International Trade and Utah’s Economic Success
By: Gov. Gary R. Herbert
Utah Governor Gary R. Herbert
12th Annual Utah Economic Summit, April 27, 2018
Keynote Address: International Trade and Utah’s Economic Success
You are all aware that by almost any measure, the State of Utah has one of the strongest and most diverse economies in America. I attribute that success primarily to the hard work and ingenuity of our extraordinary people. But I also know that the institutional, the cultural and the policy framework in which hard-working people live makes a huge difference in how truly successful they will be.
Perhaps nowhere on earth is that truth more evident today than on the Korean peninsula, where just over a half century ago a proud people with a common culture, a common language, a common economy and a common heritage were violently divided into two radically different political and economic frameworks.
I don’t doubt the work ethic or ingenuity of the people who live in North Korea, but because they now live in a nation whose dictators have chosen central economic planning and isolationism instead of freedom, free enterprise and free trade, they are now impoverished, with a per capita GDP of $1,700 per year.
By stark contrast, their cousins to the south, who inhabit a land with nearly identical natural resources, now enjoy prosperity that far exceeds their northern neighbor, with an incredible per capita GDP of $39,400 per year. Why the disparity? Because South Korea has embraced freedom, free enterprise and free trade.
Although far less dramatic, because of the differences in geography, culture, policies and politics, there is variance in the economic performance of the fifty states in our nation. And those differences, coupled with the free movement we have between the states, creates great opportunities to experiment and to learn from one another.
Thankfully, Utah’s differences are mostly on the positive side of the economic ledger. Our enviable unemployment rate of 3.1 percent is holding steady — even while more and more people are optimistically returning to the job market. Utah has the highest rate of job growth in the country, with 3.7 percent growth in private sector job creation just this past March. We enjoy one of the highest growth rates in Gross Domestic Product in America.
And this rising tide of economic expansion is truly lifting all boats. On an annual basis, every sector of Utah’s economy is growing again — even our mining and energy sector, which has, in recent years,faced a slump.
Incomes in Utah are also on the rise. In 2017, personal incomes in Utah rose by 4.4 percent, the third-largest increase in the country. Utah’s median household income grew by 3.56 percent to $65,977, which is more than $8,300 above the national average. So, not only are there more jobs, but they are also producing higher incomes.
I believe that Utah is a welcoming place for entrepreneurs and businesses because of many reasons. For example — our increasingly skilled workforce, our fiscal stability, our competitive tax rates, our efforts to streamline regulation, our well-maintained infrastructure, our low utility rates, and our exceptional quality of life. We are the state for business!
But another very important reason that every sector of Utah’s economy is flourishing is because of something most people don’t talk about, but something that I would like to focus on today, and that is our robust and growing international trade.
Seventy percent of the world’s purchasing power is located outside of the United States, and 95 percent of the world’s consumers live outside the United States. If Utah businesses were only to buy and sell in Utah, their customer base would be a little more than 3 million people. But when we take our goods and services to the world, Utah businesses can potentially now market and expand their services to over 7.6 billion people. That’s why in Utah we have made international trade a top priority.
And that’s why I have led Utah trade delegations to expanding markets around the world — most recently to Mexico — and the results of these trade missions have been very impressive. Today, for example, Utah ranks 16th in the nation for exports as a percentage of GDP. Businesses in Utah last year exported over $11.5 billion in goods and services, and nearly 1 in 4 Utah jobs is now tied to international trade. Over the last 10 years, Utah’s value-added exports have grown an impressive 75 percent.
More Utah businesses than ever before are looking beyond our borders to boost their profitability and market share by exporting goods and services to international markets. Moreover, our community is enhancing opportunities for international trade with major investments such as Salt Lake City investing $3.3 billion to modernize the Salt Lake International Airport.
As you know, we are also in the process of establishing an Inland Port. For a land-locked state like Utah, being able to provide services such as customs clearance, turns our distribution hub into an international port, much like traditional coastal ports, saving businesses time and money. Utah has long been known as the “Crossroads of the West.” Utah’s Inland Port will position the state as one of the modern global trade hubs in America, making Utah now a “Crossroads of the World.”
In addition to increasing Utah companies’ profits, international trade provides Utahns with access to a greater variety of goods and services from those who can provide them more economically. And by taking advantage of the widest possible array of specialization, we bring together goods and services that enhance our own quality of life.
We could think about what that means to us for what we eat, for how we dress, or for what we drive. But consider, for a moment, what it means for your experience as a Utah Jazz fan.
