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Tariffs, Lower Commodity Prices Slow CA Exports

August 3, 2018 - A combination of higher tariffs and lower commodity prices put the brakes on California’s merchandise export trade in the latest numbers, 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 $15.41 billion for June, a nominal gain of just 2.3% over the $15.06 billion recorded one year earlier.

Although exports of manufactured goods were up 7.3% to $9.64 billion from $8.98 billion in June 2017, exports of non-manufactured goods (chiefly agricultural products and raw materials) slipped by 1.7% to $1.74 billion from $1.77 billion. The value of re-exported goods stumbled further, declining by 6.5% to $4.03 billion from $4.31 billion. California accounted for 10.6% of the nation’s overall merchandise export trade in June, down from 11.3% last year.

“June marked the month California exporters really began to face the headwinds brought on by increased tariffs and uncertainties about the future of NAFTA and other U.S. trade relationships,” said Jock O’Connell, Beacon Economics’ International Trade Advisor.

The state’s agricultural exports were early targets of retaliatory tariffs after the Trump Administration imposed additional duties on steel, iron, and aluminum imports in April. On a tonnage basis, June shipments of California almonds to China and Hong Kong were down 47.5% from last June. Worldwide, California wine exports were off 15.5% by value, while shipments of cherries to foreign markets fell by 35.7%.

The state’s re-export trade also took an unaccustomed hit. Re-exports largely involve products that have been imported by California-based wholesalers for redistribution in countries throughout Central and South America. Many of those nations have lately been enduring economic slowdowns.

Data for the first half of 2018 show that California businesses exported $89.82 billion in merchandise, up 6.6% from $84.27 billion last year. Manufactured exports were up 5.5% to $57.13 billion from $54.15 billion, while non-manufactured shipments abroad totaled $11.26 billion, an increase of 11.2% over $10.13 billion last year. Re-exports similarly rose by 7.2% to $21.43 billion from $20.00 billion in 2017’s first half. California exports in the first half of 2018 accounted for 10.8% of the nation’s total merchandise export trade.

“A combination of factors seems to have boosted California’s trade numbers in the first half of the year,” said Robert Kleinhenz, Executive Director of Research at Beacon Economics. “Given the strength of the U.S. economy and the steady economic activity occurring among our trading partners, 2018 was expected to be a good year. However, uncertainty about trade policies may have caused some firms to shift their shipments to the early part of the year, making the outlook for the second half less certain.”

California Imports Decline in June
The Census Bureau eports that California was the state-of-destination for 16.6% of all U.S. merchandise imports in June, with a value of $35.30 billion, down 5.2% from $37.24 billion in June 2017. Manufactured imports totaled $31.19 billion, down 7.3% from $33.64 billion. Non-manufactured imports were valued at $4.11 billion, 14.5% higher than the $3.59 billion recorded one year earlier. 

For the first half of the year, California imports totaled $212.53 billion, up 1.9% from $208.60 billion in the first half of 2017. (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., April-June) with the corresponding period in the preceding year.

Leading Export Commodities
California's merchandise exports in the April-June period totaled $45.54 billion, a nominal gain of 6.9% over the $42.59 billion in exports during the same period one year earlier.

On the plus side, shipments of Computer & Electronic Products (computers and peripherals; communication, audio, and video equipment; navigational controls; and electro-medical instruments) moved up by 8.2% to $11.20 billion from $10.35 billion.

The state’s exports of Transportation Equipment (automobiles, trucks, trains, boats, airplanes, and their parts) improved by 7.1% to $5.21 billion from $4.86 billion. Exports of Non-Electrical Machinery (machinery for industrial, agricultural and construction uses as well as ventilation, heating, and air conditioning equipment) jumped by 13.2% to $ $4.80 billion from $4.25 billion.

Shipments of Miscellaneous Manufactured Commodities (a catchall category of merchandise ranging from medical equipment to sporting goods) edged higher by 0.3% to $4.12 billion from $4.11 billion. Chemical exports (including pesticides and fertilizers; pharmaceutical products; paints and adhesives; soap and cleaning products; and raw plastics, resins, and rubber) gained 9.2% rising to $3.55 billion from $3.25 billion. Shipments abroad of Food & Kindred goods grew by 5.4% to $2.37 billion from $2.25 billion.

Exports of Electrical Equipment and Appliances increased 11.2% to $2.08 billion from $1.87 billion. Exports of Petroleum and Coal Products leaped 33.4% to $1.25 billion from $935 million. Waste & Scrap exports roared ahead by 31.0% to $1.24 billion from $943 million. Exports of Fabricated Metal Products increased by 5.1% to $1.15 billion over $1.10 billion. Shipments of Used or Second-hand Merchandise rose by 7.2% to $1.02 billion from $947 million.

On the minus side, exports of Agricultural commodities not unexpectedly slipped by 7.0% to $2.95 billion from $3.17 billion, as shipments of fruits, nuts, wines, and dairy products faced higher tariffs abroad.

Mexico easily retained its rank as California’s most important export destination during this year’s second quarter. Shipments south of the border grew by a vigorous 20.4% to $7.98 billion from $6.62 billion. China took second place among the state’s second largest export markets, with shipments increasing 11.7% to $4.70 billion from $4.20 billion. Canada placed third with $4.47 billion, up 4.4% from $4.28 billion. Next came Japan, which imported $3.32 billion worth of California goods, a decline of 3.7% from $3.44 billion during the same period one year earlier. Exports to South Korea rose 6.8% to $2.70 billion from $2.53 billion. Hong Kong saw its California imports plummet by 16.2% to $2.23 billion from $2.70 billion one year ago.

Despite the healthy growth in exports to China and South Korea, the state’s overall export trade with the economies of East Asia rose by just 2.2% to $16.47 billion from $16.12 billion one year ago. Meanwhile, California’s exports to the European Union increased by 6.4% to $7.85 billion from $7.37 billion.

Reinforcing the importance of NAFTA to California, Mexico and Canada together accounted for 27.3% of the state’s merchandise export trade in the second quarter of 2018, up from 25.6% in the same period one year ago. Exports to our two neighbors soared in value by a remarkable 14.1% in the latest three-month period over the same quarter last year, rising to $12.44 billion from $10.90 billion.

Mode of Transport
This year’s second quarter saw 47.8% of the state’s $45.54 billion merchandise export trade depart by air, while waterborne transport carried 28.1% of the outbound trade. The balance of the state’s exports moved overland to Canada and Mexico.

The Outlook
The immediate outlook is clouded by uncertainty. Since last month’s analysis, talks to update NAFTA continue to yield reports of lights being perceived dimly at ends of various tunnels. At the same time, there has been little evident progress in trade negotiations among the Trump Administration’s principals, let alone with Chinese officials. Consequently, the outlook, especially for certain California exports, is far from favorable.

The one bit of good news involved an agreement between President Trump and European Commission President Jean-Claude Juncker to maneuver away from a confrontation that threatened to seriously disrupt trade between the U.S. and European Union. Time has been bought, but prospects for a lasting accord look no more promising.

Most troubling is the announcement this week that the White House is considering increasing its proposed tariffs on $200 billion worth of Chinese imports to 25%. Ratcheting up the trade conflict with China is likely to elicit further Chinese restrictions on U.S. goods imported into China. Last year, California’s merchandise exports to China/Hong Kong totaled $28.54 billion or 16.6% of the state’s overall export trade of $172.01 billion. In the second quarter of this year, the state’s exports to China/Hong Kong rose by only 0.4% over the same quarter last year. The $6.93 billion in California exports to China/Hong Kong in the second quarter represented 15.2% of the state’s overall merchandise export trade.

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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