and government. This was the eye-popping stat issued by Nobel economist Michael Spence. In short, we stopped innovating and producing jobs in value-added industries that create wealth, grow local industries, and make our American marketplace distinct from our competitors.

The other big structural shift: Economic growth is increasingly taking place outside the U.S. 

In 2010, the combined global GDP of the BIC nations surpassed that of the U.S. for the first time, making up one-fifth of the world economy. That shift is expected to accelerate in the coming years while the U.S. share of global GDP is forecasted to stay the same.

The rise of the BICs is also in part a reflection of the rise of global metros. Rapid industrialization has been matched by rapid urbanization. More than half of the world’s population now lives in cities, and that share is expected to grow to 60 percent in 2030 and 70 percent by 2050.

With rapid urbanization comes the rise of the global middle class which is driving the growth of consumption. OECD predicts that, despite the recession, consumption is expected to rise from $21 trillion today to $31 trillion by 2020, mostly due to the growth in Asia and Latin America.

We view these trends as less a threat but a market opportunity.

Against this back drop, let me tell you what the data is telling us. The winners in the next economy will be those who strengthen global assets and tap new sources of aggregate demand.

The leaders in the next economy will innovate in manufacturing. While manufacturing has contracted as a share of the overall economy, it is becoming leaner and more advanced. Thus, manufacturing jobs are recovering faster than the economy as a whole, at 2.3 percent in the third quarter of last year compared to 1.4 percent nationally. The manufacturing sector has added about 350,000 jobs in the last two years.

For those who remain skeptical about U.S. competitive advantage in manufacturing, this is not the industry of yesterday. The U.S. is the third largest manufacturing exporter in the world because manufacturing remains a critical part of our innovation cycle. U.S. manufacturing employs 35 percent of all of our scientists and engineers, invests 68 percent of all R&D; and generates 90 percent of all patents.

Leaders will also need to innovate in services. In fact, services, such as business consulting, education, architecture and planning, are the fastest growing segment of our export economy, and the U.S. has a trade surplus in services.

Within the services sector, expenditures of foreign students in U.S. colleges is growing steadily. We now have more than 720,000 international students studying in the United States, led by those from China, India, and Korea. That sector represents $21.2 billion in U.S. service exports.

Leaders in the next economy will also invent and deploy clean economy goods and services.

Rapid urbanization worldwide has pushed up the global demand for environmentally friendly goods and services, such as energy efficient appliances and building technologies, smart grid, sustainable land use planning and infrastructure, and organic foods.  We are meeting that demand.  In fact the U.S. has a sizeable clean economy, representing 2.7 million jobs.

The upshot: U.S. clean economy products generated $54 billion in exports, two times more value per job than the typical U.S. export.

Additionally, the regions that prosper will be those that take advantage of global demand. The post-recession reality has made that more urgent. 

According to our recent Global MetroMonitor, 90 percent of the fastest growing markets among the 200 largest world cities were located outside of the U.S., Western Europe, and earthquake-ravaged Japan.

In fact, there are more than 20 markets around the globe that did not experience this last recession or have already fully recovered— Shanghai, Shenzhen, Mumbai in Asia … Istanbul in Europe … Santiago and Buenos Aires in Latin America.

Bottom line: If we are to grow, our firms must look outside of the U.S. and tap emerging markets and global consumption as a source of growth here at home.

And here is the evidence: Those firms who embraced international sales drove our economic recovery.  Exports were responsible for 46 percent of US GDP growth between 2010 and 2011 … which is remarkable since exports make up only 13 percent of the GDP of the U.S. … compared to much higher shares in China, Canada, and the entire EU.

Going global pays off for small and mid-sized firms. Those who exported saw their revenues grow, by 37 percent, through 2009, compared to just 7 percent among non-exporters.

Selling globally simply makes good business sense.

Second, it will be metro areas like Los Angeles that will drive the transition to the next economy.

Metro areas are the engines of the global economy b/c they aggregate and integrate the very market assets that drive growth.  Even though the 100 largest metro areas sit on just 12 percent of the nation’s land area, they dominate in innovation, by attracting 94 percent of the nation’s venture capital.  They are the producers of our trade economy, generating 75 percent of all services exports. And they are the hubs of supply chains and goods movements, handling 82 percent of the nation’s air freight.

As a result of those assets, the 100 largest metro areas generate 75 percent of the nation’s GDP. 