I love our high school and college basketball teams in Utah, but where would the Utah Jazz be today if they could only recruit from Utah? Where would they be if they could only recruit from the U.S.? A brilliant front office at the Jazz organization (thank you Steve Starks and the Miller Family!) and the guy who should be the NBA Coach of the Year, Quin Snyder, have worked hard and smart to rebuild their team.
Strategically, they have pulled together talented players born in states like Florida, Georgia, Missouri, New York and Washington. But they didn’t stop at our American borders. They saw the opportunities in what is now an international market for basketball talent, and found world-class players from Australia, Brazil, France, Spain, Sweden and Switzerland. The result is an extraordinary team that is having tremendous success.
Doing business with partners around the world is not all that different from doing business with your neighborhood entrepreneur, such as your local auto repair shop. You go there because you know and you trust the people who run the business.
You know from experience that you’ll receive quality service. And therefore you want to do business with them now and in the future.
That’s also true of international trade. We meet and get to know people and organizations from around the world. We form better relationships and friendships, and we come to understand each other better. And we develop a sense of trust.
In this way, trade helps us turn potential rivals into friends and partners — and that by the way, brings greater stability to the world.
Free trade — based upon fair rules of exchange — means greater economic opportunity, and a higher standard of living and less strife. International trade can be and should be a win-win for everyone.
Because of the great good accomplished by free international trade, I’m concerned about some of the rhetoric I hear coming out of Washington DC these days that is critical of free trade.
I understand that major trading partnerships need to be regularly updated to reflect changes in our dynamic global economy. I understand that maintaining and enforcing fair rules of exchange in groups like the World Trade Organization can be difficult. And I also understand that helping our workforce adapt to the demands of a rapidly changing global marketplace is one of the major social and political challenges of our time.
But having observed first hand the enormous benefits that come from free trade, I would urge us as a society — instead of criticizing free trade — to consider how we can better address each of these unique challenges that come along with free trade.
For example, we can update our trade pacts. We can better monitor and enforce the rules in our multilateral trade organizations. And we can certainly do a better job to support and retrain workers displaced by disruptions in the international marketplace.
I actually don’t doubt for a minute the good intentions of our government officials who are pushing for things like increased tariffs in order to protect domestic businesses from international competition. I think that they genuinely believe that they are going to help our people. But in my considered opinion, the consequences of such protectionism could in fact be catastrophic.
In reflecting upon this some of you — especially you students of history — might have a sense of déjà vu. Nearly a century ago, one of Utah’s most successful politicians and a great man, Senator Reed Smoot, was deeply concerned about how the prices for agricultural products around the world were hurting his constituents — especially sugar beet farmers. He also had a belief that economic turmoil in Europe could have a contagion effect on the U.S. economy, especially in the wake of the stock market crash of 1929. So Senator Smoot partnered with Representative Willis Hawley from Oregon to protect domestic agricultural products by imposing tariffs.
By the time their legislation worked its way through Congress, it wasn’t just Utah sugar beets and Oregon lumber that were “protected.” The Smoot-Hawley Tariff Act of 1930 raised U.S. tariffs on over 20,000 imported goods.
Smoot’s intentions were good, but the results to our economy were terrible. Instead of protecting American businesses, the Smoot-Hawley Tariff Act invited retaliatory tariffs from abroad. It cut American trade by half and the consensus among economists today is that the Smoot-Hawley Tariff turned a challenging stock market crisis into the Great Depression that brought massive unemployment and suffering to millions of Americans, including many here in Utah.
In 1930, the year Smoot-Hawley was enacted, Utah had a 5.1 percent unemployment rate. Just two years later, Utah faced a crippling and unbelievable 35.9 percent unemployment rate. That’s why in Utah I believe we should be far more interested in building bridges for trade and economic expansion rather than erecting walls or barriers.
In touting the benefits of free trade, I’m not discounting the challenges of trying to have a level playing field in a rules-based system of international trade. America should act in its own self-interest to negotiate the best trade deals possible and to improve existing ones.
A case in point is the North American Free Trade Agreement, or NAFTA. It pre-dates the emergence of the Internet. It didn’t include energy. NAFTA certainly needs to be updated and modernized. But scrapping NAFTA would be killing the proverbial goose that has laid the golden egg. NAFTA has been good for Utahns and Utah businesses.
For your information, since its inception in 1994, Utah’s exports to Mexico have increased by 1,233 percent. Nearly 47,000 jobs in Utah today depend on trade with Mexico.
Of course NAFTA is not just about Mexico. Utah’s largest trading partner is Canada. Many Utah businesses benefit from using Canadian steel and aluminum in their finished products. Threatened tariffs on Canadian metals could seriously reduce the profitability of important Utah businesses.
