Regional President Speech

The Importance of Trade to Maine and New England Remarks by Cathy E. Minehan 1996 CEO Forum Corporate Affiliate Program, University of Maine Orono, Maine May 30, 1996 1 I am delighted to join you today in exploring trends reflecting and affecting the international competitiveness of the Maine economy. In particular, I would like to focus my remarks on the importance of international trade -- not just to New England exporters and their employees but also to the economy at large. To preview my main points, trade increases the efficiency with which each trading region uses the resources available to it. This increased efficiency improves each region's standard of living. In addition, trade is linked to learning; it promotes technological progress and, thus, competitiveness and potential growth over the long run. Unfortunately, current events indicate that a significant part of the public believes that trade only benefits a few giant multinationals. Many individuals seem to forget the gains to consumers or to the economy as a whole. The resulting opposition to trade liberalization within parts of the general public diminishes the U.S. role in current trade initiatives, like the rapid development of a Latin American free trade area. Accordingly, I'll 2 end by suggesting the need for a public education effort to remind citizens of the broad-based benefits of international trade. Nowhere should the benefits of trade be more obvious than in New England. Here we sit on a jumble of rocks jutting out into the North Atlantic. We have no vast expanses of agricultural land, no iron or coal or oil. Basically, as Charles Francis Adams noted long ago, New England's resources amount to "ice and rocks and men." While we have in the past exported rocks and ice, our most successful exports have generally reflected the brain-power of our entrepreneurs and our skilled labor force. Of course, many creative New England firms do export natural-resource-based products -- particularly here in Maine. You may, for instance, have noted the occasional news coverage of Maine exports of sea urchins and urchin roe to Japan; this holiday delicacy is out of season in Japan's coastal waters in December but is particularly abundant off New England at that time. Similarly, one of Massport' s chief exporters, in volume terms, is Decoster Egg Farm of Turner, Maine, which ships over 10,000 3 metric tons of eggs a year, largely to the Far East. Their secret? Brown eggs. Since white represents death in parts of Asia, white eggs are not very popular there. And when West Coast exporters tried dying their eggs in tea, they got found out. In addition, of course, paper, lumber and wood products, and leather and leather products have above-average importance in Maine's export base. Still, elsewhere in New England, and increasingly in Maine (where electronics exports are growing rapidly, for instance) high tech capital equipment and niche products dominate our export base. As in the nation, New England's most valuable merchandise '/4 exports include industrial machinery, electronic equipment, _ . lud au. ~lo~-~~-- transportation equipment, instruments and chemicals.A~ .~ ~ these ~tlf ~se-4-i~ a g_o__a_d-<ieal-frem the ,,1//G~ °l~; nation's, at l·east-aeeo1ding-to-detailed-data-on-trade-witb Canada, ~~ e~1 OA1I our largest trading partrmr-. Newe---nglancttrade-rs-three times more dependent on computer-related proi:lucts than-the natiorr's ( 1 i! ~ --Vt~/ percent versus. ~Lp_ercent) and-eight- times mo-re dependent on . ~~ Ja.tegcate~its. I 16--percent versus. 2 -percent ortl:rtah!xports). ~ ~- 4 aulbs.,.Jry.cksand_, pat:ta;UJJ~ew-ertgflfflG1-t-r-am;:po,-~at~to ~ft-8Q_~ ai p_jr:ts.J~tfef'eil'FW11:a'~htS'aO~,,,lJbats ~leeti@ OJJ r DFEs:::-s-t1-l:t---~~verage-impottance oef:EIV':-We-e~g:.rr~elt4~1i l<~G.cu:.tex, - New England, it turns out, has a favorable export mix when compared with the nation. We sell what the world wants, but we are not selling it in the fastest-growing markets. If New England's ~owth in each industry to each foreign market had /I matched the national pace, overall export growth would have been faster in New England than in the nation from 1987 to 1993. It wasn't. Why? ~A-s-mamrl-a-et-g--aetivity-has-shifted-sout-h--and JffUN1-,lruJ-µ_d we-s-t, export-aetivity-has shifted with it. In addition, New England ,1 is more dependent than the nation on merchandise trade with Europe and Canada, and less dependent on trade with fast growing markets in Asia and Latin America. In 1993, emerging Asia and Latin America accounted for about 40 percent of U.S. 5 exports, but for just 25 percent of exports from New England. As you know, Canada, Europe, and Japan suffered more severe recessions than we did in the early 1990s, while most emerging markets continued to grow at remarkably healthy real rates. Encouragingly, recent merchandise trade data from the Department of Commerce indicate that Maine along with Massachusetts, New Hampshire, and Vermont outperformed the nation in exporting in 1995. As of last year, merchandise exports supported an estimated 403,000 jobs in New England, of which 23,000 were in Maine. {That's about 7 percent of non-agricultural employment for the region and 4 percent for the state.) Assuming that each $1 billion in exports supports 17,000 jobs, last year's merchandise export growth accounted for about half of the increase in the region's nonagricultural jobs from 1994 to 1995. Also encouraging for Maine's export prospects is the outlook for growth in our traditional trading partners. Although France and Germany have been going through a rough patch, and the latter has probably experienced negative growth in the last two quarters, 6 European GDP growth is generally expected to accelerate in the second half of