Golden and Global California

By DAVE LESHER

Jan. 8, 1998 12 AM PT

TIMES STAFF WRITER

SACRAMENTO —

Around the world, California is already well known as a very big state. But lately, Gov. Pete Wilson’s economic speeches are sounding like a straight line for a stand-up comic:

How big is it?

It is so big, the governor said during his London trade tour in October, that the Canadian ambassador to the United States recently confided his relief that California was only a state--otherwise, it would have taken his country’s seat at last year’s annual G-7 meeting of the world’s largest economic democracies.

It is so big, the governor reminded a Taiwanese business organization in San Diego last month, that the gross state product topped $1 trillion in 1996--a benchmark not reached by the United States until 1970. California, he added, now accounts for more than one-seventh of America’s economic product.

It is so big, Wilson says, that agriculture--the state’s No. 2 industry after electronics--produces nearly twice as much as the second largest farming state (Texas) and almost as much as the next three (Iowa, Nebraska, Illinois) combined.

“The farmer’s in the dell, all right--on his cell phone cutting a deal with an export customer overseas,” Wilson told the state Chamber of Commerce in Sacramento in September. “We have led the nation in [agricultural] production for half a century, and now we are able to aggressively expand into new markets because farmers grow produce that is as much in demand in Seoul and Singapore as in Salinas or Sausalito.”

Like much of the world, California trade is rapidly globalizing, a process that began nearly a decade ago and grew with enough force to practically pluck the state out of its latest recession. Now fueling a surging prosperity, analysts say this globalization has vaulted state policymakers into some unexplored territory, forcing a reassessment of traditional affiliations with business, foreign governments and U.S. diplomats.

Washington lawmakers are increasingly worried about the constitutional questions raised when a state’s expanding interests overseas are at odds with U.S. foreign policy.

“There has always been a sense [in Washington] that when [federal authorities] speak, the rest of the nation is going to follow,” former White House Chief of Staff Leon Panetta said. “That may not be the case in the future.

“Part of the responsibility in engaging in global trade is going to be the challenge of balancing the states’ individual economic interests with the nation’s,” Panetta said.

Nowhere is that going to be more important than in California, added the former congressman from Monterey.

Business Portfolio

Since 1992, foreign trade has leaped 45% in California. It now accounts for what economists say is perhaps $200 billion to $250 billion a year--up to a quarter of the state’s economy--a far higher portion than in the United States overall.

One major reason is California’s perch on some of the world’s busiest trade routes. In agriculture, officials say that California recently passed Wisconsin as the nation’s top milk producer largely because Asian consumers have developed a taste for cheese pizza.

In addition to its geographic edge, California has a business portfolio that includes most of America’s top export industries--such as entertainment and electronics. It also has a diverse population with close bonds to other countries. Those assets left the state well positioned for the opportunities that followed the end of the Cold War, which opened up many of the world’s economies, and the removal of many international trade barriers.

With so much at stake, state officials are aggressively augmenting the natural advantages California has in foreign relations.

Wilson, one of the business community’s friendliest governors, started in 1991 by transforming the cabinet-level Commerce Agency into the Trade and Commerce Agency. Since then he has doubled the number of foreign trade offices to 10. California now has staff assigned to Tokyo, London, Mexico City, Frankfurt, Hong Kong, Jerusalem, Taipei, Johannesburg, Jakarta and Seoul.

In an unreleased report obtained by The Times, Wilson’s administration recommends at least five more outposts, expanding state government’s full-time presence to almost every non-frozen continent on the globe. The new offices are proposed for China, Brazil, Singapore, Poland and France. In addition, the new report will suggest that the state hire trade consultants in Spain and Italy.

“California’s economic trends underscore the importance of trade and investment to the state’s prosperity,” the study says. “The Golden State’s international competitiveness will only become more relevant in the future.”

The trade offices represent a marketing staff for the state. Their reports even refer to California as their “product.” And sometimes, their overseas hospitality can resemble a corporate-sponsored Super Bowl party.

