Imports in the Washington State Economy: Importance and Regional Effects of Import Liberalization

Imports in the Washington State Economy: Importance and
Regional Effects of Import Liberalization1

Christine Wieck2 and Thomas I. Wahl
IMPACT Center and School of Economic Sciences, Washington State University
Pullman, WA

Selected Paper/Poster
American Agricultural Economics Association
Portland, Oregon, July 29 - August 1, 2007

Abstract
This paper focuses on the import side of a regional economy quantifying the economic
impact of import levels and trade liberalization. An innovation represents the linkage of a
regional with a national model by combining two separate Computable General
Equilibrium models into one framework. This allows for import price formation in
liberalization scenarios on the national level and subsequent incorporation of these
nationally simulated prices into the regional model.
The regional model is applied to Washington State, one of the most trade
dependent states of the U.S, the national model to the U.S. Data for the two identically
structured models origin from the IMPLAN database which divides the U.S. and
Washington economy into 509 industries. For both models, Monte Carlo techniques are
used to mitigate parameter uncertainty inherent in CGE specifications. Two scenarios are
simulated that differ in the assumptions about the macroeconomic and factor market
adjustment options of the economies.
Keywords: Computable General equilibrium, regional modelling, trade liberalization
JEL classification: C68, R13, F17

1 Copyright 2007 by Christine Wieck and Thomas I. Wahl. All rights reserved. The authors gratefully
acknowledge helpful comments and suggestions by Dr. David Holland, Washington State University.
2 Corresponding author: Christine Wieck (cwieck@wsu.edu)

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1 Introduction
The trend towards more integrated economies that depend on the international exchange
of goods has been accelerated over the past decades. Between 1980 and 1998, the
worldwide trade volume increased at an average annual growth rate of 5.6%, much
higher than the 3.3% growth rate for global production (OFM, 2000). Washington State is
one of the most trade dependent states of the U.S., consistently ranking in the top five
states in exports during the last decade (OFM, 2005). Due to its geographical location,
Washington State serves as one of the nation’s gateways to East Asia. The ports of
Tacoma and Seattle are the second largest container load centers in the U.S., ahead of
New York/New Jersey and second only to Los Angeles/Long Beach (WITC 2003). The
value of imports and exports that were processed through the port system of Washington
State continuously increased over the past decade and accounted for $98 billion in the
year 2003 (Figure 1).
Figure 1 Value of imports and exports (“Pass-through”)
Washington State
70,000
60,000
50,000
$
n 40,000
illio 30,000
M 20,000
10,000
0
81
83
85
91
93
95
97
99
19
19
19
1987
1989
19
19
19
19
19
2001
2003
Exports
Imports

Note: All data are based on goods laded or unladed in Washington State regardless of goods origin or destination.
Nominal values.
Source: Department of Community, Trade and Economic Development, Washington State.
With a Gross State Product (GSP) of around $262 billion in the year 2004, Washington
State rank 14 in the U.S. in absolute terms. Important contribution to the state GSP are
provided by the real estate sector, information, manufacturing, retail and wholesale trade,

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and the professional and technical service sectors as Figure 2 indicates. The comparison
of figures over time shows that overall contribution to the total GSP increased for the
information sector by 1.8% to 9.2% in 2004 of total state GSP, as well as the retail trade
(+1.1% to 8.2% in 2004), professional and technical services (+1.4;6.6%), and health
care sectors (+0.4;6.2%). For manufacturing we observe a decrease by -1.4% to 9.1% in
2004 as well as for the contribution of the government sectors to total GSP by around
1.8% (to 13.4% in 2004).3
Figure 2 Value added of private industries in Washington State: Development over
time
40,000
35,000
30,000
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(r 20,000
15,000
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1997
2004

Note: Real values in 2000 dollars.
Source: Bureau of Economic Analysis (BEA).
In terms of employment, the statistics reveal that in 2004, manufacturing contributes to
16% of total employment and various service sectors (including government) account for
the rest. Among the service sectors, retail trade (12% in total employment), education and
health (12%), and the leisure and hospitality sector (10%) capture most of the
employment. A view on the trend shows that the importance of the service sectors
increased over time (+3.6%) on the costs of manufacturing jobs.