And metro areas generate the majority of export activities in 30 out 50 states.

Let’s take a quick aerial trip to this metro area and showcase the unique components of your trade economy, which is truly regional in nature.

You are the largest metro exporter in the country, with $80b in export sales, and exports make up a larger share of this economy at 11 percent than the typical metro area or even the nation as a whole.

Your export economy is more service oriented than the national average … driven by royalties, travel and tourism, and business and professional services.

That’s not surprising. Ask anyone what they think L.A. produces:  Hollywood is the first thing that comes to mind.  In 2010, royalties were a $12.4 billion export industry, powered by film and television.

Yet L.A. does not just make films, it makes things. Close to 60 percent of your exports comes from the manufacturing sector, and you have over 106,000 direct export manufacturing jobs. 

In Torrance, southwest of downtown, we find Luminit, a small manufacturer of advanced lighting products that are used in a broad range of applications.  Luminit’s production center houses some of the world’s most advanced equipment for R&D, engineering, and the manufacturing of optics. In the last two years, the firm’s exports have grown 68 percent.

Just to the south of Luminit is Pelican Products, a firm that produces high-performance protective cases and advanced portable lighting equipment used by law enforcement, defense, aerospace, and the entertainment industry.  Exports make up 35 percent of Pelican’s total business, and the firm sells its products to over 100 countries. As with Luminit, Pelican has experienced significant export growth in the past few years, driven by strong demand in Europe and Asia. 

Both Pelican and Luminit benefit from their partnership with USC’s Center for International Business Education and Research and UCLA. One works with CIBER to help determine where to locate distribution centers in Asia. And the other benefits from the Export Champions program, a collaboration also with the L.A. Area Chamber of Commerce, which deploys MBA students to small firms to help them integrate international sales and markets into their business plans.

Further, these universities are service exporters themselves, attracting nearly 39,000 international students who purchase their top notch educational programs.

USC and UCLA are joined by Mayor Antonio Villaraigosa at City Hall, the L.A. Area Chamber of Commerce, and others, such as the Ports of L.A. and Port of Long Beach, the Los Angeles World Airports and regional business associations in being part of a larger regional group—the Los Angeles Regional Export Council which was formed last November to bring greater coherence and focus in helping L.A. firms expand effectively in to global markets.  

Finally, as you know well, the ports of Los Angeles and Long Beach play particularly critical roles in the movement of goods produced by firms like Pelican and Luminit to markets throughout the world, especially to Asia. Taken together, these two ports form the busiest complex in the Western Hemisphere, and the sixth busiest port complex in the world. 

The L.A. story reveals why it is not just the city but the entire metro area that powers our economy: these hyper-linked networks of private firms, universities and public and nonprofit institutions rely on each other to fertilize ideas, extend innovation, enhance competitiveness, and collaborate to catalyze economic growth for the entire region. These actors also make up the civic infrastructure needed to make sure the economy doesn’t just grow by luck but with purpose and vision.

That leads me to my final point, given all these assets, this region is poised to lead in the global economy.

First, you are innovating locally. And you must not only because of increased competition abroad but because partisan gridlock in Washington and the fiscal straightjacket in Sacramento demand that you drive your own fortunes in this global economy.

This region is one of four metro areas in the country piloting some of the nation’s first metro export plans. Your leadership in this space, alongside Portland, Minneapolis-St. Paul and Central New York, will likely spawn copycatting among state, city, and regional leaders who are eager to better orient their economies for export growth.  Further, this state, and federal trade-related agencies, like ITA, SBA, Ex-Im Bank, are all committed to better align their state and federal activities with this region’s ambitions.

To develop its plan, this region conducted a market assessment of its export position, using data analysis and surveys and interviews of companies.

Leaders here worked hard to set exporting goals and objectives, devise strategies to meet those goals, and establish metrics to gauge progress.

And lastly and noted before, this plan was prepared by a consortium of corporate, government, university and civic institutions who “collaborated to compete” globally.

What I like about these plans is that it exemplifies exactly why you can not double exports nationally from the top but instead from the bottom up. The L.A. region and each of the other metros set a goal of doubling exports in five years. But each is meeting that goal with very different strategies, built on their unique competitive advantages. There is no one size fits all approach to doubling exports.

This region has established a Los Angeles Regional Export Council. The council, to be formal and funded, will be held accountable for ensuring that existing efforts and new programs are coordinated, unified, and sustained in ways that will increase the number and volume of exporters in this region.

