Fearing Trump's Trade Policies, U.S. States and Foreign Countries Grow Closer
The president's "America First" message and his new trade barriers have caused anxiety in states where the economy depends on investment from abroad. It's pushing governors to hone their diplomatic skills.
Lucid Motors, an electric carmaker, scouted 60 locations looking for a place to build a $700 million manufacturing plant. Top of the list: Casa Grande in southern Arizona, which sits close to Lucid’s supply chain in nearby Mexico. But Lucid executives were concerned about the state’s relations with Mexico, given Arizona’s anti-immigration policies. Arizona Gov. Doug Ducey knew one surefire way to allay their fears. He asked them to call Gov. Claudia Pavlovich, his counterpart in the neighboring province of Sonora, Mexico. She offered them every assurance about the close and improving ties between her government and Arizona.
That was enough for Lucid. “There were many reasons why we chose the site in Casa Grande,” says David Salguero, marketing manager for Lucid, “including the spirit of collaboration and understanding that both Gov. Ducey and Gov. Pavlovich brought to the table.”
Ducey has tried to make Arizona’s relations with Sonora as close as those between, say, Connecticut and New York. Maybe closer. Ducey attended Pavlovich’s inauguration and has welcomed her to Arizona for Christmas. They helped work out a new deal on sharing water from the Colorado River basin and have greatly sped up waiting times at ports of entry.
Ducey regularly meets with other political and business leaders from Mexico: Bilateral trade between Arizona and Mexico is worth $16 billion a year. That level of trade and investment is responsible for 100,000 jobs in the state. Mexico is Arizona’s largest trading partner, by a factor of four. “There have been years in Arizona where the difference between recession and growth is our trade relationship with Mexico,” says Glenn Hamer, president of the Arizona Chamber of Commerce and Industry. “It’s that important.”
The importance of international trade has long been obvious to border states. But trade and foreign investment have become priorities for governors all over the country. Governors don’t shy from competing with each other to land companies; they know there’s lots of opportunity to sell goods and services abroad. You can hardly talk to an economic development director in any state without hearing the statistic that 95 percent of the world’s customers live outside the United States. “If we are going to continue to grow our economy the way we want, it’s going to happen from outside our state borders,” says Jim Schellinger, Indiana’s commerce secretary.
State officials are nervous that President Trump's protectionist rhetoric is turning into a new reality that could hurt their bottom lines. On Jan. 22, Trump imposed tariffs on solar panels and washing machines, sparking fear that more trade barriers could go up, with other countries retaliating. "They made an error," South Carolina Gov. Henry McMaster said at a chamber of commerce function the next day. The washing machine tariffs were aimed at Samsung, a South Korean company that opened a $380 million facility in his state this month. The company has warned that the move could hamper future expansions, depending on the environment for trade. "We'll do what we can to make sure that Samsung's investment is strong and productive for the people of our state," McMaster said.
The Trump administration is currently engaged in negotiations with Canada and Mexico to rewrite or potentially walk away from the North American Free Trade Agreement (NAFTA), which eliminates most tariffs on trade among the three nations. At the state level, everyone involved in trade, from governors on down, is hearing expressions of anxiety from abroad about whether new trade barriers will be erected. Governors are working to send every signal they can that their states are going to stay open for business.
At the same time, foreign entities -- not just companies but also other governments -- are aggressively reaching out to states. That’s one of the reasons Canadian Prime Minister Justin Trudeau addressed the National Governors Association last summer. As with the very different issue of climate change, Trudeau and others are looking to see if there are subnational leaders they can work with if they lack a partner in Washington. “The international community is reaching out in a way that has never happened,” says Scott Pattison, executive director of the governors association. “You’ve got premiers calling and talking to governors like never before. I have CEOs of foreign companies wanting to know how they can meet with governors. I’ve got ambassadors calling me.”
Governors are always cheerleaders for their states, but they’re now devoting considerably more of their time and influence to promote trade abroad and hunt for foreign investment in their states. It’s become an essential part of the job description. “Twenty years ago, it may have been that all of their attention was on K-12 -- they were going to be the education governor,” Pattison says. “Now, it’s all economics, and it makes sense for them to do what they can to get attention from companies abroad that want to invest.”
Arizona Gov. Doug Ducey has a close relationship with Gov. Claudia Pavlovich of Sonora, Mexico.(Office of Gov. Doug Ducey)
The nature of their job puts governors in a unique position to make international deals for their states. A governor is simply held in higher regard in a foreign setting than is generally true at home. They are able to open doors that would remain closed to their economic development staff or the head of the chamber of commerce. Prime ministers and provincial and prefecture governors feel obligated to meet with them when they’re on trade missions, as do many foreign CEOs. “We don’t like politicians in America, but government officials are viewed positively in other places,” says Timothy Wilkinson, dean of the business school at Whitworth University in Spokane, Wash. “People want to meet with governors, and it lends legitimacy to the process.”
