Global Slowdown Will Hit Home

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.

Mexican government figures tracking maquiladora employment for January and February are not yet available.

The ripple effect of the U.S. slowdown is only beginning to make its way around the world, which means the worst of the effect will probably not be felt until three to six months down the road, according to analysts. But Canada’s economy is showing signs of weakness and most of Asia--with the exception of China--is ratcheting back growth rates dramatically.

“The impact will be a bit later here, but it’s going to happen,” said Piyush Singh, the managing director of IDC Asia Pacific, a technology research firm.

As a global manufacturing base, much of Asia’s imports are components or intermediate products that end up coming back to the U.S. for their end sale. Intel and Microsoft export heavily to Taiwan, for example, but their products end up in Dell or Gateway computers assembled on the island and shipped back to the U.S. More than half of California’s exports to Asia are electronic equipment and industrial machinery.

On Friday, Taiwan, a world leader in silicon chip production, reported the sharpest two-month drop in manufacturing production in 25 years in January and February.

Japan, whose weakened economy still dwarfs the rest of Asia, remains the biggest worry. U.S. Commerce Secretary Don Evans, in California last week on his first official visit, said he was “very concerned” about Japan, which is struggling with a weakening banking sector and collapsing stock market. Slowing imports would exacerbate the regional woes, particularly for such key partners in Asia as South Korea.

Analysts predict the yen could fall to as low as 130 against the dollar in the coming months, which could spark currency devaluations across the region, according to William Belchere, chief Asia economist for Merrill Lynch in Singapore. That will make it easier for Japan and its neighbors to sell their products overseas, but raises the bar for U.S. firms selling their more-expensive dollar-denominated goods abroad.

California agricultural products, including meat and fruit, are highly attractive to Asia’s consumers, but many of them occupy the high end of the market and will suffer in a recession, according to analysts.

The plight of the U.S. beef industry shows the perilous nature of life in a global economy. Like many industries, cattle ranchers sell the bulk of their animals and meat products domestically--90% in this case--but depend on foreign markets to pay premium prices for the remainder.

Record beef prices in the U.S., strong domestic demand and an absence of the devastating diseases that have destroyed European competitors should have Bruce Berven, executive director of the California Beef Council, rejoicing. California ranks No. 5 in cattle production in the U.S.

But Berven fears financial jitters and widespread publicity about foot-and-mouth or mad cow disease could make consumers meat-shy in Japan and South Korea, two of this nation’s largest export markets. Japan purchased $1.75 billion worth of U.S. beef last year, more than half of all exports.

When compared to the previous year, U.S. beef exports in January declined by 8% to Japan and 7% to South Korea measured in dollars.

If these export markets disappear, “that would be devastating for us,” Berven explained.

Not everyone is as pessimistic about the Golden State’s prospects. Charlie Woo, the founder of a $40-million toy empire and chairman of the Los Angeles Chamber of Commerce, said California firms accustomed to dodging global bullets are surprisingly resilient.

Concerned that his Megatoys’ primary market was getting too competitive a few years back, Woo shifted into high-end Halloween costumes, Easter baskets and other seasonal products less susceptible to a downturn. Now he is protected from the slowdown in toy sales because at least half of his firm’s revenue comes from the specialty items.

“You have to use what you have as a springboard to go into related types of products,” he said. “The only thing that doesn’t change is change.”

Certainly, not all of Asia is a bad news story. China’s fast-moving economy continues to grow at a projected clip of around 7% this year and there are so far no signs of slowing. This is good news for companies such as Lucent Technologies Inc. and Cisco Systems Inc., who are heavily involved in supplying an exploding Chinese telecom market.

“These guys are doing great business,” noted Andy Xie, a Hong Kong-based China specialist for Morgan Stanley Dean Witter. “[Foreign direct investment] is still going into China, so I don’t see that economy weakening like the others.”

Those familiar with India’s budding computer software industry believe it could actually benefit from the economic squeeze hitting the global IT sector, mainly because it offers relatively high-quality solutions at costs its American competitors can’t match.

“We polled most of our large customers and find that there is still an increase in IT spending,” noted Nandan Nilekani, president and chief operating officer of Infosys Technologies, a Bangalore-based software company.

In a slowing market, however, India’s gain could spell losses for American competitors and workers. IBM Corp. just announced plans to add 2,000 programmers to its India staff.

“Those [U.S.] companies that are hurting will want to reduce high-cost capacity first,” noted Tim Condon, chief economist at ING Barings in Hong Kong. “That would leave Asian companies that offer low-cost solutions well placed.”

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Iritani reported from Los Angeles, Marshall from Hong Kong and Bangalore and Kraul from Mexico City.