Trade and Investment

California is now the world’s sixth largest economy

The California-China Office of Trade and Investment helped Tesla establish a factory in China. The state needs more offices like it

The California-China Office of Trade and Investment was instrumental in helping Tesla establish a factory in China. Image: REUTERS/Fabian Bimmer

Rodrigo Tavares
Founder and President, Granito Group
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Trade and Investment

After the Second World War, US President Harry Truman called on the US to assume the mantle of world power. “Great responsibilities have been placed upon us by the swift movement of events”, Truman told the US Congress in March 1947.

Seventy years later, the world looks very different. Cities, states, and regions - known as sub-national entities - are gaining autonomous global authority. They contribute to local citizens’ welfare and address global challenges such as climate change, migration or terrorism.

These entities have their own foreign policy, which is known as paradiplomacy. It is the new normal for mayors and governors. They sign international agreements, organize trade missions, and join international organizations, seeking global solutions to their local challenges. At the recent COP23 in Bonn, the Climate Summit of Local and Regional Leaders adopted the Bonn-Fiji Commitment “to deliver the Paris Agreement at all levels”.

Every US state and the majority of US cities with more than one million inhabitants conduct foreign affairs, with varying levels of efficacy and resources. Approximately 40 US states have a rough total of 250 representations abroad. Pennsylvania and Missouri operate the most overseas offices (15), followed by Florida (13) and Georgia (11).

But while power has grown at a sub-national level, leadership has not. National states have manifest leaders and the narratives of power are clearly demarcated by economic, military, technological or social strength. But sub-national mayors and governors have not shown the same drive. Leadership is diffuse and often absent. This makes activity fragmented, experimental, and often duplicated. Although there are more than 150 international networks and organizations with cities and states as members, about a third of them present overlapping agendas and questionable performance. This shows poor governance.

California is the world’s wealthiest sub-national entity - and its sixth largest economy, between the UK and France. Now is the perfect time for it to step in. To paraphrase Truman, California “must take immediate and resolute action”. It has made some headway in the international arena over the last decade. But it has been punching beneath its weight. California is the modern version of Kumbhakarna, the Hindu giant cursed to fight for six months of every year - and sleep for the remaining six.

California is bound to lead

California is a cradle foreign affairs experiment. Many signatories of the state’s original constitution, which was ratified in 1849 prior to California’s admission to the Union in 1850, had an international background. They were born in Mexico, France or Spain, such as Miguel Pedrorena or Pierre Sainsevain. But the constitution neglected international affairs. However, the practice was starting to germinate elsewhere. In 1857, the Australian state of Victoria became the first to set up a representation abroad, in London.

Throughout its history, California has attracted people from all over the world. But it took until Governor Pat Brown’s administration, from 1959 to 1967, for it to grasp the relevance of an international agenda. It opened offices in London and Tokyo, since discontinued, to strengthen international trade. Then it 1977, the state established an internal Office of International Trade. In 1999, it nominated a Secretary of Foreign Affairs to strengthen political and economic ties with international partners. Under Governors Arnold Schwarzenegger (2003-2011) and Jerry Brown (2011- present), it made some important achievements around trade and climate change.

Have you read?

In June 2017, Governor Brown met the Chinese president Xi Jinping and signed an agreement to work together to reduce emissions. At COP 23 in Bonn, Governor Brown and former New York mayor Michael Bloomberg reiterated the US’ commitment to fighting climate change.

But the world expects more from California.

Recently, I spoke at a California State University conference discussing “Should California Have Its Own Trade Policy?”, attended by Los Angeles Mayor Eric Garcetti and several business leaders. It was disclosed that the California-China Office of Trade and Investment - run by a San Francisco-based business and economic policy association called the Bay Area Council - was at risk of closure due to budgetary constraints. The Bay Area Council fully funds the office’s $500,000 annual costs, and has been doing so since before it was named the “California trade office in China” in 2013.

The California state government’s foreign policy apparatus - such as its budget, staff, legal capacity, and operational robustness - is weaker than that of Canadian and Chinese provinces, and that of German länder. This puts California on a fragile footing compared to other strong regional economies. For example, Bavaria in Germany runs 28 offices abroad from its own budget sheet. The Chinese province of Jiangsu has a network of trade offices in 18 countries.

Even compared to other American states, California’s foreign policy apparatus is weaker. Consider Montana, the economic strength and demographic density of which is significantly less than California’s. While the latter has no proper representations abroad, Montana has maintained an overseas trade office in Japan since 1988.