the year. Incoming data -- housing starts, auto sales, and the like -- indicate a rebound in Canada as well. In Japan the worst recession of the postwar period finally seems to be over, as private investment and industrial production are picking up steam. Even in Mexico, first-quarter GDP fell much less than expected from year-ago levels. Mexico's contraction seems to be over, and some analysts expect that Mexican output will have recovered its pre-crisis levels by the middle of next year. Nevertheless, it remains essential that New Englanders continue their efforts to expand their export markets. After all, competitiveness includes marketing savvy. And over the long run, annual growth in the mature industrial countries is likely to stay in the 2 to 2.5 percent range. All of these countries face pressures to reduce government budget deficits. In Europe the need to meet Maastricht fiscal standards looms large, and in Japan the budgetary impact of a rapidly aging population is a constant concern. Moreover, in all of these countries, firms continue to feel 7 burdened by excess labor. Like fiscal stringency, industrial restructuring is likely to restrain growth in the mature economies for the foreseeable future. By contrast, the emerging markets are expected to continue growing at relatively rapid rates. You've probably noticed that so far I have only discussed merchandise exports. Unfortunately, we have no data on state exports of services like tourism, transportation, and business and professional services, which now total close to 40 percent of merchandise exports nationally. From national data we know that service exports have been growing a good deal faster than exports of goods -- an 85 percent gain for private service exports from 1988 to 1994, for instance, versus a 60 percent increase for goods. We also know that services, including finance, insurance and real estate, account for a larger share of jobs in New England (39 percent) than the nation (34 percent). Thus, it is probably safe to assume that this region accounts for a disproportionately large share of the nation's rapidly growing service exports. According to national data, travel and transportation exports 8 bulk largest in service exports, as those of you who live in the state with "Vacationland" on its license plates undoubtedly know. As a trip through Freeport or Kennebunkport confirms, Maine has succeeded in attracting a growing number of foreign tourists who, reportedly, spend more per person in local stores and restaurants than U.S. travelers. Astoundingly, tourism jobs have grown faster in Maine since 1982 than in the region despite the surge in casino related employment in Connecticut. Looking forward, tourism is an income-elastic service. In other words, as foreign incomes grow, foreigners will choose to spend increasing shares of that income on travel. And Maine, with its clear comparative advantage in this industry, should be in a good position to benefit. Lice se and royalty receipts ccount for a other ma r shar f service xports. A sig iflcant p rt of the reg n's biote h and s ftware co panies' forei earning falls in this category. And fo ign earn in s often equal 30 to 50 ercent of t ese comp nies' tota revenues. Other major finan ·a1 services, telecommuni ations, ata processi g and da a 9 ar Now I would like to broaden the perspective from exporting and discuss the benefits of trade for the economy as a whole. As I mentioned at the outset, international trade increases the efficiency with which regions and nations use the resources available to them. By so doing, trade raises these nations' standard of living above levels achievable in the absence of trade. f s ~~id ~ ard p inte o t to f r~~ns a.I 1 Ae/o1uh/n, ations gain by producing and exporting the products 10 which they can make comparatively efficiently. Even if an industrialized nation is absolutely more efficient at producing all goods, it will still gain from using its resources to produce goods at which it is relatively more efficient while importing goods made in countries that are relatively efficient at other products. ln~do's classic example, thus, it was better for England, with its relatively abundant capital and skilled labor, to concentrate on making cloth to trade for wine from Spain, rather than to pull labor and capital away from textiles in a struggle to make British wine. By concentrating on what each country was equipped to do best and trading, both could consume more wine and cloth in total than they could in the absence of trade. j~ In this classi.c-1ixampte, each country's exporters clearly gain from having access to larger markets, while firms making import competing goods lose out, as they and their workers are quick to tell elected officials. And consumers in both countries gain by having access to cheaper and more varied goods. Together, the gains to exporters and consumers~e than offset the losses 11 suffered by import-competing firms in both countries, though, again, perceptions of relative benefits may vary. In addition to these one-time gains based on comparative advantage, trade also allows dynamic gains based on economies of scale and specialization or increased competition. Among industrial countries, for example, trade liberalization generally leads to increased two-way trade in closely related products like different grades of paper, newsprint versus fine stationery, say, or different types of integrated circuits, as producers on both sides of a disappearing border seek economies of scale or specialization. Again, consumers get a more varied menu and better prices than they would in the absence of trade. But in this case, many import competing firms also thrive by finding a niche from which they can serve the domestic market or can even begin exporting themselves. Thus, in time gains from trade based on economies of scale benefit almost everyone. Indeed, the prevalence of two way trade has helped smooth adjustments to recent trade liberalizations in Europe and North America. 