This is especially important when governors are trying to drum up business with sovereign wealth funds that invest government money and with companies in countries such as China where the government itself can hold huge sway over investment decisions. But governors do more than fly around on trade missions. Everyone understands that they hold enormous authority to work out the details, whether it’s securing tax breaks, speeding up permits, or making problems presented by regulatory agencies go away. “You’re talking to someone who’s at the top of a state administration,” says Nebraska Gov. Pete Ricketts. “You know you’re talking to the person who can make things happen.”
Ricketts, along with Ducey and numerous other current governors such as Matt Bevin of Kentucky, Bill Haslam of Tennessee and Rick Scott of Florida, came to government from a business background. When they’re negotiating with a CEO or entrepreneur, they know from firsthand experience what obstacles governments can present and the ways that government can help. They not only bring the cachet of their office to sales meetings, but also are able to talk the nuts and bolts of business. Being able to anticipate and answer questions about infrastructure or workforce to an executive thinking about investing in a foreign land can go a good ways toward assuaging fears and uncertainty.
That role has become more pressing. The signals out of Washington have been nerve-racking for state economic development officials. The Trans-Pacific Partnership was likely going to die with or without Trump, but his election made the death of that trade deal with Asian countries a given. A House Republican plan to impose a border adjustment tax -- a 20 percent tariff on imported goods -- died last year. But Trump continues to talk about the need to renegotiate or walk away from NAFTA. "I may terminate NAFTA, I may not," Trump told CNBC on Jan. 25. "We'll see what happens."
That’s a concern not just for Canada and Mexico, but also for businesses all over the world. When a Japanese company opens a plant in Ohio or a German company locates a facility in South Carolina, they’re doing so not only to gain easy access to the U.S. market, but also the whole of North America. “Lots of state chambers and community chambers and state officials are doing their best to lobby not only the White House but [the departments of] Commerce, Labor and State to try to get them to realize how big a deal NAFTA is to most states,” says Randy Zook, president of the Arkansas State Chamber of Commerce.
For the present, this is having two opposite effects on foreign investment. Some foreign companies are holding back, waiting to see if the rules of the game are about to change, while others are speeding up their timelines, trying to get in while the getting’s good.
States have sought to build business abroad for decades, but the amount of effort and attention governors have devoted to the cause has ebbed and flowed. During the 1990s, when globalization was still viewed as a force that could lift all boats, states went all in, opening up trade offices around the globe and sending governors on standing annual trade missions. Those efforts didn’t bear as much fruit as was hoped, and during the recession of 2007-2009, states closed many of their overseas offices.
States still engage in the hunt for exporting opportunities, looking for ways to help companies at home sell products and services abroad. But for many states, that effort has taken a back seat lately to the effort to attract foreign direct investment. Governors have made it a priority to persuade companies to open locations in their states, such as the giant deal Wisconsin cut last year with the Taiwanese electronics manufacturer Foxconn.
Governors are devoting more of their own time to the pursuit than was generally true for their predecessors. Terry McAuliffe, who just completed his term as governor of Virginia, went on 35 sales trips abroad, often hitting several countries at a time, during his four years in office. That’s a pretty high ratio, but it’s become common for governors to take international flights multiple times per year. In some cases, having a governor take a trip is useful for ceremonial occasions and gift-giving, both of which tend to be more a part of the business culture in Asia than in America.
Wanting to squeeze out every advantage from having the governor on the ground, the staff sets up meetings that go from dawn to well past dinner, in a way that may be even more extreme than the governor’s schedule back home in the capital. “It’s not uncommon for us to fly overnight, take a shower in the airport lounge and be at our first meeting within two hours of landing,” says Vince Barnett, vice president of business investment for the Virginia Economic Development Partnership.
For the most part, states are pretty strategic about where they seek trade deals and where they send their governors. “They’re not going to obvious vacation destinations,” says Andrew Cassey, an adjunct economist at Washington State University. “No one’s going to Bermuda.”
The approach, boiled down, tends to be rather basic. They keep digging in places where they’ve made connections in the past. If a state has already landed a major company from South Korea, for instance, it makes sense to go after more Korean companies. There can be network effects, with other suppliers or other companies from the same sector deciding to tag along. Once a company is established and enjoys success in a state, it might vouch for that state back home. “No one wants to be the first firm,” Cassey says. “They want to find out what their neighbors are doing.”
