Texas’ outsized economic success is sometimes referred to as the “Texas miracle.” Since 1990, the state has added over 5 million jobs, growing nearly twice as fast as the nation. The numbers for 2017 show Texas growing at an annual rate near 3 percent.
Today’s Texas economy rose out of the ashes of the 1980s oil bust and banking crisis and has been one of the biggest economic success stories in the nation.
Though tere is no shortage of factors contributing to the state’s emergence, none has been more significant than trade and Texas’ role in globalization. The state’s exports have risen 270 percent in real terms since 1994, the year the North American Free Trade Agreement was implemented. By 2002, Texas was the No. 1 exporting state in the nation. Texas exports totaled $233 billion in 2016, exceeding No. 2 California by $71 billion.
Most observers cite Texas’ large oil and gas deposits as the key contributor to the state’s superior performance, though the energy industry — a source of booms and busts in the state’s economy — has had less to do with its long-term growth premium. Oil and gas extraction’s share of Texas GDP peaked in 1981 at 19 percent and declined to below 10 percent by 1990. Energy boomed again in the fracking revolution, starting in the mid-2000s, only to end with the oil bust of 2015 and 2016 that left the sector’s share of the economy below where it was in 1990.
The state’s business climate is also a much-touted Texas advantage. Low taxes and light regulation likely account for 10 to 20 percent of the Texas job growth premium.
So while these factors — the energy industry and the business climate — shouldn’t be ignored, it is globalization that has made the difference.
Texas was well-positioned to benefit from an increasingly globalized economy. The state has a long international border with numerous land ports, a plethora of seaports along the Gulf, and a network of roads, rails and airports that reach across the nation.
Free trade boosts growth because it allows countries to specialize in what they do best and trade for the rest. Since resources are allocated more efficiently, consumers can buy products at lower prices and better stretch their incomes.
Initially, however, some industries lose jobs while other industries gain. We have seen this along the Texas border, where cities had to reinvent themselves after NAFTA. While the loss of low-skilled manufacturing jobs was painful, they went on to thrive in providing business services, transportation and logistics, and border and customs controls.
In fact, Texas’ biggest partner in its globalization success story has been Mexico. Since the implementation of NAFTA, trade with Mexico has surged and Texas has benefited more than the rest of the United States. Today, Texas exports to Mexico make up 40 percent of the state’s total exports versus 16 percent for the nation. Imports from Mexico represent 35 percent of Texas imports versus 13 percent for the U.S.
Mexican imports are important. Final goods imports directly benefit consumers by lowering prices, while intermediate goods imports are often part of manufacturing production-sharing arrangements. Mexico is the United States’ No. 1 supplier of auto parts. Proximity to the large and globally competitive auto parts manufacturing industry in Mexico is a big reason carmakers have expanded production in Texas in recent years— Toyota in San Antonio and General Motors in Arlington — and helps explain why Toyota moved its North American headquarters from Torrance, California, to Plano.
Imports — as well as exports — also boost activity at the state’s ports. Texas is home to two of the nation’s top five ports. The Laredo port district is the nation’s third-largest by export value; Houston is the fifth-largest. These growing ports and the trade that flows through them support hundreds of thousands of jobs in warehousing, trucking, rail transportation and logistics.
As the rhetoric over free trade heats up, Texans would do well to remember that globalization has — on net — benefited the state and made up a sizable part of its economic growth. The only way to ensure future Texans enjoy the gains we’ve had is to preserve openness to the world through markets and trade — an underpinning of the Texas miracle.
Orrenius is a vice president and Phillips is an assistant vice president at the Federal Reserve Bank of Dallas.