FRBSF Economic Letter
98-35; November 20, 1998
East Asia's Impact on Twelfth District Exports
This year, Japan's economy is mired in recession, and the financial
crisis that hit several smaller East Asian countries has deepened and
spread throughout most of the region. Many analysts have predicted that
these problems would exert restraining effects on economic growth in the
U.S. A key channel for these effects is reduced export flows to East Asia,
due to the appreciation of the dollar against East Asian currencies and
declining aggregate demand in those countries. Because the Twelfth District's
East Asian export exposure is substantially greater than the East Asian
export exposure of the rest of the nation, many observers expected the
restraining effect of conditions in East Asia to be larger for the District
economy than for the national economy.
In this Economic Letter, I provide an updated view of the impact
of the East Asian situation on the District economy, focusing largely
on export growth figures through the first half of 1998. East Asia appears
to be having the expected restraining effects: national and District exports
to East Asia have fallen substantially this year and have held down growth
in total exports. The employment impact has been concentrated in the durable
goods manufacturing sector, where employment growth has slowed substantially.
These effects appear to be somewhat larger for the District than for the
nation as a whole.
Export patterns
The Twelfth District exports more of its total output (gross state product)
and sends a larger share of exports to East Asia than does the rest of
the U.S. Figure 1 displays
the relevant figures for 1996. As a share of total output, District merchandise
exports to East Asia were about 3-1/2 times the figure for the U.S. excluding
the Twelfth District. If instead we compare the District to the nation
as a whole (which exports 2.4% of its output to East Asia), the District
is 2-1/2 times more reliant on East Asian exports. Japan receives the
largest single share of the District's East Asian exports, although the
group of four Newly Industrialized Economies (NIE), led by South Korea,
accounts for a slightly larger share than does Japan.
Among the nine District states, Washington and Alaska are at the top
of the list: their merchandise exports to East Asia each equal just over
10% of total state output. Oregon, California, and Arizona also are highly
reliant on East Asian sales. In contrast, Nevada has a negligible dependence
on sales to East Asia. East Asian exports from Utah and Idaho fall in
between those from Nevada and Arizona. The District's East Asian exports
are heavily concentrated in durable manufacturing products: about two-thirds
of these exports fall in the categories of industrial machinery (including
computers), electronic and transportation equipment, and measuring instruments,
with the largest portion of the remainder being agricultural and food
products at 11%. Moreover, although Hawaii has limited direct merchandise
exports to East Asia, its East Asian share of output is among the largest
in the District when tourism revenues are included.
Export growth
Figure 2 displays total export
growth figures for 1996-1998, based on the U.S. Census Bureau's "origin
of movement" series (excluding re-exports). This figure and the following
figures display the growth or decline in exports in percentage terms relative
to the same period a year earlier. Following a strong performance during
1996-97, export growth dropped off sharply during the first seven months
of 1998 in the U.S. and even slightly more in the District. Although national
export growth to all major countries or groups except Mexico slowed substantially
in 1998, the most pronounced slowing occurred for exports to East Asian
countries, which fell by 15.7%. Within the District, the sharp drop in
1998 also is evident within the state breakdown shown (California, Washington,
and the rest of the District).
Data on the breakdown of state export figures by destination country
are available from the Massachusetts Institute of Social and Economic
Research (MISER). I now focus on the MISER data for California, Washington,
and Oregon, which together are reasonably representative of the entire
Twelfth District. As of 1997, these three states accounted for 59.6%,
21.7%, and 5.7% of total District exports (compared to Oregon, Arizona
accounts for a larger share of total District exports but a smaller share
of District exports to East Asia).
Figure 3 displays export
growth figures for California, with the total broken down into sales to
East Asia and the rest of the world. State exports--total and to East
Asia--grew at a solid pace in 1996. However, growth slowed in 1997, when
a 2.5% decline in exports to East Asia offset a pickup in exports to the
rest of the world. The weak performance of California's exports to East
Asia in 1997 largely was attributable to sharp drops in sales to Japan
and South Korea; these fell by about 8% and 20%, respectively, compared
to 1996.
