||Cover Story - The world is our customer: Washington’s economy depends on foreign trade
||Written On: March/April 2007
||Written By: by Ron Dalby, Richard S. Davis and Paul Schlienz
Washington’s economy is larger than those of many nations, and it is rapidly expanding its global reach. Gov. Chris Gregoire has often stressed the importance of foreign trade and has travelled to both Europe and Asia on numerous trade missions.
"Washington is like a small nation, rather than a state, and in order to succeed in a global economy we must continue to grow our relationships with our trading partners," she said.
As 2006 drew to a close, Washington’s merchandise exports were running at a record pace, up some 38.5 percent over the previous year, according to the Tacoma World Trade Center. About 62 percent of this figure came from aircraft sales, 21 percent from industrial machinery and computers, and agricultural products were responsible for 17 percent of the increase.
In the 2007 Competitiveness Redbook published by the Washington Alliance for a Competitive Economy, Washington ranks second in exports per capita (bested only by tiny Vermont) and fourth in total exports, behind Texas, California, and New York. We are rapidly catching up to New York and may surpass them in the value of exports in 2007. Japan is still our largest customer, but mainland China is quickly closing the gap and may become the largest importer of Washington products by the end of the year.
If Washington were a sovereign nation, it would be one of the top 30 exporting countries in the world. Statewide, one in three jobs is tied to international trade.
Washington feeds the world
Of the industries leading the charge for Washington’s growth in exports, agriculture is the least touted of the top three. While Boeing, Microsoft and other related companies make the news almost daily, agriculture, which employs more people than any other industry in the state—more than 173,000, according to the Trade Development of Alliance of Greater Seattle—is often taken for granted. The importance of agriculture to the state’s economy becomes apparent when you consider these statistics from the U.S. Department of Agriculture:
• 36 percent of Washington, about 15.3 million acres, is classified as farmland.
• 52 percent of the total farmland—8 million acres—is further classified as cropland.
• 32 percent of the total farmland, about 4.9 million acres, is classified as pasture.
• 426 acres was the size of the average Washington farm in 2005.
• 35,000—approximate number of Washington farms in 2005.
• $6.6 billion—value of crop and animal output in 2005.
• $1.2 billion—farm payroll for hired hands in 2005.
These numbers, though impressive, are only part of the story. Dave Carlson, president of the Washington Apple Commission, believes the key to selling Washington agriculture products anywhere is the ability to deliver a "very good eating experience."
"It’s very difficult to promote a bad product, but it’s very easy to promote a good product," Carlson said.
Washington’s apples more than meet Carlson’s goal. About 85 percent of the apples exported from the United States come from Washington. In addition, Washington apple growers are able to deliver seemingly fresh apples anywhere in the world at any time of the year thanks to a little-known secret—1-methylcyclopropelene, better known as MCP.
MCP was developed by North Carolina State University a few years back when researchers looked into extending the shelf life of fresh products. According to Carlson, MCP blocks the fruit’s ethylene receptors that are responsible for the process of ripening, allowing stored apples to remain in exactly the same condition as when they were picked from the tree. Depending on the ripeness of the apple when picked, which is determined by measuring the state of the starch-to-sugar conversion, it is possible to use MCP to regulate the timing of the final ripening of apples. This way, growers can create three-month or nine-months apples, depending on how far they are to be shipped.
"It has allowed us to pick apples at a certain eating quality and still deliver it to the consumer like that nine months later," said Carlson. In those nine months, the apples can be shipped anywhere in the world.
Since 2003, when Washington’s growers first started using MCP, the results have been very positive. Per capita consumption of apples in the United States has risen from 15 to 19 pounds per person since 2000.
Washington is a big player
Overall, Washington ranks eighth in terms of agricultural output for the 50 states. In fruits and vegetables, though, it ranks second—only California produces more. By specific crops and in terms of farm receipts, Washington’s top five agriculture commodities are apples (16.2 percent), dairy products (14.3 percent), cattle and calves (11.8 percent), wheat (8.3 percent), and potatoes (7.4 percent).
In terms of the dollar value of exports, Washington’s most valuable products in 2005 were fruits ($683.1 million), vegetables ($520.7 million), wheat ($319.1 million) and dairy products ($55.4 million). Products like hay, timber and other consumables that don’t fit under the standard categories account for another $297.4 million. Figures for 2006 were not yet available at press time.