3 All numbers in this paragraph rely on information drawn from the BEA Regional Economic Accounts
website.

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Past bilateral, regional, and multilateral trade agreements have expanded both
export opportunities and import competition. Further future trade liberalization under the
Central American Free Trade Agreement and the Doha Round of the World Trade
Organization is expected to come and will intensify this trend. Conceptually, one may
expect that rising exports would help the state economy while rising imports would hurt
it. However, in fact, the situation is more complex affecting both manufacturing and
services, and previous studies (e.g. Chase and Pascall, 1999) indicated that also rising
imports contributed to economic growth in certain industries and that the impact of trade
liberalization will depend on the character of the regional industries.
The growth of imports over the last decade affected the regional economy both
directly and indirectly. From a consumer’s point of view, these are positive developments
given that the availability of imports increases the variety of products and services
available for purchase and may reduce their costs. On the production side, the rise of
imports can be seen both, positively and negatively. To the extent that imports are used in
the production process, an increase in availability at a potentially lower price decreases
production costs and enable the firm to remain competitive. On the negative side, imports
may have an dampening effect on the economic development of industries if they become
a new source of competition and substitute for goods and services that otherwise would
have been produced regionally. In addition, an economy like Washington State that is an
important gateway for im- and exports, benefit from increased trade volumes through all
services that are required for the processing of the shipments. Impacts of imports on
employment are most likely to fall on sectors that have a heavy component of imports as
part of total final consumption and where the industries are relevant to the regional
economy. Economic effects of these developments will include changes in production
and consumption pattern, factor valuation, employment, and state GSP.
Over the last decade, research has been done on several aspects of the importance
of foreign trade for regional economies. Recent work on determinants foreign trade
earnings is provided by Leichenko and Silva (2004) whereas several other studies
quantify the importance of imports (Chase and Pascall, 1999) or exports (Gosh and
Holland, 2004) for the regional economy and trade liberalization (Dixon et al., 2006)
using mostly input-output or Computable General Equilibrium (CGE) models.

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Leichenko and Silva (2004) studied the effect of international trade on rural
manufacturing communities in the U.S. using a regression model where manufacturing
earnings and employment is explained by regional endowment factors, exchange rates
and indicators of regional export and import orientation. Their model suggests that the
regional impacts of trade are complex and must be differentiated for rural and urban
counties and dependent on the import or export orientation of the regional communities.
Chase and Pascall (1999) analyze the importance of imports for the Washington
State economy. First, they provide a description of trends and current situation of pass-
through trade and imports with Washington as final destination, and highlight the most
import dependent sectors and major trading partners. Afterwards, they use a model
(“Washington Input-Output model”) to estimate both, the economic impacts of pass-
through trade, i.e. all trade that is e.g. handled by the ports of Seattle and Tacoma but
further shipped to destinations mainly in the Midwest, and the economic impacts of
imports terminating in Washington State. They conclude that 7% of all employment in
Washington is import-related and that the entire trade-related employment base is around
32%.
Gosh and Holland (2004) analyze the role of agriculture and food processing
exports on the Washington economy using a social accounting matrix for 2000 that is
based on IMPLAN data. Their results indicate that there are significant indirect and
induces effects of non-agriculturally related service sectors like wholesale and retail
trade, and business, health, banking and insurance services.
Dixon et al. (2006) use a detailed U.S. CGE model to analyze the impact of the
removal of major tariffs and quotas. In addition, they implement an approach to
regionalize the national results. Using regression analysis they search for further
explanatories that beyond the regional break-down of national indicators may explain
regional differences. Their results indicate that further import liberalization would have
only small long-run effects on the U.S. economy. For most industries output changes are
in the range -/+ 1%, however there are a few industries (sugar, butter, textile) where
larger negative output changes can be expected. State employment effects are estimated
to be in the range of -0.5% to +0.2% with Idaho and North Carolina being at the negative
end of these effects and Washington State at the positive end of employment

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developments. These state results are mainly influenced by the trade orientation of
important regional industries.
As a reason of the widespread use of input-output models and the underlying
economic base theory approach, most work in this area focused on the assessment of the
export base of a regional economy.4 However, this paper aims at expanding this picture to
the import side quantifying the economic importance of current impact levels as well as
prospects of the economy as a whole under further trade liberalization. Therefore, this
study is driven by the following research questions:
How dependent is the regional economy on imports?
What is the effect of the removal of import restraints on WA?
The analysis is undertaken using a CGE modeling framework. However, an innovation in
this approach represents the integration of the regional economy into the national picture
by combining two separate models that represent the regional economy of Washington
State and the national economy of the U.S. into one modeling framework In addition, in
both models, Monte Carlo techniques will be used in order to address parameter
uncertainty inherent in the specification of CGE models.
The remainder of the paper is organized as follows: In the next section, indicators
regarding the regional economic importance of imports are analyzed. In the third section
an import restraint liberalization scenario using CGE methodology is simulated. The last
section concludes.
2 The import picture of the regional economy
Imports of goods (or services) into an economy mainly serve two purposes: they either
enter the production chain of the regional economy as inputs in the manufacturing
process or enter the marketing or transportation chain to satisfy final consumption and
service demands by household or other institutions.5 The following graphs and tables will

4 An approach that is extended by Waters et al. (1999) including service export, extraregional income, and
government transfers into the economic base estimation and related industry importance indicators.
5 This also holds for so-called “pass-through” imports that are landed at a port and then transported to a
final destination that is outside of the regional economy. In this case, these imports make use of warehouse,
transportation, and processing services provided by the region.

