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Welcome to the California Trade Report, Beacon Economics’ monthly analysis of California’s international trade activity. This report analyzes data released by the U.S. Census Bureau’s Foreign Trade Division and pinpoints important trends in the state’s import/export industry, identifying potential effects on the state’s economy. The report is only a sampling of the kind of economic research and data analysis available from Beacon Economics.

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California Exports Maintain Growth Trajectory

May 7, 2018 - California’s merchandise export trade maintained its growth trajectory in March, according to a Beacon Economics’ analysis of the latest U.S. trade statistics compiled by the U.S. Census Bureau's Foreign Trade Division. Shipments abroad by California businesses totaled $15.96 billion for the month, a nominal 7.0% gain over the $14.91 billion recorded in the same month a year earlier.

The state’s exports of manufactured goods were up 3.6% to $10.27 billion from the $9.91 billion recorded in March 2017. Meanwhile, exports of non-manufactured goods (chiefly agricultural products and raw materials) jumped by 21.3% to $2.11 billion from $1.74 billion. Re-exports likewise increased by 9.5% to $3.58 billion from $3.27 billion.

“California’s export trade in March was about as normal as things go these days, betraying few of the anxieties that are likely to scramble next month’s numbers," said Jock O’Connell, Beacon Economics’ International Trade Adviser. "Economic fundamentals look sound; trade policies, not so much.” The Golden State accounted for 11.4% of the nation’s total merchandise export trade in March.

For the first quarter of 2018, California’s merchandise export trade totaled $44.28 billion, up 11.0% from the first quarter of last year. Manufactured exports rose 2.0% to $28.00 billion, while non-manufactured shipments abroad increased by 19.4% to $5.85 billion. Re-exports totaled $10.23 billion in this year’s first three months, up 12.3% from the same period one year ago.

California Imports Decline
The U.S. Census Bureau reports that California was the state-of-destination for 16.4% of all U.S. merchandise imports in March, with a value of $34.03 billion, down 2.4% from the $34.88 billion in imported goods in March 2017. Manufactured imports totaled $29.88 billion, down 3.5% from $30.95 billion. Non-manufactured imports were valued at $4.15 billion, 5.9% higher than the $3.92 billion recorded one year earlier. (See our caveats about state-of-destination import statistics at the end of this report.)

In 2018’s first quarter, California accounted for 17.5% of all U.S. merchandise imports with a trade value of $104.59 billion, up 5.2% from the same quarter last year. Imports of manufactured goods rose 4.5% to $92.66 billion, while imports of non-manufactured goods increased by 10.7% to $11.93 billion.

A Closer Look At The Numbers
As always, Beacon Economics cautions against reading too much into month-to-month fluctuations in state export statistics, especially when focusing on specific commodities or destinations. Significant variations can occur as the result of unusual developments or exceptional one-off trades and may not be indicative of underlying trends. For that reason, Beacon Economics compares the latest three months for which data are available (i.e., January-March) with the corresponding period one year earlier.

Leading Export Commodities
California's merchandise exports during the first quarter of 2018 totaled $44.28 billion, a nominal gain of 6.3% over the $41.65 billion during the same period in 2017. Of the dozen categories of California exports that typically see quarterly shipments abroad valued at more than $1 billion, ten saw gains in the latest three-month period.

On the plus side, exports of Computer & Electronic Products (computers and peripherals; communication, audio, and video equipment; navigational controls; and electro-medical instruments) moved up by 5.5% to $10.87 billion from $10.31 billion. Exports of Non-Electrical Machinery (machinery for industrial, agricultural and construction uses as well as ventilation, heating, and air conditioning equipment) improved by 6.7% to $4.51 billion from $4.23 billion.

Shipments of Miscellaneous Manufactured Commodities (a catchall category of merchandise ranging from medical equipment to sporting goods) sped ahead by 16.8% to $3.80 billion from $3.26 billion.  Agricultural exports grew by 13.2% to $3.48 billion from $3.07 billion. Chemical exports (including pesticides and fertilizers; pharmaceutical products; paints and adhesives; soap and cleaning products; and raw plastics, resins, and rubber) gained 7.7% to reach $3.33 billion from $3.01 billion.

Shipments abroad of Food & Kindred goods increased 7.5% to $2.26 billion from $2.10 billion. Exports of Electrical Equipment and Appliances improved by 8.7% to $1.93 billion from $1.76 billion. Exports of Petroleum and Coal Products jumped 32.7% to $1.38 billion from $1.04 billion. Waste & Scrap exports leaped by 37.2% to $1.28 billion from $930 million. Exports of Fabricated Metal Products were higher by 7.3%, rising to $1.05 billion from $980 million.