The focus will be helping export ready companies in 12 target industries, like aerospace and energy/green technologies, connect to priority markets like the Pacific Rim.   

In short, this proactive effort to bring more companies into the trade economy is good for all parts of greater L.A., such as for both ports and area airports, so they are shipping not just any goods but more products made in L.A.

To take this metro innovation to scale, Mayor Villaraigosa, in his capacity as head of the U.S. Conference of Mayors, put out an Export Challenge to America’s cities and metros: “Design strategies that build from your special export strengths.”

Soon, other metro areas will be joining you in developing innovative approaches to trade.

But, as you know, as much as you innovate locally, the states and federal leaders matter to the success of your efforts.  So, you must advocate nationally.

Local leaders in China, Germany, South Korea, Spain, Brazil, and Columbia are working in partnership with their regional and national governments to make transformative investments in world class ports, high speed rail, research and innovation.

We must do the same here at home.

So what does this region want in a state and federal partnership to make a regional export and trade strategy a success?

First, at the state level, it has been helpful to have a state partner in the governor’s new Office of Business and Economic Development.  The governor announced the opening of a new California-China Trade and Investment Office, while in L.A. during the Chinese vice president’s visit earlier this year.

That global presence is critical.  But the state can do more at a time when other states are aggressively ramping up their state export capacity.  It can re-establish the California Export Finance Office to provide small exporting firms with short-term financing, a self-generating program with little cost to tax payers.  It should commit long term funding to the critical CITD program, the Centers of International Trade and Development, which trains firms on exporting but currently on a financial lifeline.  Or it can establish a competitive grant program for metro area, as done in other states, so regions like L.A. can implement their own trade strategies

At the federal level, one of the few bipartisan successes was the passage of the free trade agreements. Hopefully, for the remainder of the year, we will also pass the reauthorization of the Ex-Im Bank, and maybe a short term national transportation bill.

But when this election is over, this region should demand real action:

No matter who is president, there is a good chance that the federal government will streamline and reorganize federal trade agencies and services.  And the business community is demanding it.  Metros also need to play an enormous role.

President Obama, for example, has proposed consolidating six agencies in this federal apparatus involved in trade activities: the U.S. Department of Commerce’s core business and trade functions, the Small Business Administration, the Office of the U.S. Trade Representative, the Export-Import Bank, and the Overseas Private Investment Corporation.  

Yet consolidation would be a failure if it just moved agency boxes around in Washington D.C.

The key to success is to integrate activities on the ground.  As I have heard Carlos urge often… local representatives of the federal export agencies must operate as a unified export team themselves– with one set of export objectives, one set of performance metrics, in alignment with a region’s ambitions and puts businesses first.

Finally, beyond innovating locally and advocating nationally, U.S. metros must network globally—creating and stewarding close working relationships with trading partners in both mature and rising nations.

Strong connections already exist:

Metros with concentrations in financial services, like New York, are forming tight, interlocking networks with similarly focused metros around the world.

Metros with concentrations in advanced manufacturing, like Detroit, are similarly linking with metros in both developed and rising nations.

And port metros like Los Angeles-Long Beach are making key connections with the world’s air, rail and sea hubs.

These networks obviously start with firms and ports that do business with each other.

But, over time, they must extend to supporting institutions— governments, universities, regional business groups—that provide support for companies at the leading edge of metropolitan economies.

The goal is to revive the way the global economy evolved before the rise of nation states when historical trade routes flowed through cities … like the 15th century Silk Road that connected Asian cities and silk, tea, spices, they produced to cities in Europe, Mediterranean and Africa. 

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In closing, I want to urge you to not rest on your rankings. You may be the largest exporter in the U.S., and the busiest port hub in the U.S., but the L.A. economy lags on the global stage in the extent to which its firms are selling and engaging globally. To stay on top of the global game, you need to work together as one region, with one global vision, engaging with other markets around the world.  Leveraging and building up the assets of a globally connected economy—cutting edge innovation in manufacturing and services, strong firms and sectors, skilled workers, freight/passenger logistics, immigrant gateways, FDI—can not be the sole responsibility of one jurisdiction or one organization. The export council and export plan is a promising start to working together.  So please join these and other regional efforts and commit to their success. Only then will you be able to bring home the fruits of global trade to all firms, workers, and neighborhoods in the L.A. region.