Building up existing networks makes more sense for economic development directors than trying to tap into whatever country or region seems hot at a given moment. Economic development is a long game. In general, East Coast states tend to look toward Europe, while West Coast states think about Asia, although Canada is the top trading partner for the vast majority of states.
That’s not to say that state officials don’t look for new opportunities. That’s where a governor’s help can be especially important. His or her personal involvement signals to entities abroad that the state is serious about trying to make deals happen. When a governor brings executives from homegrown companies along for the ride, that acts as a seal of approval for those companies. “People overseas want to know if the state government is supporting the activity,” Zook says. “When they’re committing big sums, they want to know conditions are right, and are going to be kept right, and they want to talk to the guy that can make it happen.”
There’s a lot of upside for governors getting involved in seeking foreign trade and investment, but there’s also a lot of competition. States try to build on their own strengths, whether it’s advanced manufacturing or agriculture. Regardless of the market, other states are bound to compete. In a global context, trade and investment have become increasingly cutthroat. Where globalization once promised border-free trading, now barriers are going up, as symbolized both by Trump’s election and the Brexit referendum in the United Kingdom. “It’s become much more territorial and, dare I say, confrontational,” says Andrew Thomas, a University of Akron economist. “It’s become almost a zero-sum game.”
Louisiana Gov. John Bel Edwards signed ceremonial "memorandums of understanding" in 2016 that pledged to enter into trade deals with Cuba if and when relations are normalized.(AP)
Most state officials engaged with trade say they’re simply doing their best to assure foreign partners of their commitment to fostering business. They are keeping their heads down and working on the issues they have some control over, as opposed to worrying about what the Trump administration might do.
The Trump effect is unpredictable, but it’s not likely to put the brakes on foreign investment in this country in the long run, Thomas suggests. While Trump may not look like a trade promoter, he’s unlikely to hamper states’ efforts entirely. For one thing, foreign firms that set up a physical presence in this country are probably not going to be accused of dumping their products, or illegally underpricing American companies. It may become more expensive to do business here, but the U.S. remains the world’s largest market and its stability will remain attractive as global markets grow more insular and chaotic. “Over the next several decades, more and more money is going to flow into the U.S., despite all the pronouncements from the present administration,” Thomas says. “More and more foreign companies are going to want to do business here, whatever the terms are.”
Maybe that’s too optimistic. Or maybe Trump really can, as Ricketts suggests, get the “best deal possible” for America.
For many governors, the next step in their foreign trade and investment strategies is busting down silos and harmonizing efforts with the private sector. Last fall, for instance, Ricketts went on a trade trip to Japan. As his plane was landing, a group of corn growers from Nebraska was taking off. “We didn’t know they were going,” Ricketts says. “If we had, we could have been able to coordinate our efforts.” Toward that end, Ricketts established a council for international trade, a standing group bringing together members of his administration, private companies, trade associations, farmers and universities -- essentially everyone in the state regularly engaged in international diplomacy and business.
States have to play a multilayered game, not just concentrating their efforts in favorable regions, but also pursuing development in sectors that make sense for them. Colorado Gov. John Hickenlooper identified the key economic clusters in his state and consulted with major private players to plan out how to make the state’s strengths in those areas better known around the world. State trade officials have mapped out a strategy in terms of what private companies need to do in this regard, what the federal government can do where appropriate and what the state’s own role should be. The state tries to convene everyone involved in, say, aerospace, to figure out how best to market that sector abroad, while also getting industry and universities and other domestic constituents talking more with one another.
Canadian Prime Minister Justin Trudeau spoke at the National Governors Association last summer, telling then-Gov. Terry McAuliffe that governors are better equipped to show the "tangible benefits of trade." (AP)
Too many states are still thinking only in terms of what regional markets they hope to enter -- China, for instance, or India -- without concentrating on a strategy to attract the type of investment dollars they’ll ultimately want, says Michelle Hadwiger, director of global business at the Colorado Office of Economic Development and International Trade. “Chambers will talk to chambers and the European trade association will talk to the trade association here, but there isn’t an outcome strategy to increase exports or drive investment,” she says.
Everyone in economic development likes to brag about what they’re doing. That’s kind of the point. It’s a big reason governors have been getting more involved. Governors are uniquely equipped to bring people together within their own states, while also serving as the lead promoter of their states abroad. “The governors now really understand the importance of showing up and leading these efforts,” says Hamer, the Arizona chamber president. “There’s simply no substitute for having the governor out there, whether a company is relocating, or getting investment from another country.”
*A version of this story appears in the February print issue of Governing.