On the minus side, the state’s exports of Transportation Equipment (automobiles, trucks, trains, boats, airplanes, and their parts) were down by 4.2% to $4.67 billion from $4.88 billion. Exports of Primary Metal Manufacturing products also tumbled by 43.6% to $1.07 million from $1.90 billion.

Mexico handily maintained its position atop the list of California’s most important export destinations during the year’s first quarter. The value of shipments sent south of the border swelled by 17.5% to $7.36 billion from $6.27 billion. Canada was the state’s second largest export market, with trade surging by 12.9% to $4.15 billion from $3.67 billion. Exports to China were up by 6.3% to $4.08 billion from $3.84 billion. In fourth place was Japan, which imported $3.23 billion worth of California goods, an increase of 10.6% from $3.01 billion during the same period one year earlier.

South Korea rounded out the list of Top Five export destinations by importing $2.73 billion worth of California goods, up 15.2% from $2.37 billion one year earlier. It is worth noting is that California’s export trade with Hong Kong fell 30.7% in the first quarter, falling to $2.55 billion from $3.68 billion.

The state’s export trade with the economies of East Asia hardly budged in nominal terms between the first three months of this year and the same period in 2017. This year’s first quarter exports were valued at $16.05 billion. A year ago, the trade was valued at $16.04 billion. Meanwhile, California’s exports to the European Union edged ahead by 2.2% to $8.06 billion from $7.89 billion. 

The state’s export trade with the economies of East Asia hardly budged in nominal terms between the first three months of this year and the same period in 2017. This year’s first quarter exports were valued at $16.05 billion. A year ago, the trade was valued at $16.04 billion. Meanwhile, California’s exports to the European Union edged ahead by 2.2% to $8.06 billion from $7.89 billion.

Mode of Transport
The latest three-month period saw 48.4% of the state’s $44.28 billion merchandise export trade depart by air, while waterborne transport carried 29.4% of the outbound trade. The balance traveled overland.

The Outlook
The outlook for California’s export trade could hardly be more muddled as (1) American and Chinese negotiators meet in Beijing to address President Trump’s broad list of issues; (2) American, Mexican, and Canadian officials attempt to wrap up a revised North American Free Trade Agreement; and (3) American and European leaders ponder the future of Transatlantic trade.

From a purely economic perspective, circumstances seem ripe for growth in global trade. That certainly was the message in the International Monetary Fund’s latest World Economic Outlook issued in early April. IMF analysts found that the global economic upswing that began in the middle of 2016 has become broader and stronger. Their new report projects that advanced economies will continue to expand above their potential growth rates this year and next before decelerating, while growth in emerging market and developing economies will rise before leveling off. For most countries, however, current favorable growth rates will not last.

“The strong current growth of the global economy is an opportunity for California exporters,” said Beacon Economics’ Founding Partner Christopher Thornberg. “The IMF has predicted the global economy will grow at 3.9% this year, the best since 2011 during the recovery from the Great Recession. This is the reason the U.S. dollar continues to depreciate despite rising interest rates. Still, the potential for a major trade conflict has many on edge and wondering what's next."

Indeed, tempering the generally upbeat outlook was the IMF’s Global Financial Stability Report, issued in late April. The report found that although growth momentum remains strong, short-term risks have increased recently amid rising trade tensions, while medium-term risks to growth and financial stability remain elevated. More specifically, the IMF feels that threats to global financial stability are emerging from elevated political and policy uncertainty around the globe. If policy developments in advanced economies stumble into trade conflicts, the result could involve shocks to the global financial system as well as lower volumes of international commerce.

Note: The U.S. Commerce Department has been publishing state-of-destination import statistics since 2008. Beacon Economics has long felt that state import data provide a highly misleading indication of the state in which imported goods were ultimately consumed. As a major gateway for the nation’s foreign trade, California has consistently been credited with an out-sized share of U.S. merchandise imports. (January 2018 statistics, for example, indicate that California is the destination of 18.3% of all merchandise imports and 19.1% of all manufactured imports.) However, we now believe that the process by which state-of-destination import statistics are compiled has become stable enough to be used to measure relative increases or decreases in the value of imported goods consumed or otherwise used by residents or businesses located in California. We strongly emphasize that we are solely interested in identifying trends. We continue to believe it is not useful to use state export and import statistics to calculate a state trade balance.

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