In Paris last fall, California hosted a champagne reception for about 70 leaders of the world’s premier fashion industry. The price of the bonhomie was to watch a live, closed-circuit satellite broadcast of a Los Angeles runway show from California’s garment district.

In Taiwan last summer, when a lavish hotel staged its grand opening, California’s office in Taipei supplied the food and wine along with a prominent display promoting the home state’s agriculture industry.

Right now, the state is preparing a 5,000-square-foot promotional exhibit--including a giant, 40-minute IMAX movie--that is scheduled to travel the world for the next five years. Creators say the film will portray the state’s leading industries, tourist destinations and cultures.

“For the first time ever, we are going to take our product directly to . . . the people” instead of through trade shows, said Carolyn Beteta, deputy trade secretary for marketing and tourism.

Like many of California’s promotional efforts, the $5-million IMAX exhibit is largely underwritten by private sponsors. The state’s role has been to prepare a global marketing strategy for California industries, identify opportunities for promotion and solicit sponsors.

Meanwhile, the foreign trade offices have worked to encourage exports and imports--often one product or company at a time.

Take the case of Nick Renner. He is the owner of NESS Inc., a three-person computer software company in the Central Valley town of Madera. For years he wanted to sell his software in Mexico, but lacked the resources and know-how.

In August he called the state Trade and Commerce Agency, which asked him to send his product to their office in Mexico City. There, the staff prepared a market analysis that identified potential customers, competitors, pertinent government regulations and economic conditions specific to his company.

Renner then flew to Mexico City, where the staff briefed him on their market research. Then for the next four days he was escorted to a series of scheduled appointments with prospective clients.

The results were amazing, he said. In the three weeks after his return, sales soared from about $10,000 to more than $40,000 per month. Next year, he expects sales with Mexico to reach $1 million and he is planning an expanded software line for markets throughout South America.

“To me, this is an incredible story,” the 49-year-old Renner said. “It’s hard to believe that a little guy like me was doing nothing but trying to survive and all of a sudden I’m dealing with another country.”

Wide Range of Issues

California’s office in Mexico City takes up the 14th floor of a downtown high-rise, with a distant view of the snowcapped Popocatepetl volcano. With 12 workers, it has a larger staff than any other trade office.

State taxpayers spend about $1 million a year to operate the offices in Tokyo and Mexico City--the two largest. In all, California spends about $4 million on its 10 foreign offices.

Reinhold C. Schrader, director of the Mexico office, said his staff fields about 740 inquiries a month as it works to foster about $10 billion in exports per year--the third-largest foreign market for California products behind Japan and Canada.

Some of the inquiries are from prospective exporters like Renner. Others cover a wide range of issues, from problems with containers delayed by customs to billing disputes.

The state’s offices in Asia are geared somewhat differently because they handle a much larger volume of imports and investment activity headed to California. Foreign investment in California reached $92 billion in 1994, representing about 12% of the U.S. total.

Just as it assists exporters, California provides a similar hand-holding policy to help foreign investors.

Last summer, the multibillion-dollar conglomerate GVC Group in Taiwan decided to build a computer assembly plant in the United States. It considered sites in Texas, Arizona or California. But company officials said California was easily the most aggressive suitor.

The state office in Taipei provided briefings on market research and economic conditions for company officials at the Taiwan headquarters. Then, in California, a state representative spent several days escorting a GVC vice president to possible sites for a manufacturing plant.

At each location, the state provided data on labor conditions, crime, taxes and other information.

Last fall, GVC decided to build its plant in Orange County. It expects to employ about 120 workers and invest about $3 million in construction. The facility will assemble about $30 million worth of computer components each month, officials said.

Wilson’s new secretary for trade and commerce, Lee Grissom, telephoned the GVC corporate president in November to thank him for choosing California.

“They wrapped this up very nicely,” said Mark Yang, executive vice president of G-tech USA Inc., the Taiwan company’s American subsidiary. “It made the headquarters feel that the state of California did value this investment.”

