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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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CA Exports Slow As Tariffs Begin To Bite

November 2, 2018 - California’s merchandise export trade slowed significantly in September, according to a Beacon Economics analysis of U.S. trade statistics released this morning by the U.S. Census Bureau.

Foreign shipments by California businesses totaled $14.46 billion for the month, a nominal 1.2% gain over the $14.19 billion recorded in the same month one year earlier.

“Although this year has been filled with trade frictions with our major trading partners, the worst case scenarios that were envisioned have not materialized,” said Robert Kleinhenz, Economist and Executive Director of Research at Beacon Economics. “However, segments of the California economy, among them agriculture, have been hit hard this year and it behooves the Administration to resolve trade issues expediently so California’s companies and workers can get back to work and sustain continued economic growth.”

While exports of manufactured goods were up 1.7% to $8.94 billion from $8.79 billion in September 2017, exports of non-manufactured goods (chiefly agricultural products and raw materials) dropped by 1.7% to $1.79 billion from $1.82 billion. The value of re-exported goods meanwhile rose by 4.2% to $3.73 billion from $3.58 billion. 

“What we are seeing here is more evidence that California’s exporters are being hindered not only by an overall slowdown in global trade but also by retaliatory tariffs that have singled out some of the state’s iconic products,” said Jock O’Connell, Beacon Economics’ International Trade Advisor. September shipments to China of California wines and almonds, for example, were down by 71.0% and 45.2%, respectively, from the same month last year, before the tariff wars began.

California accounted for 10.4% of the nation’s overall merchandise export trade in September, down from 10.9% last year. The state’s exports in the first nine months of 2018 amounted to $133.47 billion, 5.5% higher than the $126.46 billion during the same period last year.

California Imports Up
The Census Bureau reports that California was the state-of-destination for 18% of all U.S. merchandise imports in September, with a value of $38.19 billion, an increase of 2.1% from the $37.39 billion in imported goods in September 2017. Manufactured imports totaled $34.10 billion, up 0.5% from the $33.92 billion recorded one year earlier. Non-manufactured imports in September were valued at $4.10 billion, 18.2% higher than the $3.47 billion reported in September 2017.

For the first nine months of the year, California imports totaled $325.27 billion, a 1.5% gain over the $320.53 billion during the same period last year. 

(To calculate a California state trade balance, please see our caveats about state-of-destination import statistics at the end of this report.)

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., July-September) with the corresponding period in the preceding year.

Leading Export Commodities
California's merchandise exports during the July-September period totaled $43.65 billion, a nominal gain of 3.0% from the $42.40 billion in the third quarter of last year.

On the plus side, shipments of Computer & Electronic Products (computers and peripherals; communication, audio, and video equipment; navigational controls; and electro-medical instruments) rose by 2.7% to $11.57 billion from $11.27 billion.
Exports of Non-Electrical Machinery (machinery for industrial, agricultural and construction uses as well as ventilation, heating, and air conditioning equipment) increased by 4.0% to $4.24 billion from $4.08 billion.

Shipments of Miscellaneous Manufactured Commodities (a catchall category of merchandise ranging from medical equipment to sporting goods) were up by 11.4% to $3.91 billion from $3.51 billion. Chemical exports (including pesticides and fertilizers; pharmaceutical products; paints and adhesives; soap and cleaning products; and raw plastics, resins, and rubber) gained 5.4% to $3.55 billion from $3.37 billion.

Shipments abroad of Food & Kindred goods edged higher by 1.1% to $2.17 billion from $2.14 billion. Exports of Electrical Equipment and Appliances improved by 6.5% to $1.92 billion from $1.80 billion. Exports of Petroleum and Coal Products surged by 41.8% to $1.33 billion from $938 million. Exports of Fabricated Metal Products grew by 6.2% to $1.16 billion from $1.09 billion. Waste & Scrap exports jumped 16.4% to $1.16 billion from $999 million. 

On the minus side, the state’s exports of Transportation Equipment (automobiles, trucks, trains, boats, airplanes, and their parts) fell by 7.2% to $4.55 billion from $4.90 billion. The chief culprit here was a very precipitous drop in exports of motor vehicles to China. Exports of agricultural commodities fell by 7.7% to $2.70 billion from $2.93 billion, as shipments of fruits, nuts, wines, and dairy products all faced higher tariffs abroad.

Destinations 
Mexico continued its reign as California’s top export market during the year’s third quarter. Shipments south of the border grew by a robust 14.0% to $7.68 billion from $6.74 billion. 

Canada claimed second place among the state’s leading export markets by increasing its purchases of California products by 6.8% to $4.56 billion from $4.27. China placed third with $3.74 billion in imports from California, down 5.3% from $3.94 billion. Japan came fourth with imports of California goods totaling $3.13 billion, a gain of 3.1% over the $3.04 billion it imported during the same quarter a year earlier. Exports to fifth-place Hong Kong plummeted by 12.8% to $2.40 billion from $2.75 billion.

Golden State exports to the economies of East Asia slipped by 1.4% to $15.15 billion from $15.36 billion. Meanwhile, California’s exports to the European Union inched up by 0.4% to $7.96 billion from $7.93 billion.

California’s stake in the renegotiated North American Free Trade Agreement is evident in the fact that Mexico and Canada together accounted for 28.0% of California’s entire merchandise export trade in the year’s third quarter, up from a 27.0% share a year earlier.

Mode of Transport
The latest three-month period saw 49.1% of the state’s $43.65 billion merchandise export trade depart by air, while waterborne transport carried 25.8% of the outbound trade. The balance of the state’s exports moved overland to Canada and Mexico.

The Outlook
The White House reports that President Trump has tasked his trade negotiators to produce a set of proposals to take to China’s President Xi when the two leaders meet during the G20 meetings in Argentina at the end of this month. Whatever the President’s staff is able to pull together in the next few weeks is unlikely to appreciably differ from positions which have so far yielded only a ratcheting up of tariffs and hostile rhetoric. Moreover, coming at the same time as the U.S. Justice Department is ramping up its public efforts to combat Chinese industrial espionage, the new initiative is likely to be treated by Beijing as a White House bid to mollify Republican critics of the President’s tariffs in the days before the November 6 mid-term elections.

Far from genuinely aiming for an accord that would dial back the current level of animosity, President Trump appears poised to follow through with threats to increase and expand U.S. tariffs on Chinese products on January 1. If imposed, those tariffs will almost certainly be met with retaliatory moves by Beijing.

It is worth emphasizing that China has thus far exempted a broad range of high-tech products such as semi-conductor manufacturing equipment, aircraft, and pharmaceuticals from higher tariffs. Importing these types of goods is thought to be essential to Chinese plans to advance its own high-tech industries. Not surprisingly, the data released today indicate that third-quarter exports of Aerospace Equipment from California to China rose 75.1% over last year. Likewise, shipments of Pharmaceutical Products from California to China were 34.8% higher in the third quarter than in the same period last year. Shipments to China of Industrial Machinery jumped 87.9% from last year’s third quarter. The implication is that, should the Chinese move to include those products in a new round of tariffs, a broad swath of California industry could be negatively affected.

This prospect comes at a time when overall levels of global trade appear to be slowing. California’s exports to the European Union, for example, barely increased in the third quarter over the same period last year. Unless constructive measures are taken to resolve current trade disputes between the United States and its key trading partners, we are not sanguine about the prospects for California’s export trade as the current year ends.

 


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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