The World's Eighth-Largest Nation

Of course it seems absurd to think of a state having a foreign policy. "The Constitution," wrote the legal scholar Edward S. Corwin, "is an invitation to struggle for the privilege of directing American foreign policy." Corwin meant a struggle between the president and Congress, not between Washington and the states. The states look after the health, safety and welfare of their citizens; they do not make treaties, regulate commerce or declare wars.

But things have changed a lot since 1957, when Corwin wrote his study of the presidency, not to mention since 1787, when the Founding Fathers finished the constitution. In 1957 California, for example, had a population of about 13 million, still well behind New York. At the time, even 13 million was considered excessive because most of the people lived in Southern California, which has no indigenous water.

Today, with 31 million legal residents, California is by far the most populous state of the nation, with half again more people than New York. As an independent nation, California's gross economic product, at about $700 billion, would be eighth largest in the world, $100 billion ahead of China's, $200 billion ahead of Canada's. (With the Soviet collapse, California may be seventh.)

Los Angeles, which had 100,000 people at the turn of the last century, will have 4 million when this one turns. San Diego, just a town of 17,000 people in 1900, is today the nation's sixth-largest city, bigger than Dallas, Detroit or Baltimore, and larger still than the capitals of most countries.

California is in many ways not a state, but a nation. When the Great Compromise was reached, creating a U.S. Senate where each state would be equal, the Founding Fathers could not have envisaged that one day the nation's largest state would be 62 times more populous than the smallest (Wyoming). Further, that this behemoth would be in the far West, indifferent to the East's traditional European orientation, far removed from the nation's political and financial capitals, peopled nearly 50 percent by brown-skin minorities, whose roots and interests most often run, not eastward across the Atlantic, but southward toward Mexico and westward across the Pacific.

California is so big, and its problems so immense, that it needs its own foreign policy. In an era when economics commands foreign relations, this does not mean embassies and armies, but it does mean more trade offices and state agents in foreign countries, its own relations with foreign nations and a governor and legislature willing to represent the state's interests independently of Washington. California is a distinct region within the United States and needs greater freedom to act on its own--not to thrive, but as this devastating recession has shown, just to survive.

From Federal Largesse to Self-Help

The days when the state's prosperity depended largely on the defense industry, which spent one out of every five dollars in California, and on a huge military presence--the Navy once was San Diego's largest employer--are finished. The time is past when the state could look to Washington for solutions, like the 1930s Central Valley Project, the largest U.S. public works project ever, which took water from the Sacramento Valley, turning California into the nation's number one agricultural producer.

California used to get more back from Washington than it paid in, but even that has changed. California, theoretically the most powerful state, ranks 33rd in per capita state and local grants received from the federal government, and 43rd in direct payments to individuals. Only in military procurement is the state in the top ten, per capita, and that era is over.

Like an independent nation, California must depend on its own wits to manage its future. Washington's 1986 attempt at immigration reform was a failure for California, and the state needs to find its own solutions. The state has begun negotiations with the Federal Bureau of Reclamation to transfer control from Washington to Sacramento of the Central Valley Project. California can no longer afford Congress' water subsidies to alfalfa farmers in Fresno while cities like San Diego go thirsty.

In setting up the California World Trade Commission eight years ago, which now has offices in Tokyo, Hong Kong, Mexico City, London and Frankfurt, the state recognized that the federal Commerce Department was inadequate for California's trading needs. This year, the state legislature decided the cwtc also was inadequate. In January, the California Trade and Commerce Agency, the state's version of Japan's Ministry of International Trade and Industry, was created to deal with "foreign" trade--with foreign nations and the other 49 states. The enacting legislation explained that ''the expansion of international trade is vital to the overall growth of California's economy.'' It also declared that "current state efforts to develop relations with foreign countries are insufficient to promote economic growth and international trade.''

California's economic future depends on export jobs, each of which creates two nonexport jobs. California's largest markets, in order, are Japan, Canada and Mexico, with Mexico soon to supplant Canada as number two and, if the North American Free Trade Agreement (NAFTA) works as expected, eventually to pull ahead of Japan.

Life After NAFTA

When ratified, NAFTA will be a formal treaty between sovereign nations. Nevertheless, it is the American West and Southwest that stand primarily to benefit. The Atlantic seaboard has been relatively indifferent to NAFTA, and the Great Lakes-Ohio Valley region ambivalent, primarily because of hostility from organized labor, which fears free trade. But the West and Southwest have been staunch supporters. It was Lloyd Bentsen of Texas who steered Bill Clinton toward a pro-NAFTA position and away from the protectionist views of House Majority leader Dick Gephardt of Missouri.

Extrapolating from existing patterns of U.S.-Mexican trade, one sees that Texas and California will reap the largest NAFTA benefits. The predominance of Texas and California in Mexican trade should not be a great surprise. Texas accounts for half the 2,000-mile U.S.-Mexican border. California has the largest city on either side of the Mexican border, San Diego, which is next door to Mexico's largest border city, Tijuana. California also has, after Mexico City, the largest Hispanic city in the world--Los Angeles.