12 It remains true, however, that increased trade canh~~ome groups worse off. Indeed, it seems clear that increased competition from low-paid labor in developing countries is one -- To the extent that trade is seen as causing increased wage ~-1-w ~? inequality~ we hear calls for added protection. But, fft my vie,N, a more effecti'le response is a focus on-i-mp-roving we-rker skiUs-an-d-1.abor mobility. Indeed, tariffs on imports, especially consumer goods and capital equipment, would lower most workers' real wages and make our ~ less competitive on world markets. lf.11.ui~{ariffs ~ be a very 13· expensive way of helping individuals hurt by imports and would do nothing to equip them to find more productive jobs. Unfortunately, the prospective sale and possible closure of Hathaway, with its distressing consequences for its 500 workers, raises the issue with special urgency in this state. It would seem that Hathaway's problems are more a consequence of changing lifestyles and a reduced demand for dress shirts than a matter of international competition. In fact, as I understand it, Warnaco plans to close the Ontario and Puerto Rican plants as well as the facility in Waterville. Still, the issue of helping displaced workers find satisfying new jobs remains a pressing problem locally and nationally. As a society, we need to give serious thought to how we should share the costs of adjusting to rapid economic change. BAJ.~ Does responsibility for investing in retraining(rest· with irfdividual workers? Individual firms? With taxpayers collectively? We need to develop a national consensus on this issue,~t/,lv ~ ~ To end with one final benefit for the entire economy, ~ ~ international trade promotes technological progress. Marco Polo's ~I 14 trips to China leap to mind, but the close links between trade and technology diffusion are far older. Did you see, for example, a recent New York Times article, headlined "And the mummy wore plaid"? It described discoveries of mummified remains that dramatize how Celtic or Germanic peoples traveling the Silk Road two to four thousand years ago carried the day's new technologies -- wheels and plaid-weaving looms -- along with them. Closer to home, unusual flint knives show that Penobscot Bay's Red Paint People were trading all along the coast from northern Labrador to New Jersey at least four thousand years ago. Today, the links between trade and technology remain important for a high tech region like New England. Since New Englanders surely hope to retain their current comparative advantage in knowledge intensive products, it is essential that the region's firms and workers be exposed to technical breakthroughs and have a chance to work with the most advanced equipment and components, which increasingly originate overseas. Indeed, data on foreign holders of U.S. patents, and on license and royalty payments to 15 foreigners, confirm that the flow of technology is no longer entirely one way. Moreover, just as exporting allows developing countries to exploit economies of scale unavailable at home, so too New England firms developing cutting-edge products benefit from large foreign markets that permit them to move faster along successive learning curves. Unfortunately, as the widespread suspicion of NAFTA and the World Trade Organization make clear, sizable segments of the U.S. public do not fully appreciate the essential importance of trade for the U.S. economy. This lack of understanding matters, because it hinders the United States in taking a leadership role in current trade negotiations. For example, since the expansion of NAFTA appears to be on hold, the Latin American countries are charging ahead to create a Latin American free trade area with Brazil as the major market. The United States also needs to be able to provide leadership in ongoing negotiations on service exports and intellectual property rights. These issues are, of course, of particular interest in New England. 16 For this reason, I will end by suggesting the need for a public education effort to promote a better understanding of the benefits of trade for the nation and the region. While programs to spur exports are surely worthwhile, a wider appreciation of the benefits of trade for today's consumers and tomorrow's technological progress is also essential and deserves support. Moreover, whether technological progress or trade liberalization is the primary cause of increased earnings inequality, worker retraining ~~ore effective response than blaming foreign competition. Indeed, admitting the existence of transition costs for low-skilled individuals and asking the majority who benefit from trade to share the costs of improved retraining programs could be the most effective way of moderating protectionist sentiment. Otherwise, lack of political support for trade liberalization may undermine the U.S. position in ongoing trade negotiation; and endanger the .. ~~U ~ fragile trading system-that premetes-effieieney and ~ . ~' 'J'C~ cuJJ/(, tto1s~ competitiveftess-to---tong run benefit-of us-all: t;t::! a,,-1,~ ~ td.ut ~~ dJ-L ~l ~ Q _' -:z::~ c~tldp u~l:al lo ~ ;:;;- I 'f0-_wY,:u, ~ ~vld-f~ .~ ru)_ ~ ✓

Cathy E. Minehan (1996, May 29). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19960530_cathy_e_minehan

@misc{wtfs_regional_speeche_19960530_cathy_e_minehan,
  author = {Cathy E. Minehan},
  title = {Regional President Speech},
  year = {1996},
  month = {May},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19960530_cathy_e_minehan},
  note = {Retrieved via When the Fed Speaks corpus}
}