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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 Resume Growth

December 6, 2016 - California’s merchandise export trade resumed its growth trajectory in October, posting a nominal 3.8% gain over the same month one year earlier, according to Beacon Economics’ analysis of U.S. trade statistics released this morning by the U.S. Census Bureau.

Foreign shipments by California businesses totaled $15.21 billion in the latest numbers, a healthy increase over the $14.66 billion recorded in October 2015. The price of exports continues to fall driven by a stronger dollar and low overall inflation. This implies that the real volume of exported products grew at close to a 5% pace—the best in several years.

“The rebound in exports is being driven by better fundamentals in the global economy,” said Christopher Thornberg, Founding Partner of Beacon Economics. “The commodity glut is still causing issues for some parts of the world, but Europe is growing faster, and the deceleration of the Chinese economy has ended. State exporters are, at least for now, seeing the upside of globalization."

While the state’s exports of manufactured goods in October fell by a nominal (non-price adjusted) 1.7% to $9.30 billion from $9.46 billion one year earlier, exports of non-manufactured goods (chiefly agricultural products and raw materials) soared 24.7%, to $2.32 billion from $1.86 billion. Re-exports, meanwhile, rose 6.2% to $3.59 billion from $3.38 billion. By way of comparison, the nominal value of overall U.S. merchandise exports in October slipped by 1.4%, while exports from Texas fell 3.8% from last October.

“October saw a particularly robust 23.5% increase in farm exports as well as smaller but still double-digit gains in chemicals and several categories of manufactured products,” said Jock O’Connell, Beacon Economics’ International Trade Advisor. “Exports to California’s major trading partners in the Far East saw double-digit growth in October, a fact that underscores the state's vulnerability should a transpacific trade conflict erupt.”

October's export gains were reflected in an increased volume of traffic at the state’s principal international trade gateways. The number of outbound loaded containers sailing from the Ports of Los Angeles, Long Beach, and Oakland was up 13.4% from October 2015. The state’s two primary international aviation gateways – Los Angeles International and San Francisco International – saw a combined 9.7% increase in airborne export tonnage in October.

California Imports

The U.S. Department of Commerce has determined that California was the state-of-destination for 18.5% of all U.S. merchandise imports in October, with a value of $37.76 billion, up 2.6% from the $36.79 billion in imported goods in October 2015. Manufactured imports totaled $34.87 billion, an increase of 2.7% from $33.95 billion last year. Non-manufactured imports in October were valued at $2.89 billion, 1.8% over the $2.84 billion recorded a year ago.

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 June occur as the result of unusual developments or exceptional one-off trades and June not be indicative of underlying trends. For that reason, Beacon Economics compares the latest three months for which data are available (i.e., August-October) with the corresponding period one year earlier.

On the plus side of the ledger, exports of Computer & Electronic Products (computers and peripherals; communication, audio, and video equipment; navigational controls; and electro-medical instruments) edged up just 0.1% to $11.14 billion from $11.12 billion. The state’s exports of Transportation Equipment (automobiles, trucks, trains, boats, airplanes, and their parts) rose 3.9% to $5.13 billion from $4.94 billion.  Exports of Miscellaneous Manufactured Commodities (a catchall category of merchandise ranging from medical equipment to sporting goods) jumped 10.7% to $3.61 billion from $3.26 billion.

Exports of Non-Electrical Machinery (machinery for industrial, agricultural and construction uses as well as ventilation, heating, and air conditioning equipment) slipped 2.2% to $3.63 billion from $3.71 billion. Chemical exports (including pesticides and fertilizers; pharmaceutical products; paints and adhesives; soap and cleaning products; and raw plastics, resins, and rubber) fell 1.5% to $3.40 billion from $3.46 billion.

Agricultural exports gained 10.0% to $3.63 billion from $3.30 billion, while foreign shipments of Food & Kindred goods remained essentially unchanged at 2.24 billion.

Mexico maintained its status as California’s single largest export destination during the latest three-month period. The value of the state’s shipments south of the border was unchanged at $6.83 billion. Exports to Canada remain disappointing, slipping 2.8% to $4.22 billion from $4.34 billion, while shipments to China were off by 0.5% to $3.69 billion from $3.71 billion. Exports to Japan strengthened, rising by 12.5% to $3.18 billion from $2.83 billion. Hong Kong, up 4.5% to $2.85 billion from $2.73 billion, rounded out the list of California’s Top Five export markets. In light of recent developments, we note that California exports to Taiwan in the latest three-month period were off by 36.4% to $1.66 billion from $2.61 billion on year ago.

By mode of transport, 46.3% of the state’s $42.99 billion merchandise export trade during the most recent three months went by air, while waterborne transport carried 30.01%. The balance travelled overland to Canada and Mexico.

The Outlook

The election of Donald Trump as the United States’ 45th President leaves us less than sanguine about the immediate future of California’s foreign trade. “Interest rates are rising along with the real value of the U.S. Dollar because of expectations of a sharp increase in Federal borrowing due to the new administration’s tax plans,” said Thornberg. “The dollar right now is hitting values it hasn’t been at since 2003.”

More concerning is the prospect of a major trade war. Trump has double-downed on his anti-Chinese rhetoric in recent days, while also raising the specter of substantial tariffs on goods imported from Mexico. Neither would be beneficial to California’s economic interests.

Many believe that a wall of tariffs will lead to a renaissance for employment in the nation’s manufacturing industries, but there is no real evidence to support that view. Manufacturing enterprises not only in the United States but around the world are fundamentally in the business of reducing their dependence on a human workforce. The jobs that might be created from the repatriation of manufacturing capacity are unlikely to be filled by unskilled workers.

In terms of most of our clothing, footwear, furniture, and other household necessities, a high tariff on imports from China will cause retail prices to soar. For many, if not most, of these items, there are no domestically-produced substitutes available, meaning that some form of government-enforced rationing may be needed to insure a measure of market equity.

Similarly, U.S. supply chains are heavily integrated with global producers. Large tariffs on such inputs would cause major disruptions in manufacturing sectors that are doing very well in the United States at the moment—including automobiles, transportation, and of course high tech products. “A major trade war could not only throw the U.S. into a recession, it could cause a global downturn,” said Thornberg. “We hope that cooler heads will prevent such a calamity.”

 


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. 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 emphasize that we are primarily interested in determining trends. We continue to think it highly inadvisable to combine state export and import statistics to calculate a state trade balance.
 

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