Since the NAFTA negotiations began, the border states have been trying to figure out how to take advantage of the coming free trade with Mexico to lift their economies out of deep slumps. Texas went into an economic slowdown when the price of oil collapsed a decade ago, and has only recently begun to revive. California profited from the Reagan defense buildup of the 1980s, but the 1990s have been an economic nightmare, with what Kevin Scott, director of the Commission on State Finance, calls "the worst recession since the Great Depression." At ten percent, California's unemployment rate is three points above the national average.

Mexico has a market of 82 million people, which is expected to grow to 100 million early in the next century. It has a growth rate of three percent and rising, and runs a large merchandise trade deficit with the United States. Seventy percent of its imports are American, and two-thirds of which come from Texas and California. Since California and Texas combined to export $25 billion in goods to Mexico, the post-NAFTA opportunities offer great promise for their ailing economies.

Free trade will also transform the "maquiladora" industry, an industry that has had mixed blessings for the United States for a quarter-century. Maquiladoras, consisting of some 2,000 assembly-only plants along the border in cities such as Tijuana, Mexicali, Ciudad Juárez and Nuevo Laredo, currently export $3 billion in goods annually to the United States. But the maquiladoras are dinosaurs, remnants of the pre-NAFTA age before foreigners were allowed to produce and sell in Mexico. For example, under the maquiladora regime, Japanese companies used Mexican labor to assemble television sets from components shipped from Asia and re-exported to United States for sale. Under NAFTA, that will change. To begin with, the agreement's rules of origin require that 62.5 percent of a product's components be made in North America to enter duty-free. Another rule requires that a product's "main component" be produced in North America. For television sets and computers assembled in Tijuana's maquiladoras, that means the Japanese no longer can use picture tubes and main circuit boards made in Southeast Asia, but must get those components in North America.

For California, whose main export to Mexico is electric and electronic equipment, this represents an opportunity, particularly as new technology appears to move toward high-definition television. For U.S.-owned maquiladoras the rules of the game will change as well. No longer will they be just tariff-free assembly warehouses whose sole purpose is to use cheap Mexican labor to assemble products for sale to Americans. Under NAFTA, the target becomes the exploding Mexican market, which was largely closed to the maquiladoras. This translates into more investment in Mexico. A study by Peat Marwick notes that NAFTA's approval will increase investment in Mexico by $25 billion over the ten-year phase-in period, resulting in an additional $2.3 billion in California exports and 3,800 new jobs per year.

Blame It On the Mexicans

Californians have always believed that their worst problems came from abroad. James Gerber, professor of economics at San Diego State University, has studied the stigmatization of Mexicans in California dating back to the 1870s. Working from old newspapers, Gerber shows that Californians have always blamed their troubles, whatever they may have been, on Mexicans. In 1870 the problem was border raids; by 1900 it had become Chinese immigration through Mexico; in the 1930s it was Mexicans taking jobs from Americans; in the 1940s it was Tijuana contributing to juvenile delinquency; in the 1950s it was communist subversion from Mexico; in the 1970s, drugs; in the 1980s, the environment. "We have projected onto the border our worst fears."

Those fears still exist. Californians still have doubts about the Mexican work ethic and Mexico's one-party democracy, but they understand that the Salinas government is something different. The opening up of Mexico, which the NAFTA treaty will codify into law, is an opportunity to recreate a relationship that once was special.

What is known as Old California lasted barely a quarter century, roughly from Mexican independence in 1810 to the Gold Rush of 1849. But if it was short, it was, in the beginning at least, splendid. Old California was a blend of the American and the Spanish-Mexican. If the pioneer could survive a harrowing overland crossing, he was rewarded by a country whose name itself came from old Spanish mythology. This was the time of caballeros, missions, haciendas and El Camino Real; of Spanish Mediterranean towns being transplanted to places like Santa Barbara, Monterey and San Diego.

NAFTA may not be able to recreate the mythic Californian-Mexican relationship of long ago, but it is a chance to end the political demonization of Mexico that has prevailed in recent years and use the principle of comparative advantage to lift the economies of both regions.

Even as the treaty was being negotiated, forward-thinking changes were occurring. San Diego is hard at work trying to sell Mexico on the idea of a transnational airport, which the border region badly needs, and the Federal Aviation Administration badly wants in order to relieve an overcrowded Los Angeles International Airport. The long lines and waits at the San Diego-

Tijuana border checkpoint, the world's busiest, ended when customs and immigration services, in anticipation of greater flows of people and goods under NAFTA, increased staffing.

Environmental and natural resource cooperation, unknown in the past, has also begun to improve. California has offered to pay most of the costs of cleaning up Mexico's Tijuana River, which empties raw sewage into the Pacific just south of San Diego's beaches. The City of San Diego, over the objections of the federal government, has signed several bilateral agreements with Tijuana. The New River, a filthy stream composed mostly of agricultural runoff from the Colorado River and sewage that rises near Mexicali and dumps into the Salton Sea, will be cleaned up under a U.S.-Mexican agreement announced in December. After 150 years, the Californian-Mexican relationship is ready to be reinvented.

