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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 Rise In Latest Numbers

December 6, 2018 - California’s merchandise export trade picked up in October, 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 $15.96 billion for the month, a nominal 7.7% gain over the $14.82 billion recorded in the same month one year earlier. While exports of manufactured goods were up 6.7% to $9.46 billion from $8.87 billion in October 2017, exports of non-manufactured goods (chiefly agricultural products and raw materials) fell by 4.8% to $2.20 billion from $2.31 billion. The value of re-exported goods meanwhile surged by 17.8% to $4.30 billion from $3.65 billion.

“On balance, California’s trade picture has been better than expected, despite hard hits to some of our exporting industries,” said Robert Kleinhenz, Economist and Executive Director of Research at Beacon Economics. “That said, we head into the new year with ongoing uncertainty regarding the US-China trade relationship, which continues to be cause for concern, both to California’s exporters and the state as a whole.”

The mixed news for California exports comes at a particularly turbulent time for global trade, despite an announcement of a stand-down in the U.S. tariff war with China and the signing of a revised North American trade accord. The focus on U.S.-China relations obscures how much California counts on trade with America's two closest neighbors. 

“Even though President Trump has obvious reservations about our commercial relations with Mexico and Canada, the fact remains that these two trading partners have accounted for 65% of the growth in California’s export trade since last October,” said Jock O’Connell, Beacon Economics’ International Trade Advisor. “They are vitally important to the state’s economy."

California ccounted for 10.8% of the nation’s overall merchandise export trade in October, down from 11.1% last year. The state’s exports in the first nine months of 2018 amounted to $149.43 billion, 5.7% higher than the $141.28 billion at the same point last year.

California Imports Up
The Census Bureau reports that California was the state-of-destination for 17.5% of all U.S. merchandise imports in October, with a value of $41.46 billion, an increase of 4.4% from the $39.72 billion in imported goods in October 2017. Manufactured imports totaled $37.05 billion, up 3.0 % from the $35.97 billion recorded one year earlier. Non-manufactured imports in October were valued at $4.41 billion, 17.6% higher than the $3.75 billion reported in October 2017.

For the first ten months of the year, California imports reportedly totaled $366.74 billion, a 0.1% gain from $360.25 billion in 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., August-October) with the corresponding period in the preceding year.

Leading Export Commodities
California's merchandise exports during the August-October period totaled $45.60 billion, a nominal gain of 3.9% over the $43.88 billion in the same period last year. Eleven commodity groups posted exports of at least $1 billion in the latest three months of data.

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 5.6% to $12.16 billion from $11.51 billion. Exports of Non-Electrical Machinery (machinery for industrial, agricultural and construction uses as well as ventilation, heating, and air conditioning equipment) increased by 3.1% to $4.22 billion from $4.10 billion. Shipments of Miscellaneous Manufactured Commodities (a catchall category of merchandise ranging from medical equipment to sporting goods) jumped by 17.2% to $4.18 billion from $3.57 billion.

Chemical exports (including pesticides and fertilizers; pharmaceutical products; paints and adhesives; soap and cleaning products; and raw plastics, resins, and rubber) edged ahead by 1.8% to $3.58 billion from $3.52 billion. Shipments abroad of Food & Kindred goods remained essentially unchanged at $2.20 billion. Exports of Electrical Equipment and Appliances improved by 6.0% to $1.92 billion from $1.81 billion. Waste & Scrap exports soared by 19.0% to $1.28 billion from $1.08 billion. Foreign shipments of Fabricated Metal Products grew by 12.5% to $1.25 billion from $1.10 billion. Exports of Petroleum and Coal Products surged by 21.9% to $1.25 billion from $1.03 billion. 

On the minus side, the state’s exports of Transportation Equipment (automobiles, trucks, trains, boats, airplanes, and their parts) fell by 1.6% to $4.87 billion from $4.94 billion. The chief culprit here was a sharp drop in exports of motor vehicles to China. Exports of agricultural commodities fell by 7.5% to $3.25 billion from $3.51 billion, as shipments of fruits, nuts, wines, and dairy products all faced higher tariffs abroad.

Destinations 
Mexico easily maintained its status as California’s top export market during the August-October period. Shipments south of the border grew by a robust 15.4% to $8.15 billion from $7.06 billion. Canada claimed second place among the state’s leading export markets by increasing its purchases of California products by 7.5% to $4.69 billion from $4.36. China placed third with $ billion in imports from California, down 4.9% to $3.74 billion from $3.93 billion. Japan came fourth with imports of California goods totaling $3.24 billion, a gain of 4.0% over the $3.12 billion it imported during the same quarter a year earlier. Exports to fifth-place Hong Kong fell by 10.5% to $2.65 billion from $2.96 billion.

Golden State exports to the economies of East Asia nudged up by 1.1% to $15.88 billion from $15.70 billion. Meanwhile, California’s exports to the European Union rose 1.7% to $8.31 billion from $8.17 billion.

California’s stake in the USMCA, the revised North American Free Trade Agreement, is evident in the fact that Mexico and Canada together accounted for 28.1% of California’s entire merchandise export trade in the latest three-month period, up from a 26.0% share a year earlier.

Mode of Transport
The latest three-month period saw 48.9% of the state’s $43.88 billion merchandise export trade depart by air, while waterborne transport carried 26.0% of the outbound trade. The balance of the state’s exports moved overland to Canada and Mexico.

The Outlook
The outlook for the next several months remains muddied despite an agreement President Trump says he reached with Chinese President Xi Jinping on the sidelines of the G-20 meetings in Buenos Aires. The concern is that many of the terms said to be in that agreement have not been confirmed by the Chinese and it is unclear as to whether they share President Trump’s version of events.

Moreover, the U.S. decision to suspend a sharp increase in duties on a broad range of Chinese imports for 90 days does little to ease business concerns. Importers who had rushed to bring products through U.S. Customs prior to January 1 now find themselves saddled with excess inventory and the extra costs associated with warehousing and holding title to goods unlikely to produce revenue in the short-term. Now these importers must cope with the possibility that tariffs on Chinese goods might instead be raised on either March 1 or April 1, depending on when the 90-day clock starts ticking.

Given the fundamental nature of the economic reforms the U.S. is demanding, it seems likely that Washington’s expectations will be frustrated. That virtually insures that the President will follow through on his threat to ratchet up tariffs on Chinese products from 10% to 15% in the spring. 
If imposed, those tariffs will almost certainly be met with retaliatory moves by Beijing that would likely take the form of higher tariffs, quotas on certain imports, and moves designed to hamper and harass U.S. businesses in China.

We continue to emphasize that China has until now largely 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.

The prospect that those products would be targeted in a new round of tariff increases comes at a time when overall levels of global trade appear to be ebbing. The European Union is in a pre-Brexit funk and emerging economies are suffering from the slowdown in China’s economic growth.

Finally, uncertainty is also the by-word for U.S. relations with Canada and Mexico. The new accord faces challenges in Congress, especially in the House where Democrats have voiced several objections to the new treaty. Moreover, the President’s ever-shifting statements about the value of our commercial links with our immediate neighbors inhibits both traders and investors.

Unless constructive measures are taken to resolve current trade disputes between the United States and its key trading partners, California’s export trade may be closing out one turbulent year and entering a new, equally unsettled one.

 


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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