Bringing water to the land
It’s not always things that grow that makes news under the heading of Washington agricultural exports. Nelson Irrigation in Walla Walla finds a significant share of its business overseas, selling irrigation equipment to aid in the production of crops around the world.
Exporting irrigation equipment " ... is not a large industry, but it’s a worldwide industry," according to Bob Rupar, vice president of Nelson Irrigation. "We irrigate the major crops around the world."
Among Nelson Irrigation’s larger overseas customers are sugar cane and banana growers, crops not normally associated with Washington. About 30 percent of the company’s business is realized from foreign markets. Rupar, though, notes that the actual figure is probably higher because many of the parts they ship to manufacturers in the United States are ultimately resold overseas as components used in larger systems.
Walla Walla is world headquarters for Nelson Irrigation, and Rupar notes with some pride that his company is one of only two irrigation component manufacturers left in the United States. "We believe in automation to reduce labor rather than moving to Mexico for cheap labor," he said.
The irrigation industry is changing, too. No longer is flood irrigation the method of choice, as it uses water with only about 40 percent efficiency. "[Irrigation] has gotten very sophisticated because we’ve taken on the challenge of water-saving devices," Rupar said. Utilizing new methods and equipment, he estimates efficiencies are now better than 90 percent.
In terms of the geographic value of farming in Washington, the bulk of it is concentrated east of the Cascade Range. Grant, Yakima, Benton, Franklin and Walla Walla counties are the five largest producers of farm income in Washington, combining to produce more than 50 percent of the value of Washington’s farm products.
The common denominator in these five counties is irrigation. All are part of either the Columbia River or Snake River drainage systems and rely on various dams to store water for irrigation and to produce electricity.
The dams and the reservoirs behind them also provide a cost-effective means of getting farm products to market, especially in the case of bulky items such as wheat. An extensive tug-and-barge system reaches all the way from the Pacific Ocean to Lewiston, Idaho, on the Snake River and deep into north-central Washington on the Columbia River. Shipment of heavy bulk products by water is almost always more cost effective, making the dams on the Columbia and Snake Rivers critical to Washington’s vast agricultural industry—providing both the water to grow crops and the highway for getting them to market.
Increasing reliance on agricultural exports
Every year, the United States relies more heavily on the export of agricultural products for income. Suppliers of bulk commodities like wheat and rice have long counted on the demand driven by foreign trade to sell 50 percent or more of their annual yield. High-value crops such as fruits, nuts and vegetables are even more in demand for export. Since the mid-1980s, export sales of high-value crops overseas have outpaced domestic sales by a wide margin, according to the U.S. Department of Agriculture.
More than a third of Washington’s crops, by value, are exported, creating many thousands of jobs. Exporting crops also requires an extensive transportation system and the people to make it work. It requires storage facilities, loading facilities and deep-water ports. All of this infrastructure creates jobs and helps boost Washington’s economy.
Another key to Washington’s success in world trade is the state’s growth in the manufacturing and technology arena. In 2005, Washington’s exports climbed 12.3 percent to just under $38 billion dollars. This increase was led by transportation, which boasted a 16-percent increase over 2004. This sector—which includes Boeing, Washington’s leading manufacturer and exporter—accounts for 54 percent of the state’s export activity.
Washington’s strong aerospace industry has long put us near the top of the list of exporting states. Though our export volume soars with aircraft sales, Washington would be a major player in international trade even without Boeing.
"Even if you take Boeing out, we are more trade dependent than the typical state," said Kriss Sjoblom, the Washington Research Council’s economist. "Ag is a big part of that, and so is our location. We’re closer to foreign markets, particularly those along the Pacific Rim, and it’s natural that we would be engaged in international trade." Japan, Canada and China are the top three destinations for Washington exports.
Sjoblom points out that one effect of globalization has been to make it more difficult to interpret export statistics. Manufacturing has become an international activity, with components often produced, assembled, and reassembled in several different countries.