Going West

For California, NAFTA is not the only piece of the puzzle. The other foreign relationship California seeks to develop lies to the west, in Asia. China alone has 1.2 billion people and areas, like Guangdong province, with 18 percent economic growth rates. The Pacific Rim is the fastest-

growing economic region in the world, and 40 percent of America's trade with the region passes through California.

In a Boston Study Group's 1992 report companies locating in California cited its Pacific Rim location (together with population growth and an excellent higher education system) as one of the top three reasons for their move. One of the keys to California's future will be how well the state organizes to take advantage of Pacific Rim opportunities, particularly as China's economic opening spreads northward from Hong Kong and Guangdong to the entire nation.

The Pacific Rim region today accounts for 25 percent of world gross domestic product, only slightly behind Western Europe, with 29 percent, and North America, with 28 percent (leaving 18 percent for everybody else). California is the natural jumping-off point for America's business with this huge, economically vibrant, demographically expanding region. Further, the Pacific Rim is a region with which many Californians have close historical and familial ties.

As the 25-year-old Association of Southeast Asian Nations has failed to live up to expectations, both Asians and Americans have begun looking for new structures. One course of action, proposed two years ago by Malaysian Prime Minister Datuk Seri Mahathir Mohamad, is for the Pacific Rim nations to loosen ties with America and form their own regional group, to be called the East Asia Economic Group (eaeg). Mahathir sees this bloc as a logical Asian response to NAFTA.

Perhaps because most nations of Australasia and East Asia suspect that such a group, by excluding the United States, would be dominated by Japan, Mahathir has found few takers. A more popular idea is to strengthen the Asia-Pacific Economic Cooperation Council (apec), which includes the United States as a member, upgrading it into a permanent organization with its own secretariat.

California's economic interests depend on keeping the Pacific Rim from retreating into a eaeg-

style regional shell. The creation this year of California's Trade and Commerce Agency was aimed precisely at such an end. The Pacific Rim needs California, and vice versa. For the United States as a whole, the Pacific Rim is already as important commercially as Europe. For California, there is no comparison: two-thirds of the state's foreign trade is with Asia. Only trade with Mexico, which increased 13 percent in 1991, is keeping pace.

The interest in strengthening apec works both ways. Hong Kong, South Korea, Singapore, Taiwan, Thailand, the Philippines and China all trade more with the United States than with Japan and do not see any advantage in forming an eaeg-type club that excludes their principal customer. Indo-nesia, because of oil, is an exception to this trading pattern, but Indonesia opposes Mahathir's idea for its own reasons.

The United States should support strengthening apec. Washington needs to demonstrate to the Asians that NAFTA does not mean turning its back on the Pacific Rim or turning North America into a fortress. Just as the Franco-German friendship treaty 30 years ago was a means for reconciling those two former enemies, NAFTA is a means for Mexicans and Americans to heal old wounds and plan a brighter future--but not at the expense of others.

Free trade areas always cause trade dislocation as old partners are replaced by new ones. Nevertheless, these areas are blessed by the gatt under the principle that rising regional prosperity increases overall world prosperity. NAFTA will lift the American states' economies--California's and Texas' in particular--by increasing domestic manufacturing and providing Americans with a low-wage platform to meet competition from Asia and Europe. But if gatt's reasoning holds, as it has in the past, Americans will also trade more with Asia, as overall trade increases.

The apec forum is a natural for managing Pacific Rim ties far into the future. Its new headquarters was recently set up in Singapore. As apec grows, no more natural site for a U.S. headquarters exists than California.

A State of Crisis

California is in a state of political, economic and demographic crisis. People still flood the state-the population rose 25 percent between 1980 and 1990--even though opportunity is diminishing. Population grew at three times the national rate in 1990 and twice the national rate in 1991, although current indications are that it will slow to about 150,000 annual (legal) arrivals over the next few years.

In the past, California used its abundant natural resources to cope with new waves of settlers, but today that path is closed. Lack of water restricts land development and industry. Teeming populations demand social services that the working population cannot sustain. Schools and cities are in crisis. Young workers cannot afford to live near their jobs. The industries that have supported the state for decades-real estate, aerospace, defense, military, high technology--are in transition. Tremendous tension exists between economic growth and environmental protection. Population growth may slow, but it will still rise enough to be a major concern.

The best hope is for California to pursue aggressively its own foreign policy. The state must rediscover its old relationship with Mexico, which offers the best means for dealing with its economic problems, as well as its immigration problem. In addition, California must also look westward, over the horizon, to the region that has become the most dynamic economic area in the world--the Pacific Rim. California's natural assets remain incomparable, but the state let itself grow too dependent on the Pentagon, too oriented toward the east.

In the past the state has thrived because of domestic opportunities: the Gold R sush, the railroads, Hollywood, the Central Valley Project, the defense industry, Silicon Valley. This time the opportunity comes from abroad. California needs the vision and leadership that it has previously lacked to take advantage of it.

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