The sharp contrast between California's exports to East Asia and its
exports to the rest of the world became more pronounced in 1998. For the
first half of the year, state exports to East Asia fell by 17.5%, compared
to growth of 16.6% in exports to the rest of the world. State exports
to most individual East Asian countries fell at a double-digit rate during
this period, with exports to Japan and South Korea falling by 15.2% and
40.5%, respectively, relative to the first half of 1997. California exports
to China grew at a strong pace--nearly 30%--during the first half of the
year, but these exports constitute only a very small share of the state's
East Asian exports. Most of California's exports to the rest of the world
go to Canada, Western Europe, and Mexico. The state's exports to these
destinations grew at a strong pace during the first half of the year--especially
exports to Mexico, which expanded by 23% following similarly strong growth
in 1996 and 1997.
The pattern in Oregon exports during 1997-98 is very similar to that
for California and therefore is not displayed in a figure. Oregon exports
to East Asia fell by about 12% during the first half of 1998. The smaller
drop-off there than in California largely is attributable to Oregon's
maintenance of its 1997 rate of exports to South Korea and its smaller
drop-off in exports to the ASEAN(4) countries.
Figure 4 displays detailed
state export figures for Washington, which are dominated by Boeing aircraft;
in 1997, transportation equipment constituted 60% of Washington exports.
Growth in Washington's total exports was very rapid during 1996 and 1997,
as Boeing enjoyed a sharp acceleration in orders, production, and sales;
however, most of the growth came from sales to regions other than East
Asia. Figure 4 indicates that state export growth has slowed substantially
in 1998. For the first half of the year, state exports to East Asia fell
by 11.4%, largely offsetting strong growth in exports to the rest of the
world (including a 27.4% increase in exports to Mexico). Total state exports
of transportation equipment grew by 20% during the first half of the year,
although this represents slower growth than gains of 40-50% in 1996-97.
Moreover, exports in other key product categories slowed or fell substantially.
For example, Washington exports of agricultural, hunting and fishing,
and food products to the world fell by 22% during the first half of 1998.
Implications
As the figures indicate, the Twelfth District economy is substantially
more reliant on merchandise exports to East Asia than is the rest of the
nation. However, our relatively greater merchandise export exposure does
not translate directly into a larger impact on the District economy. The
exact impact depends on factors such as service exports, for which we
do not have data at the state level, and other features of the production
process, such as the national and international pattern of value added
for District export products.
That said, it appears that thus far in 1998 the East Asian slowdown has
had a larger impact on the Twelfth District economy than on the national
economy. Treating California, Oregon, and Washington as representative
of the District, it appears that District and national exports to East
Asia slowed by roughly the same amount during the first half of 1998.
Given the substantially greater share of District output that goes to
East Asia, these figures suggest that the East Asian situation has held
down District merchandise exports by roughly 21/2 times as much as it
has held down national exports.
The effects of this export slowdown are most evident in the manufacturing
sector, where activity has slowed more in the District than in the nation
as a whole. For the District, employment growth in this sector fell from
3.6% in 1997 to -0.2% at an annual rate for the first eight months of
1998; the corresponding drop for the nation was from 1.3% to -0.8%. District
agricultural producers also have suffered from reduced export demand and
low prices this year, and Hawaii's already struggling economy has been
hurt by further reductions in Japanese tourism this year. In the short
run--late 1998 and early 1999--these adverse effects on the District economy
are more likely to solidify than to dissipate. In the longer term, significant
improvement in East Asian economic performance will be needed to revitalize
the District's exporting sectors.
Rob Valletta
Senior Economist
Opinions expressed in this newsletter do not necessarily reflect
the views of the management of the Federal Reserve Bank of San Francisco
or of the Board of Governors of the Federal Reserve System. Editorial
comments may be addressed to the editor or to the author. Mail comments
to:
Research Department
Federal Reserve Bank of San Francisco
P.O. Box 7702
San Francisco, CA 94120
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