Governor Sarah Huckabee Sanders is traveling to South Korea and Japan until March 14th, marking her second trip out of the country on official Arkansas business. In the last 12 months there have been overseas trade missions from the governors from Nebraksa, Minnesota, Florida, California, Montana … the list goes on. But do these international trade mission make a noticeable impact on a state?
“I’ve been able to find very little evidence of this,” Jeremey Horpedahl said. He’s an associate professor of economics at the University of Central Arkansas.
There’s just not been much research at all done on the impact of overseas trade missions. However, there is substantially more research on trade done on an interstate level.
“Not to summarize a large research literature in a sentence,” Horpedahl said, “but if I will, there's been close to 100 studies done on this. Most of them find that there's essentially no effect for a lot of these programs is trying to get companies to come. A lot of the companies that move are going to move anyway. The research on that says maybe 75% to 98% were going to move anyway. So that's almost all of them by some estimates. And even the ones that do, it's not clear that when you offer a company incentives to come, that it will pass a cost benefit test. If you give someone a break on their corporate income tax for five or ten years, that that is actually worth it in terms of the additional economic benefits you'll get.”
So maybe the real question is, why do states do this?
Horpedahl points to research by Nathan Jensen, a professor of government at the University of Texas. “[Jensen] suggests that voters actually reward politicians for trying to get jobs to come,” Horpedahl said, “whether they do or not. Sometimes you offer them a deal and they don't come. Voters tend to like that, because they tend to see that as politician — the governor or economic development officer — is trying to better the state in some way. From a politician’s perspective, the incentive for them to do it is that it's good for votes that they will get more votes by doing this, whether it works or not. In some cases it will, but in a lot of cases, it's probably not necessary.”
Horpedahl said one study that has been done that looks at the impact of international trade missions examines Canada and its trade missions.
“The research on Canada that I've seen suggests that it doesn't increase trade,” Horpedahl said, “these missions just they have no effect. They may be a little bit positive, a little bit negative, but not a big effect from this. On this I would say we don't know how effective these are. But certainly like the economic development incentives done domestically, lots of governors do this and try to do it. I think historically, we've seen a lot of it done for agricultural products, governors going to other countries to try to get them to buy our rice or whatever else it might be. I think that now we've seen a shift to maybe more high-tech things with aerospace especially for Arkansas. But the evidence on whether this works or not is not clear in terms of whether these deals are going to happen anyway. My hunch is that it's similar to the local state-based economic development incentives were mostly they're gonna happen anyway.”
Not only is there just not a lot of research on this topic, the details of these agreements that are made are protected by these companies who make deals with state economic commissions. Horpedahl said without the data, he wants to remain neutral and hope that these international agreements do work, but these happen less frequently, so they’re harder to study.
“I think that there's just not a lot of good data,” Horpedahl said. “We've tried to get better data on the trying to attract companies across state lines, but even on that, Arkansas and other states are very protected with the data — both because they consider it private data of the companies, but also they don't want to lose their competitive advantage. If you know what deals the states were offering that might they would save and reduce their ability to do in other cases. We'd like to try to say we know, especially as academics, but I think here's when we're just say, ‘We don't know, and if we had better data, we could study it.’”
In a press release announcing the trip to Japan and South Korea, Governor Sanders said she is meeting with Korean and Japanese business leaders to encourage investment and deepen Arkansas’ connection with American allies. She goes on to say, “With the rising threat posed by the Chinese Communist Party, these relationships have never been more important.” Horpedahl said it was just a few years ago that Governor Sanders’ predecessor Asa Hutchinson made multiple trade mission trips to China.
“In the case of some of the Chinese companies under Hutchinson,” Horpedahl said, “they actually did both these. Not only did they have a trade mission, but they also offered them these incentives to come here. And a lot of those were some of the biggest ones Arkansas ever offered, such as the Sun Paper deal, and a lot of those ended up not happening. Some of that was because they were right before the pandemic, a lot of pieces fell apart as international trade slowed down at that point, but a lot of the deals with China the Hutchinson administration had negotiated just never happened.”
It’s worth noting that technically speaking, nations and individual states cannot strike trade deals. These overseas trips are actually state leaders going to foreign countries and signing incentive deals with individual businesses. Only the federal government can make trade deals with other nations. But Horpedahl said that forging new trade deals was not a priority for President Trump, nor has it been for President Biden.
“So I think because there's been basically no energy to do this in Washington for the past eight years,” Horpedahl said, “maybe state governors have felt like they need to pick up the slack. maybe [more trade deals will happen] in the future, but I think in this current election, that does not seem to be there's going to be any movement towards more free trade with either of these candidates this year. It could be a while before we get back to a situation where we're negotiating new trade deals, which might make governors feel like they need to step in and fill that void.”
Whether it’s domestic or international, the decision for a company to relocate to Arkansas for economic development is likely going to happen regardless of whether or not the governor makes a visit outside of the state. Horpedahl said that he’s heard economic development officers say publicly that deals were going there regardless.
“’The company is essentially using us as leverage against Mississippi to get a better deal in terms of better tax breaks,’” Horpedahl said. “I think that's actually what ends up happening with a lot of these negotiations. We know where the investment is going to go already. The company already knows where they want to go because they either already have an investment there or it's relatively close to their supply chain, and then they kind of play states against each other to get a better deal.”
When asked what he would do if Governor Sanders called him and asked where she should go on her next overseas trade trip and what would be the best use of her time, Horpedahl says he would take a hands off approach.
“As a conservative, we believe in the free market, right? That's what conservatives say. I think we should have a lot of confidence in the market being able to determine what the right investments are going to be. Not that the state has no role for this, but I would take cues from what the market is already doing. If a company is already investing here, I'd say that's something that makes sense. But a lot of that's going to happen anyway. So, if the governor called me I would probably say, I don't know. That is a really complex question. It's hard for either me as a researcher or them as politicians to know what's best. And I think with a lot of these kind of development incentives and trying to look like they're doing something, but these deals are going to happen or not happen based on their own merits.”
Governor Sanders is scheduled to return from her overseas trade mission on March 14th.