This integration of supply chains means that it’s sometimes hard to know what’s a foreign product and what’s domestic. According to a recent WashACE report, 80 percent of the $21.9 billion worth of goods imported in 1997 comprised intermediate or investment goods—goods used as inputs in the production of other goods, such as partly finished components or raw materials. To further muddy the picture, the value of the same component can be counted as an export when shipped to a foreign supplier, counted again when it’s imported as part of a larger assembly, and then counted a third time when the final product is sold to an overseas customer.
The nature of overseas trade has also changed, according to Sjoblom. "Japan is a partner in production," he said, "not just a customer." But despite the "perception that it’s all going offshore," said John Vicklund, president of Washington Manufacturing Services, "manufacturing is still the core of our state economy, and a huge contributor."
In the early 1990s, Vicklund said, Washington had 9,000 manufacturing firms. Now there are about 7,400, with most of the decline coming in the 1999-2003 period. Since 2005, the state has seen a rebound, adding 250 new companies representing 6,000 manufacturing jobs. While we’re down about 57,000 manufacturing jobs between 1990 and 2006, according to the WashACE report, the bleeding appears to have stopped.
Manufacturing employment has been on the upswing, although the increased diversification of the economy has caused it to decrease as a share of total employment.
Vicklund said goods manufactured here are unlikely to go directly offshore.
"Think about the industries that have gone offshore," he said. "They’ve been able to take commodity-type production and move it closer to other markets, resources, and cheap labor. It’s retail-type stuff. I can’t name a company in Washington that is a producer of consumer goods available at Wal-Mart or Costco. Our 7,400 manufacturers produce for other manufacturers."
That kind of production, Vicklund said, is unlikely to be shipped overseas.
Many Washington manufacturers that are primarily engaged in production for domestic use can be seen as exporters, once removed. As suppliers to firms like Boeing, their work is often destined for overseas markets.
Will more of these firms be looking to increase their direct sales to international customers? Vicklund thinks so.
"If I’m reading the tea leaves right, I’d say manufacturers here are poised to do that. It’s all a matter of their will," he said.
Advances in technology have made international partnerships both possible and productive, and Washington’s thriving technology sector actively participates in the global marketplace.
Getting a handle on technology exports through trade data can be tricky. "It’s easier to count boxes of pre-packaged software than it is to source downloads from the Internet. Those transactions can move around at will," said Sjoblom. In addition, what we think of as the tech sector crosses industry lines. For example, Boeing and Microsoft can be considered leaders in both manufacturing and technology.
International partnerships also play a major role in our technology sector, according to Wister Kay. She specializes in the information and communication technology sector for the international trade division of Washington’s Department of Community, Trade and Economic Development.
That internationalization and the difficulty of tracking digital transactions make it extremely difficult to produce hard data on export sales, she said. Nonetheless, she sees a continuing trend toward global sales from Washington’s technology leaders.
"For companies who have an established sales presence oversees, they are seeing the percentage of revenue attributed to international sales grow to the point where it’s 25 percent to 40 percent of total sales."
Industry experts attest to the importance of international markets. Software makes up about 18 percent of Washington’s exports, said Lew McMurran of WSA, a trade group that focuses on helping Washington state technology innovators succeed.
As Boeing is to airplane sales, Microsoft is to software, said Kay. The global leader in software manufacturing, Microsoft partners with firms around the world and forms the nucleus of this state’s vibrant software cluster.
Retail and service sectors grow by leaps and bounds
Washington’s retail industry is literally everywhere, and it has a major impact on the state’s economy.
Currently, the state’s retailers employ about 323,600 people. According to Employment Security Department statistics, the industry’s employment rate has increased 1.7 percent since 2005, and is expected to increase 1.6 percent between now and 2009. Retail is the largest industry employer and the state’s largest private employer.
As of May 2006, a retail salesperson’s wage, in Washington, started at $8.04 per hour—$0.41 above the minimum wage at the time—and the average wage was $13.12. In 2005, Washington was considered to be the highest-paying state for retail salespeople. In addition, the two top-paying metropolitan areas for the occupation were Tacoma and Yakima, according to the Washington Retail Association.
Retailers come in all shapes, sizes and specialties—everything from enormous department stores and club warehouses to small mom-and-pop storefront operations. Retail is also an industry that state government would have a hard time living without.