And any reporters here today from the Daily Herald, the Deseret News, the Ogden Standard Examiner or the Salt Lake Tribune should be concerned about what a threatened tariff on Canadian newsprint — which makes up 70 percent of the newsprint supply — could mean for the already struggling newspaper business.
I would remind us all to remember that — as with everything else — the devil is in the details. I am amazed, for example, that as the United States Trade Representative Robert Lighthizer renegotiates NAFTA, that he is considering scrapping what is known as the Investor-State Dispute Settlement provisions. These provisions allow U.S. businesses to take legal action if a foreign government harms the company’s investment in that country.
For example, if the Canadian or Mexican government nationalized oil-drilling equipment owned by an American company, this measure gives that American company the right to have the issue adjudicated under NAFTA.
Lighthizer says his reason for removing this provision is because he thinks this provision encourages investment by U.S. companies in Mexico — which he thinks for some reason is a bad thing.
Well I beg to differ.
American companies will invest in foreign countries because they think they will become more profitable, that they will expand their customer base, that they will hire more workers and that they will expand their market share. This is not a zero sum game.
Consider, for example, the following. What if we were to discover that the best port to export Utah coal was in Mexico rather than in California? Wouldn’t we want to see U.S. investment in Mexico and Mexican infrastructure in order to make that happen? Why would we NOT want to keep that kind of investment protected? This is just common sense.
Bottom line: NAFTA needs updating to bring it into the 21st century to account for the digital world of commerce that did not exist in the early 1990s and into a world where there is more energy interdependence between our North American trading partners than there was 30 years ago. But doing away with NAFTA would be reactionary and, I believe, foolhardy. So would indiscriminate tariffs on imports from Utah’s other top trade partners, including the United Kingdom, Hong Kong and mainland China, just to name a few.
Even if you believe that trade deficits are a problem (and there is a certainly lively debate about whether they are) — tariffs do not fix trade imbalances. Although tariffs reduce trade, they do not reliably change trade imbalances.
If imports fall, foreigners get fewer dollars and the dollar gains value through scarcity. That strong dollar then makes American exports more expensive, meaning American exports could drop at the same time that imports drop. Which means less business for everybody. This is one of many reasons why it is not easy to win trade wars.
In 2017, Utah companies shipped $850 million in value-added goods to China and Hong Kong. If U.S. trade restrictions with China escalate we put a variety of Utah business at risk. Businesses as diverse as our aerospace industry, our aluminum recycling companies, our beef and pork producers, our orchard owners, our plastic manufacturers, our transportation-equipment suppliers, and our wheat farmers. They could lose an estimated $60 million per year.
In reciting such statistics, it’s important to remember that these numbers ultimately negatively affect local businesses and their workers. These are Utahns. These are our friends and our neighbors.
One example is Parker-Migliorini International, a global enterprise headquartered in Salt Lake City that is one of the state’s largest exporters. After China lifted its ban on U.S. beef imports last May, Parker-Migliorini’s Shanghai office became the first to import a shipment of U.S. beef. The company’s business has boomed since the ban was lifted, but unfortunately all that could go bust if we have a major trade war.
Utah’s ranchers and farmers would also feel the pain because of this. According to a World Trade Center Utah analysis released just last week, $19 million in Utah pork exports and $20 million in Utah beef exports would be threatened.
That said, the harm of protectionist policies can’t be completely summed up in just dollars and cents. For instance, one of the participants in the trade mission to Israel last fall was PEEL Therapeutics, a Utah-Israeli biotech startup which is developing a drug that utilizes the natural cancer-fighting protein that is uniquely found in elephants. Dr. Joshua Schiffman from the University of Utah combined his efforts and technologies with Dr. Avi Schroeder from the Technion-Israel Institute of Technology to co-found their startup company and produce a drug that may play an important role worldwide in treating and preventing cancer.
I believe that if nations retreat into their respective business bunkers or silos, such collaborative relationships and research could become a thing of the past — and the future could become much bleaker for people in need of innovative products and life-saving medications.
Derek Miller, now head of the Salt Lake Chamber of Commerce, correctly assesses the stakes with international trade when he says: “Utah is not known as a gambling state, but we are in the middle of a poker game not of our making, and the stakes are high.”
Indeed, the stakes are high … and the gamble is risky and absolutely unnecessary! We don’t need a hermetically sealed Utah to shut out international competition. As our state’s exponential growth in exports attests, Utah businesses already know how to compete and how to win in the global marketplace. I would much rather place my bet on them and you than to gamble on tariffs and other protectionist measures. That’s the policy we have followed in the past, that’s the policy we are following today, and that’s the policy we intend to follow going forward.