There was a time not long ago when California and many states struggled with the question of whether foreign trade offices were an effective use of state money. When he was governor in the early 1970s, Ronald Reagan, citing costs, closed what were then the state’s only foreign offices--in Tokyo and London.

By 1987, Gov. George Deukmejian commissioned a study that recommended five new trade offices, each of which was opened over the next four years. Still, the offices were watched by suspicious lawmakers who wondered whether they were worth the money.

Today, with trade accounting for a huge part of the state’s economy, the Legislature’s debate about justifying foreign offices has largely been resolved. In fact, a 1996 audit of the Trade and Commerce Department suggested that it might do even more to take advantage of foreign opportunities.

The Wilson administration cited the audit as one reason for its request to add at least five offices. Last month, that proposal was unanimously supported by the state’s bipartisan World Trade Commission.

The same audit also acknowledged, however, that there is no accurate way to measure the efficiency of the foreign offices. How much of the increase in trade would have occurred without them? it asked. Many of their services are duplicated by the U.S. Commerce Department--although those offices place no special emphasis on California or its industries.

So far, the foreign offices have justified themselves largely by contrasting their low cost with the huge stakes. As one trade official put it, the $4-million annual price is “budget dust” in California’s $65-billion spending plan.

No other state has more than 10 foreign trade offices, although some, such as Indiana and Wisconsin, are close. But no other state comes close to California’s international trade.

Texas, the nation’s second-largest export state, handles nearly a third less trade than California and almost all of its business is done with Mexico. New York, the nation’s third-largest exporter, does less than half of California’s foreign business.

With that much activity, U.S. officials sometimes worry that California is forging a brave new frontier for U.S. foreign relations.

Wilson has been strict about warning state officers to steer clear of anything that would interfere with U.S. foreign policy. But simply by working in such proximity, some overlap has been inevitable.

Washington has already grown so sensitive to the issue that the State Department dispatched a high-ranking aide to California last fall when the Legislature considered a bill to impose human rights sanctions on Burma.

“State and local sanctions do have the practical effect of interfering with the president’s ability to conduct our foreign policy,” Deputy U.S. Assistant Secretary of State David Marchick testified at a state Assembly committee hearing in October. “My main message today is one of partnership--an offer to work closely with you to respond to egregious threats to our national security, our interest in enhancing human rights or our values.”

Lawmakers shelved the Burma bill after Marchick’s testimony, but they did not kill it and proponents hope that it will be revived this year.

The Legislature also has debated penalties against Switzerland as a way of forcing its banks to identify assets of Holocaust victims. State Treasurer Matt Fong stopped state investments in Swiss banks for three months because of this issue. He lifted the ban last month at the urging of the federal government.

And there are myriad other issues that have pitted California interests against U.S. foreign policy--from the use of pesticides in agriculture to foreign-trucking safety regulations and computer encryption rules.

States Rights

In a minor skirmish in 1996, California wound up in a three-way argument with Mexico against Washington.

The issue was prompted by U.S. protections for broom makers. Mexico complained and, under the North American Free Trade Agreement, was allowed to retaliate by selecting a U.S. product for similar sanctions.

Mexican authorities chose wine, which hurt California growers. At the same time, they encouraged California officials to complain to Washington--which they have done.

Federal officials say such pressures can make their job difficult. Some also worry that the issue of states’ rights is becoming increasingly heated. It juxtaposes two of the Constitution’s fundamental assignments: federal power to control foreign commerce and states’ rights to control their spending.

California lawmakers who supported the Burma sanctions argued that they should not be forced to spend money in a way that might benefit a repressive regime.

Said Assemblywoman Dion Aroner (D-Berkeley), author of the Burma sanctions bill: “While I appreciate the fact that the Constitution calls for the president to establish foreign policy . . . we absolutely have our right to decide what we do with our own investment.”

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California’s Global Reach

Foreign trade offices are evidence of California’s global stature. This globalization has vaulted state policymakers into new roles.

Location of trade offices

(1) Mexico City

(2) London

(3) Frankfurt

(4) Johannesburg

(5) Jerusalem

(6) Jakarta

(7) Hong Kong

(8) Taipei