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provide an overview on the import picture in Washington State. Year of presentation is
2003, the most recent data set available from IMPLAN (Impact Analysis for Planning)6.
2.1 Value added and employment
Overview
Table 1 provides an overview on aggregated economic indicators for Washington State as
represented in the IMPLAN database for the year 2003. Around 3.5 million jobs in
Washington State generate a value added of nearly $240 billion. Imports in the value of
$157 billion arrive in Washington State of which around $19 billion originate from
foreign destinations. Total factor return for labor (“labor earnings”) for the 3.5 million
jobs account for around $142 billion.
Table 1 Value added, employment, and imports for Washington State
State aggregate
Value
Value added
Million $
238,633
Employment
# of jobs
3,541,345
Total WA imports
Million $
157,360
Foreign imports
Million $
137,455
Imports from rest of the U.S.
Million $
19,905
Total labor earnings
Million $
141,662
Source: Own representation based on IMPLAN data.
Breakdown by industries
Figure 3 provides an overview on the importance of the difference industries in terms of
share in value added7 in total state value added and share of employment in total state
employment in the respective industries. While the public sectors (e.g. education,
military, waste management) accounts for both the highest value added share and
employment, other industries such as money and banking, communication also contribute
significantly to the GSP but show less importance in terms of employment. Here,
personal services (e.g. rental, legal, repair, or personal care services), other retail stores,

6 IMPLAN provides regional social accounting matrices for all counties and states of the U.S. consistent
with the accounting conventions used by the BEA.
7 Value added for an industry is defined as the gross output minus intermediate inputs, i.e. it is the value
added of labor and capital in that industry. The sum over all industries gives the Gross State Product, i.e.
the value added of the state economy.

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health care, construction, other business services (e.g. management and administrative
services, office support service) and hotels and restaurants also are important employers
in Washington State.
Figure 3 Employment and value-added share, Top 25
Employment
Value Added Share
500000
20
450000
18
400000
16
350000
14
300000
12
250000
10
200000
8
150000
6
100000
4
50000
2
0
0
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Note: Employment in public sector: 656904. Value added share in public sector is 20%.
Source: Own representation based on IMPLAN data.
In Figure 4, the same indicators are displayed but for agricultural and food related
industries. Food retail and hotel and out-of-house food services and drinking places have
by far the most importance for the state in terms of value added and employment, but all
other activities in the food production and processing sector sum up to around 136,000
employees and a value added share of around 3.5%.

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Figure 4 Employment and value-added share for food and agricultural industries,
Top 25
Employment
Value Added Share
50000
8
45000
7
40000
t
6
n 35000
e 30000
5
e
m
ar
25000
oy
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Note: Employment in food retail (FRETAIL): 185144; hotels and restaurants (HOTREST): 237230.
Source: Own representation based on IMPLAN data.
2.2 The relevance of imports
Within the framework of the IMPLAN social accounting matrix (SAM), production
activities, i.e. industry sectors, produce (multiple) outputs, often called commodities.
Imports into the economy are recorded in the commodity accounts, and together with the
domestically produced output, represent the supply in the economy that can be allocated
to total domestic and export demand.8 Hence from the available data, we know the
quantity of imports of a commodity but not what it is used for in the economy
(intermediate input or final consumption). This makes some assumptions necessary in
order to come up with an estimate of the importance of imports in an economy. In the
following, the different steps of this calculation will be elaborated.
We start be looking at the import share in total consumption (Figure 5) at the
commodity level. The commodities are ranked by their share of imports. In addition, we
display the use of the good, that is, if it is mainly used as a final consumption good for

8 Here, total domestic demand (consumption) is defined as the sum of final household consumption plus
intermediate use of goods. In CGE models, this total domestic demand usually further includes investment
demand and government consumption. These two items are displayed in the above table but not considered
in the calculations here.

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households and institutions or as an intermediate input in the production process.9 The
display of the use of the commodity allows us to draw conclusions on the main use
imports may take in the economy and may hint at industries and consumers that will be
affected by changes in trade policy (to be further analyzed in the next section).
Figure 5 Import shares and use of commodities as final consumption good or
intermediates in manufacturing, Top 25
Final consumption
Intermediate good
Import share
20000
80
18000
70
16000
60
e
r
s 14000
ar
l
l
a
12000
50
o
d 10000
r
t
sh
n
40
o
p
8000
30
m
illio
6000
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M
20
%
4000
2000
10
0
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E
G
IT
I
M
IN
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TR
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IT
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H
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IS
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AN TA
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EL
TR
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ANN
W
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OF
SW
TO FR
FO
BRE

Source: Own representation based on IMPLAN data.
Commercial fishing output, textiles, and mining show the highest import shares with
around 40%-80%. Textile products, automobiles, and furniture as well as the food and
beverage products, brewery output, canned food, sweets, tobacco and distilled items, and
frozen foods are mostly destined for the final consumption whereas for the other listed
industries intermediate use of the products in other production processes prevails (e.g.
fish commodities are mainly used as intermediate products in seafood processing as well
as the hotel and restaurant business, and as final goods in household consumption).
If we want to go one step further, and draw conclusions from the commodity
import share to the importance of imports for the industry, i.e. the production activities,
we have to make some assumptions. IMPLAN provides us with a full overview on all
inputs used in the production process of a specific commodity. We know for example that

9 Final consumption goods are defined as goods that are directly consumed by households or institutions.
Intermediate goods are used as industry inputs that are accounted as inputs in the production process.
Goods may serve as both, final consumption good and intermediate input. e.g. fruits and vegetables that can
be consumed fresh or be used as an input in the canning industry.

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Document Outline

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