Retailers are the largest revenue source for the state. During the 2005-2007 budget period, the state general fund received an estimated $26.3 billion in revenues. More than half of that came from retail sales taxes.
Washington’s retailers collected more than $839 million in sales taxes for the last quarter of 2006. Statistics compiled by the Washington Retail Association show that retailers currently pay an average of 3.09 percent of the sales tax they collect as an out-of-pocket expense for which they receive no compensation.
The largest tax paid into the general fund is the Business and Occupation Tax, which accounts for approximately 18 percent of tax revenues. Washington’s retailers paid almost $115 million in B&O tax during the third quarter of 2006 alone.
Challenges at home
Retailers contribute a lot to the state, but Washington is not always the easiest place for retailers to do business.
"The tax burden is the biggest challenge we face in doing business in Washington," said Jan Teague, president of the Washington Retail Association. "Another thing on everyone’s mind is reducing the cost of health care. When we surveyed our members this year about issues, having affordable health care was the top priority."
While retailers have a proven record of bringing jobs and commerce to communities, some elements of those communities have proven to be less than welcoming to large retailers, in spite of the many benefits they bring.
A case in point was the experience of Wal-Mart—the nation’s largest retailer—when it built a store in Chelan. As the store neared its opening date, anti-growth activists, arguing in court that Wal-Mart’s building permit was illegally issued, demanded that the store be torn down. Ultimately, the suit was thrown out, and the Chelan Wal-Mart opened for business without further complications.
Large retailers, like Wal-Mart, often face opposition from small towns on the assumption that they will drive established local firms out of business. However, Chelan’s experience brings this assumption into serious doubt. Prior to Wal-Mart’s announcement that it would be moving into Chelan, the town’s central business district had a 25-percent vacancy rate. Once word got out that Wal-Mart was coming, the vacancy rate dropped to almost zero and established businesses embarked on a program of sprucing up the downtown in anticipation of an increase in commerce.
"Wal-Mart driving people out of business is just one of many urban legends," said Jennifer Holder of Wal-Mart. "I studied five communities in Washington—Aberdeen, Chehalis, Centralia, Sunnyside and Omak—and found that Wal-Mart’s moving in had the exact opposite effect. In fact, businesses grow in our shadow. If we don’t offer a certain item, it is our policy to direct customers to smaller, local businesses."
In addition, Wal-Mart is one of the largest purchasers of Washington products, according to Holder. This includes everything from agricultural goods from Yakima to Microsoft software from Redmond.
While retailers play a large role in Washington’s economy and in supporting state government, the influence of the state’s service sector—including retail—is being felt far beyond the Evergreen State.
Two Washington born-and-bred companies that have had stunning success both nationally and internationally are Costco Wholesale Corp. and Starbucks Corp.
Costco, founded in 1983 and headquartered in Issaquah, focuses on selling large volumes of goods at low prices in its membership warehouses. For fiscal 2006, the company’s sales totaled $59 billion, with a net profit of $1.1 billion. Currently, Costco is number 28 on the list of Fortune 500 companies.
During fiscal 2006, Costco employed approximately 127,000 full- and part-time employees. The company also has an impressive international expansion program. Of Costco’s 504 warehouses, there are 371 in the United States and Puerto Rico, 70 in Canada, 19 in the United Kingdom, five in South Korea, five in Japan and four in Taiwan.
Starbucks began in 1971 as a small coffee bean retailer near Seattle’s Pike Place Market. Since its acquisition by Howard Schultz in 1987, the company has expanded to 7,102 company-operated outlets on every continent with 5,668 in the United States and 1,434 in other countries and U.S. territories. In addition, there are 5,338 joint-venture and licensed outlets—3,168 in the United States and 2,170 in U.S. territories and other countries, which brings the total number of Starbucks locations to an astounding total of 12,440 locations worldwide. Thanks in large part to Starbucks, Seattle has become synonymous with coffee in all corners of the earth.
While any world traveler will confirm that the familiar Starbucks logo is a common sight on much of the globe, plans are already under way to expand even further to a grand total of 20,000 locations. Many of these will be located in China.
Companies like Costco and Starbucks are expanding Washington’s economic influence to the rest of the world. Along with other home-state giants like Microsoft and Boeing, they have helped make Washington a key player in the growing global economy.