At a city-level, California has mixed results. Los Angeles has been able to establish tourism offices in Beijing, Shanghai, Guangzhou and Chengdu, but on promoting trade and attracting foreign direct investment (FDI) cities such as Los Angeles, San Francisco, San Diego or San Jose have only a handful of people leading their international efforts. Los Angeles Mayor Eric Garcetti presents his city as the “eastern capital of the Pacific Rim, the northern capital of Latin America and the western capital of the USA”. But alongside approximately 8,000 sub-national trade promotion and FDI agencies worldwide, how will Los Angeles and California stand up to global competition?

Five recommendations

1. Draw up an international relations strategy for California and involve its largest cities

“Action plans” or “visions” are strategic documents to present government policy preferences and priorities. Quebec, Flanders, Sao Paulo, New South Wales, and the Western Cape have all adopted clear guidelines concerning their international ambitions. California could find inspiration in UAE Vision 2021, Saudi Vision 2030, or New Tokyo. New Tomorrow. The Action Plan for 2020. Such a strategy should determine California’s priorities. Trade and FDI? Climate change mitigation? Infrastructure? Fighting drought?

A state vision should integrate a strategy for cities. Only the state itself has the legitimacy to bring together entities that have no track record of working with each other. For example, it may make sense to have a unified foreign trade policy for the Greater LA Area. But who would spearhead it? The city of Los Angeles is one of 88 cities in the LA county. The LA county is one of five counties that comprise the Greater LA Area. A clear strategy would decide this, as well as counteracting a standard complaint I heard from a senior city official: “there is too much waiting around”.

2. Use resources from private sector organizations

The San Francisco-based Bay Area Council is an example of a such an organization doing good work. In November, it launched the “California Climate Challenge,” a major initiative to increase the state’s resilience to climate change.

In LA, the Los Angeles Area Chamber of Commerce (with over 1,650 member companies) and the LA County Economic Development Corporation (LAEDC) should be encouraged to design an international strategy for the LA region. It could be led by the Mayor’s Office and the World Trade Center, a non-profit organization that provides business assistance to international companies seeking to locate or expand operations in LA. With the city hosting the Olympic Games in 2028, leveraging the private sector to support the state and its largest cities is an issue of cardinal importance.

3. Be thoughtful in handling relations with Washington

California should not strengthen its foreign policy simply to oppose the Trump administration. Its external affairs should be built on long-term and more solid grounds. The latest Department of State’s Quadrennial Diplomacy and Development Review stresses the need for the Department to build stronger relationships with sub-national governments, given our “era of diffuse and networked power”. In spite of Trump, the federal infrastructure could be a good ally as California sticks its neck out internationally. In fact, the LA World Trade Center and the Mayor’s office enjoy good private relations with the Department of Commerce and the Office of the United States Trade Representative, despite the Governor and the LA Mayor publicly condemning President Trump on climate change.

4. The human touch is central to foreign policy

Foreign policy at the sub-national level is more oriented toward the needs of citizens. It aims to improve the means of local governments to implement policies of direct benefit to people, in areas including healthcare, education and housing. Public officials should deprioritize international activities that do not bring tangible and measurable benefits to the population. In contrast to national diplomacy, which is more compliant and governed by protocol, paradiplomacy is more pragmatic and citizen-led. The newly appointed LA Deputy Mayor for International Affairs, Ambassador Nina Hachigian, has indicated that her priority is to ensure that foreign policy benefits angelenos. This is the right course of action.

5. Better resources

California’s state budget for 2017-2018 is $183 billion. A small fraction should be allocated to improve the state’s presence abroad. Trade offices pay for themselves. For example, the California-China Office of Trade and Investment was instrumental in helping Tesla establish a factory in China. This increased the value of the company and generated significant tax revenues for the state. Florida invests $15 million to run its network of offices abroad, and reaps $104 million in return, according to a Bay Area Council official.

In our increasingly digital world, the notion that more employees are necessary to implement better policy seems old-fashioned. Nevertheless, California’s state government and its largest cities are understaffed. This must be addressed.

Shortly after the US took the global reins of power in 1947, it equipped itself with the appropriate institutional capacity and resources. The CIA was founded in 1947, followed by NATO in 1949. California must do likewise, fostering its state government and cities with what they need to lead.

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