Our Export "Gap"—and Its Policy Implications

In a November 1996 report,⁽⁵⁾ economists at the Federal Reserve Bank of New York examined—and rejected—three possible explanations for New York's export gap:

• It wasn't, they said, because of the growth rate of our export partners: "If New York catered to low-growth (overseas) economies, we would expect its export performance to flag. Fast-growing economies, however, are as well-represented in the state's export markets as they are in the nation's."
  
  
• Now was it because of slow-growth industries: "The industrial composition of New York's merchandise exports also fails to explain the state's export gap.... In New York, the export concentration in (the) top five categories (of export growth), 62 percent, corresponds closely to the U.S. average of 60 percent. Clearly, New York manufacturers have a presence in industries experiencing strong growth in foreign demand."

• And it wasn't because of rising labor costs: "For manufacturing as a whole, and for most major industries, New York's unit labor costs relative to the nation's have declined markedly since the mid-1980s."

The source of the gap: high costs

However, New York's labor cost advantage did not produce an overall acceleration in manufacturing input or merchandise exports. This led the Federal Reserve economists to conclude that New York's gap can only be explained by "high non-labor costs"—specifically, the highest unit energy costs of any state, high urban housing costs, and heavy tax burdens.

"The relatively harsh business climate for New York's manufacturing sector may be the answer" to the state's failure to keep pace with U.S. export growth over the past four years, the Federal Reserve economists concluded.

Opportunities to improve our record

Since those words were written, the Legislature and Governor Pataki have made progress in addressing some of the state's major business climate concerns. But obstacles to growth remain in these areas:

• First, taxes remain a key concern. The biggest corporate tax cut in the state's history, adopted as part of the 1998-99 state budget, leaves local property taxes as the major obstacle to competitiveness for manufacturers in New York State.
  
  
• Second, there is the continuing question of energy costs. Deregulation has created an opportunity to finally begin reducing New York's historically high electricity costs.

• Third, civil justice reform is an area in which New York is increasingly at a disadvantage. In his definitive 1990 study of international trade, The Competitive Advantage of Nations, Harvard Business School professor Michael Porter cited product liability as "a prominent example of an area where regulatory policy can work for or against national advantage."

  "Product liability laws can benefit competitive advantage by acting like a sophisticated buyer to encourage the development of better products," Porter said. "In the United States, however, product liability is so extreme and uncertain as to retard innovation. The legal and regulatory climate places firms in constant jeopardy of costly and … lengthy product suits. The existing approach goes beyond any reasonable need to protect consumers, as other nations have demonstrated through more pragmatic approaches."⁽⁶⁾

  New York has yet to join the wave of more than 20 states that have enacted major product liability reforms and other tort law improvements during the 1990s. In fact, while manufacturing employment was declining between 1987 and 1997, the state gained 35,000 lawyers. Sen. Dale Volker and Assemblyman Joseph Morelle have introduced a comprehensive tort reform bill that would address the issues cited by Porter, including several changes recommended more than a decade ago by a blue-ribbon, bi-partisan panel in New York State.

Our involvement in Washington

Finally, it is time to face the fact that federal policy concerning trade matters is, for New York, a vital state issue. As noted, NAFTA was followed by a tremendous boost in exports to two of New York's leading trade partners, Canada and Mexico. Unfortunately, a proposal to give the President "fast-track" authority to negotiate trade agreements with additional countries has been at least temporarily sidetracked in Congress. While fast-track opponents claim to be acting in the interests of American workers, Commerce Secretary William Daley says the slowdown of fast-track will have the opposite effect. "If the only way a company can access a foreign market is to produce there, that is a powerful incentive to move operations," Daley points out. "And once there, these protected markets can be an excellent platform to compete globally against U.S. production."⁽⁷⁾

State officials have understandably tended to view foreign trade issues as a federal matter outside their jurisdiction. But given the vital importance of exports to New York manufacturers, New York's political leadership should pursue trade liberalization policies just as avidly as transportation aid, increased Medicaid payments or other priorities from Washington, D.C.

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5. "New York's Merchandise Export Gap," Current Issues in Economics and Finance, Federal Reserve Bank of New York, Vol. 2, No. 12.

6. Op. cit., p. 469.

7. "Fast Track Trade Creates Jobs, Helps Keep U.S. In Lead Role," Ft. Lauderdale Sun-Sentinel, October 25, 1997, p. 11A.