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Global Slowdown Will Hit Home

Trade: California, this country's leading exporter, is sure to feel the effects of an economic downturn that is shaking world markets.


A sharp contraction in Mexican border jobs and a slowdown in West Coast container traffic may be early signs that trade-dependent Californians are beginning to feel the spread of America's economic malaise.

During the 1997 Asian financial crisis the state powered through with nary a permanent scar, thanks to a healthy U.S. economy and Europe's comeback. When last year's stock market implosion started eating away at growth elsewhere, California was propelled along by a rebound in ailing Asia and explosive sales to Mexico, now this state's leading trading partner.

But this time, California may not have a fallback. The chief problem: The slowing U.S. economy is hurting the rest of the world and that, in turn, means less business flowing back through California's harbors and airports.

In a worrisome sign of global weakness Mexican industry officials reported Friday that employment at the maquiladora factories lining the U.S.-Mexico border plummeted 7% in the first two months of this year, shedding 100,000 jobs over the previous period. They also pointed out, however, that those export-oriented factories are being hit hard by competition from China and the strong peso, which raises labor costs.

A decreased global appetite for U.S. computers, chips and cows is cutting into America's exports, contributing to an unexpectedly large drop in container traffic through California ports in February.

"We've still got some strong numbers but just wait," warned Donald Straszheim, former chief economist for Merrill Lynch and president of the Milken Institute. "We can all list a dozen companies that have announced major layoffs and most of that hasn't happened yet."

Not since the oil crisis of 1973 has the world had all its engines sputtering at once. With currencies tumbling from London to Bangkok and slowing growth in the U.S. and Japan, which represent 40% of global gross domestic product, the real danger is a downward spiral with no one to pull the brake.

Trade has become an increasingly important driver for the global economy and in an interconnected, wired world, financial weaknesses are transmitted faster than ever before. Over the last three decades, trade has ballooned from less than 10% of U.S. gross domestic product to more than a quarter of national output.

This brings back bad memories for Linda Tsao Yang, who was in the thick of Asia's devastating regional slowdown as the chief U.S. representative to the Manila-based Asian Development Bank. "This time, what I worry about is convergence, a synchronized slowdown."

The good news is that while these ties may speed the spread of weakness, they also should make it easier for an ailing economy to recover, according to Saul Hymans, an economic forecaster at the University of Michigan. That's because companies are able to see their problems globally and respond to them much sooner by canceling orders, reducing inventory, cutting costs and laying off workers.

"This interconnectedness . . . leads to more synchronized and rapid movements but more controlled," Hymans said. "Therefore, this downturn won't be as extreme, as attenuated or stretched out as long."

California, this country's leading exporter, is certain to feel the brunt of a global slowdown just as it enjoyed a windfall during the unprecedented boom that preceded it. Those regions most closely tied to U.S. economic health--Mexico, Canada and Asia--are also this state's largest trading partners. And California is the nation's leading destination for overseas funds, with $92.4 billion in foreign-owned plants, hotels and Silicon Valley research labs.

Since the North American Free Trade Agreement was enacted seven years ago, the state's business with Mexico and Canada has jumped 141%. Last year, when Mexico's economy expanded by nearly 7%, California sent $19 billion in goods and services south of the border.

But Jonathan Heath of LatinSource Mexico, a Mexico City consulting firm, said it is only logical that Mexico would feel the brunt of U.S. deceleration since one quarter of Mexico's economic output ends up getting shipped to the United States. He has downsized his 2001 growth estimate for Mexico to 3% to 3.5% from an earlier projection of 4.5% to 5%.

Maquiladoras, which have turned the San Diego-Tijuana corridor into the world's largest producer of televisions, among other manufactured goods, account for 48% of all Mexican exports. Hard-hit sectors include autos and auto parts, electronics and textiles, all of which have been affected by the U.S. slowdown.

"In January we started seeing a reduction in the purchases and in February more, and we are expecting further reductions in March," said Rolando Gonzalez Barron, president of the National Maquiladora Industry Council trade group.

Maquiladora employment hit an all-time peak at the end of last year with 1.3 million, but has since declined to about 1.2 million and will fall further this month, Gonzalez predicted.

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