Trade-offs in the Desert: RealEcon Visits Arizona

Earlier this month, the RealEcon team at the Council on Foreign Relations (CFR) traveled to Arizona as part of its ongoing listening tour across America, which has also taken us to Florida, Wisconsin, and western Pennsylvania and New York. The purpose of the tour is to better understand what Americans across the country think about U.S. involvement in the international economy.

In Arizona, we visited Tucson and Phoenix and talked to students and faculty at Pima Community College and Arizona State University, local workforce experts, economic development officials, and state and city representatives. We also visited a copper smelter and the headquarters of an international mining company.

Before 2008, Arizona’s economy relied heavily on tourism, call centers, and retirees looking for a warm place to live. The state economy collapsed during the financial crisis when the housing sector went bust. After the crisis, the state worked to diversify its economy and attract more outside investment, focusing on manufacturing sectors that had had a presence in Arizona for decades, such as defense, aerospace, and advanced manufacturing. (Boeing and Raytheon have long had production facilities in the state, and Motorola began making semiconductors in Phoenix in the mid-1950s.)

In 2017, Intel invested around $7 billion in a new semiconductor fabrication plant (commonly known as a “fab”). Since then, investment in Arizona has taken off. One person we met with estimated that around $105 billion had poured into the state in the last three to five years. In 2022, Arizona became the U.S. state attracting the most foreign direct investment, totaling nearly $32 billion. Our contacts explained that investors’ willingness to pour funds into the state is due in part to low taxes, large swaths of available land, comparatively relaxed regulations, a lower cost of living (especially compared to California), and a collaborative business culture.

Mexico is an important investor in Arizona and the state’s number one trading partner. (Canada is number two, thanks to NAFTA, the North American Free Trade Agreement.) The state receives roughly $2 billion a year from Mexico in tourism and business. Commerce and labor flow both ways, creating a highly integrated region. As one person explained, Tucsonans see trucks full of bananas and other goods crossing the border every day and understand the benefits of trade. Cultural links with Mexico are also strong, as most southern Arizonans have familial or personal ties to the country.

Business leaders we met with in Arizona explained that debates about the border should be broken down into three issues: commerce, immigration, and safety. While recognizing legitimate security issues, many raised concerns about the negative impact that delays and restrictions at the border can have on Arizona’s economy.

Another important contributor to Arizona’s economy is mining. As the United States looks to make the green energy transition, it will require copper and other critical minerals for batteries, semiconductors, and other technologies. Arizona has a history of mining and is home to one of the world’s largest copper-producing companies, Freeport-McMoRan. Currently, U.S. demand for copper outstrips domestic supply, and the green energy transition will further increase demand.

During a visit to Freeport-McMoRan’s Miami copper smelter east of Phoenix, we saw firsthand the effort to meet this demand—and the challenges involved. The Miami smelter is effectively working at full capacity and in 2023 processed approximately eight hundred ten thousand metric tons of copper concentrate into two hundred twenty-two thousand metric tons of copper anodes, which then get rolled into copper rods onsite or sent on to places like El Paso, Texas, for further processing. The company told us that they face a number of challenges increasing production in the United States, including lengthy permitting and legal proceedings that can take up to twenty years before production begins; perceptions that mining remains a dirty business despite new, cleaner technologies that we saw in operation at the Miami smelter; and difficulty recruiting and retaining workers because of the challenging work environment inherent to mining.

Despite Arizona’s palpable economic optimism, we repeatedly heard about four main challenges faced by the state: housing, workforce, energy, and water. As is the case across the nation, housing has become more expensive in Arizona. People from other states, particularly California, Oregon, and Washington, are selling their homes and buying up property in Arizona, increasing local prices. In Tucson, one local elected representative estimated that the average person can spend about 40 percent of their income on a two-bedroom apartment.

As advanced manufacturing expands and foreign investment continues to pour into Arizona, labor in the skilled trades has become crucial for the success of the economy. One of Arizona’s strengths in this regard is its network of community colleges, which are clearly rising to the challenge. We spent a fascinating day-and-a-half on the advanced manufacturing campus of Pima Community College (PCC) in Tucson, meeting with administrators, students, local officials, and business leaders. PCC partners with local manufacturing companies and other employers to provide fast-track, hands-on training directly related to industry needs—from welding to computer-aided design—and to expose youth, rural residents, and others who are restarting their careers to high-paying job opportunities. Meanwhile, in Phoenix, we learned that Arizona State University under President Michael Crow has worked to grow enrollment in the engineering program from 6,000 to 32,000 students over the past decade or so to meet demand from the defense, aerospace, and advanced manufacturing industries.

In addition to housing and workforce issues, energy is increasingly a concern as new, energy-intensive industries, including data centers and chips fabs, set up shop in Arizona. We heard complaints that utility companies have been slow to provide more power and to switch to solar, a natural solution for a state that has three hundred days of sunshine a year.

No conversation in Arizona is complete without a discussion of water. Some people we met argued that the need to conserve water in the desert should be an important factor when deciding which industries to attract to Arizona, including water-intensive data centers and semiconductor fabs. Today, the agricultural sector uses around 70 percent of the state’s water. In rural areas, ground water is largely unregulated, and corporations often drill deep wells and suck up water from residents.

Despite the challenges, Arizonans have adapted well. The city reportedly consumes the same amount of water today as it did in 1985, despite having 226,000 more people. The city government requires companies to develop a strategy for their water consumption needs. Some companies are exploring reusing their own water in a closed-circuit system. Companies and real-estate developers in Active Management Areas are required to show proof that they have a one-hundred-year water supply before selling a lot. While Arizona is currently managing its water needs, people understand the importance of continuing to conserve water and developing technologies to help with this effort. 

Arizona has become a testing ground for addressing today’s most urgent economic challenges. The state is grappling with climate change (acutely felt on the one-hundred-degree-plus days we spent there in mid-October), the green transition, developing the workforce of the future, strengthening U.S. technological prowess, and how to work with trade and investment partners such as Mexico and Canada in the current geopolitical climate. As it contends with a range of challenging economic trade-offs, the Grand Canyon State offers an array of insights and potential lessons for other states and the federal government.