Cross-Border
Economic Bulletin - October 2001
The Cross-Border Economy After September 11
Official
figures show that both the U.S. and Mexican economies slowed sharply during
the second quarter (April-May-June) of 2001. Partial figures for July
and August are consistent with the beginning of a recession, and analysts
in both countries continue to revise downward their estimates of growth
for the year. Against this backdrop, the events of September 11 caused
an unimaginable amount of physical destruction and human suffering in
the dead-center of U.S. financial markets.
Given the emotional pain inflicted by the terrorists, and the depth of
the grief and sadness felt by people everywhere, it seems incongruous
to note that the immediate economic impact on the U.S. economy will be
relatively small. Without doubt, a share of the wealth of the U.S. has
been destroyed, but it is tiny in comparison to the overall wealth of
the nation. The U.S.’s ability to generate income is even less affected,
although some industries such as airlines, insurance, and tourism will
take losses.
This issue of the Cross Border Economic Bulletin describes the recent
slowdown in both the United States and Mexico. The cross border regional
economy is examined for evidence of the slowdown, and the national and
regional effects of September 11 are discussed. Its main points are:
A
slowdown in the NAFTA region and beyond
All three NAFTA economies are slowing down. During the second
quarter of 2001, Mexico’s real gross domestic product was completely
flat at 0% growth, while the U.S. grew 0.2% on an annual basis, and Canada
grew 0.4%, also annualized. Figure 1 illustrates the slowdown in the U.S.
and Mexico.
The rule-of-thumb definition of a recession as two consecutive quarters
of negative growth has not been met, but analysts such as the director of
the UCLA Anderson Forecast have pointed out that the trend is more important
than the level. The U.S. has never experienced a similar decline in capacity
utilization together with a similar increase in the unemployment rate without
entering a recession.
Two characteristics of the current slowdown are unusual. First, the slowdown
is worldwide. Economic activity in Japan and much of East Asia outside China
has declined, along with Europe, and several countries in South America.
This has affected exports in both the U.S. and Mexico, which are off sharply
and have contributed to the slowdown in both countries.
The second feature of the current slowdown is that it is
investment led, rather than consumption led. Particularly important is the
investment decline in information and technologies and software.
Local trends
Both San Diego and Tijuana have escaped the full impact of
the current slowdown. In Baja California, for example, the growth of manufacturing
output has remained positive through the first five months of 2001, while
Mexico as a whole has experienced declining manufacturing output, since
last February (Figure 2). According to the 1998 Economic Census, manufacturing
employment makes up more than 50% of all employment in Baja California.
Manufacturing is a relatively small share of the San Diego
economy (just over 10% of employment), so the downturn in both U.S. and
Mexican manufacturing has not had much of an impact on the San Diego economy.
Overall, San Diego added 22,600 jobs in the last twelve months, and the
unemployment rate for August, 2001, remains at 3.3%, exactly where it was
one year ago.
This is not to argue that San Diego and Tijuana will not be affected by
recessions in Mexico and the United States. It does hold out the possibility,
however, that if recessions develop, and if they are relatively mild, then
the worst effects may not reach the San Diego-Tijuana region.
Impacts of the terrorist attack
The immediate destruction caused by the terrorist attack
of September 11 is unlikely to affect the overall U.S. economy, except perhaps
insofar as it affects spending priorities. Rebuilding of the Pentagon and
the World Trade Center in New York City are likely to stimulate the economy
in the short run, as will increased federal expenditures for military preparedness
and military actions. These measures will partially counteract a developing
recession.
This scenario is consistent with the pattern of recovery in countries, including
the United States, that have experienced major natural disasters. For example,
the 1995 earthquake in Kobe, Japan, destroyed 100,000 buildings and killed
6,500 people, but manufacturing activity was 98% of normal within 15 months
after the quake. Over time, the implications of the attack may have a more
lasting effect on economic behavior and priorities. No one can doubt that
there is a tremendous amount of uncertainty right now, and that markets,
particularly financial markets, hate uncertainty. The uncertainty has driven
down the stock market, made people afraid to travel, and created chaos on
the border.
Locally, the most visible impacts are the heightened state of military preparedness,
the waits at the border, and sudden decline in the visitor services industry,
including both tourism and business travel. These impacts are clearly not
symmetrical between San Diego and Tijuana. According to a recent study by
the Workforce Partnership,
visitor services (restaurants, hotels, amusement parks, etc.) is actually
a smaller share of the San Diego economy (about 7% of local employment)
than its share nationally. This is contrary to most people’s assumption,
and a reversal of the situation in the early 1990s, when visitor services
employment was a larger percentage of total employment. Over the 1990s,
however, the rest of the San Diego economy grew much faster than visitor
services, so that by the decade’s end, it accounted for a smaller share
of the economy. In addition, the Workforce
Partnership describes the industry’s linkages to the rest of the
local economy as “weak,” implying that its decline may not spread
as readily to the rest of the economy.
The situation in Tijuana is less clear since tourism’s share of the
economy is unknown. In the immediate aftermath of the terrorist attack,
the U.S. declared a “Stage One Alert” on its borders and imposed
much more stringent inspections of pedestrians and vehicles entering the
U.S. The increase in wait times has caused a significant drop in tourist
visits to Tijuana and is hurting merchants there. Perhaps in response, the
state Secretary of
Tourism announced a discount package at hotels and restaurants which
is targeted at California, Arizona, and Nevada residents. The problem of
long wait times at the border is compounded by the fact that an increase
in average wait times is associated with an increase in the variation of
wait times. This makes it much more difficult to anticipate how long the
lines will be, and how much time needs to be planned for crossing the border.
A significant increase in border wait times creates additional problems
for the cross border economy. INEGI
estimates that for July, 2001, the percent of the labor force in Tijuana
and Mexicali living in one of these two cities and working in the U.S. is
7.0%. This works out to approximately 35,000 workers in Tijuana and about
22,000 in Mexicali. The ability of these individuals to cross on a daily
basis is threatened by long waits at the border, and, in turn, threatens
the incomes they earn. This could have a potentially serious impact on income
and spending in those two cities. Nor will the impact be limited to the
Mexican side of the border. Long border waits reduce cross border shopping,
and will harm Calexico and Imperial
County. The impact on San
Diego County is also important, but more muted, given the size of the
county’s economy.
Finally, if longer border waits are a permanent feature of the local economy,
then one has to wonder what the impacts might be on cross border investment
and collaboration. American firms have a particular advantage in doing business
in the border region, since they avoid many of the costs of executive relocation
abroad and longer turn-around between design and production, and, in addition,
they are able to maintain greater inventory control. Similarly, many Japanese
and Korean executives of maquilas enjoy the quality of life available in
San Diego, with its abundant golf courses, tourist attractions, and public
schools. If long waits at the border-or a wide variation in the wait at
the border-become routine, then some of these advantages disappear. The
ability of executives and managers to travel back an forth is already strained
and additional waits and congestion may end that option altogether.
In effect, the terrorist attack underscores an obvious point. Like the airport
problem in San Diego, the border’s infrastructure-human, organizational,
and physical-continues to plague the region and hamper its growth. Until
the border wait problem is resolved, the possibilities for a binational
regional economy are limited. Perhaps even worse, every achievement of closer
collaboration and greater integration is under a constant threat of reversal
due to some unforeseen shock.
The Cross-Border Economic Bulletin is prepared monthly by Dr. Jim Gerber, professor of economics at San Diego State University. It is underwritten by Concert, a global venture of AT&T and BT.