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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 Exporters Weather New Tariffs, Lower Commodity Prices

September 5, 2018 - Known disruptions and unknown uncertainties in the international trading system failed to stall growth in California’s merchandise export trade in July, 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 $14.01 billion for the month, a nominal 5.3% gain over the $13.30 billion recorded one year earlier.

Although exports of manufactured goods were up 9.6% to $9.18 billion from $8.38 billion in July 2017, exports of non-manufactured goods (chiefly agricultural products and raw materials) slipped by 5.6% to $1.51 billion from $1.60 billion. The value of re-exported goods remained unchanged at $3.32 billion.

California accounted for 10.5% of the nation’s overall merchandise export trade in July, down from 10.9% last year. 

"With America’s trading partners selectively targeting U.S. exports in the current tariff quarrels, it’s not surprising that growth in the much-in-demand products of California’s high-tech industries contrasted with an expected 10% drop in tariff-saddled agricultural exports,” 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 May. One result is that July shipments of almonds, California’s leading farm export, to China and Hong Kong were down 35% from last year. Worldwide, California almond exports were off by 13.1%.

California merchandise exports in the first seven months of 2018 amounted to $103.83 billion, 6.4% higher than the $97.57 billion during the same period last year.

California Imports Stagnate in July

The Census Bureau reports that California was the state-of-destination for 17.2% of all U.S. merchandise imports in July, with a value of $36.84 billion, up just 0.9% from the $36.53 billion in imported goods in July 2017. Manufactured imports totaled $32.48 billion, a decline of 2.4% from the $33.27 billion recorded one year earlier. Non-manufactured imports in July were valued at $4.36 billion, 33.7% higher than the $3.26 billion reported in July 2017. 

For the first seven months of the year, California imports totaled $249.37 billion, up 1.7% from $245.13 billion during the same period last year. 

“California’s top trade partners are Mexico, Canada, and China,” said Robert Kleinhenz, Economist and Executive Director of Research at Beacon Economics. “Successful trade negotiations with all three countries are essential to the long-term health of our state’s significant foreign trade/logistics sector and the industries that comprise our trade flows. Trade restrictions that harm one sector of the state economy ultimately have negative effects on other sectors as well.”

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

Leading Export Commodities
California's merchandise exports during the May-July period totaled $44.57 billion, a nominal gain of 6.6% from the $41.80 billion in the same three months 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 6.9% to $11.17 billion from $10.45 billion. The state’s exports of Transportation Equipment (automobiles, trucks, trains, boats, airplanes, and their parts) improved by 11.0% to $5.02 billion from $4.52 billion.

Exports of Non-Electrical Machinery (machinery for industrial, agricultural and construction uses as well as ventilation, heating, and air conditioning equipment) rose by 8.6% to $4.54 billion from $4.18 billion. Shipments of Miscellaneous Manufactured Commodities (a catchall category of merchandise ranging from medical equipment to sporting goods) edged higher by 0.6% to $4.16 billion from $4.14 billion. 

Chemical exports (including pesticides and fertilizers; pharmaceutical products; paints and adhesives; soap and cleaning products; and raw plastics, resins, and rubber) gained 14.0% to reach $3.52 billion from $3.09 billion. Shipments abroad of Food & Kindred goods inched up by 1.3% to $2.27 billion from $2.24 billion.

Exports of Electrical Equipment and Appliances moved up by 9.1% to $2.07 billion from $1.89 billion. Exports of Petroleum and Coal Products surged by 31.9% to $1.22 billion from $923 million. Exports of Fabricated Metal Products grew by 11.1% to $1.16 billion from $1.05 billion. Waste & Scrap exports soared by 24.6% to $1.15 billion from $925 million.

On the minus side, exports of Agricultural commodities not unexpectedly slipped by 10.0% to $2.77 billion from $3.08 billion, as shipments of fruits, nuts, wines, and dairy products all faced higher tariffs abroad.

Mexico built on its rank as California’s most important export destination during the year’s second quarter. Shipments south of the border grew by a robust 19.0% to $7.94 billion from $6.67 billion. Canada retook second place among the state’s second largest export markets, with shipments increasing 5.1% to $4.53 billion from $4.31 billion. China placed third with $4.30 billion, up 4.1% from $4.13 billion. Japan came fourth with imports of California goods totaling $3.20 billion, a gain of 6.7% from $3.00 billion during the same period one year earlier. Exports to fifth-place South Korea rose 1.2% to $2.46 billion from $2.43 billion.

Despite steady growth in exports to China, Japan, and South Korea, the state’s overall export trade with the economies of East Asia edged up by just 2.7% to $15.73 billion from $15.32 billion. Meanwhile, California’s exports to the European Union increased by 7.1% to $7.84 billion from $7.32 billion.

Emphasizing the size of California’s stake in the future of the North American Free Trade Agreement, Mexico and Canada together accounted for 28.0% of California’s merchandise export trade in the latest three-month period, up from 26.2% during the same period one year ago. Exports to the state’s two neighbors soared in value by 13.4% to $12.46 billion from $10.99 billion.

Mode of Transport
The latest three months saw 48.3% of the state’s $44.57 billion merchandise export trade depart by air, while waterborne transport carried 26.9% of the outbound trade. The balance of the state’s exports moved overland to Canada and Mexico.

The Outlook
Beacon Economics’ near-term outlook is not optimistic. Although efforts to revise and update the North American Free Trade Agreement have achieved some progress in talks between the U.S. and Mexico, Canada’s participation remains up in the air. Even with a draft agreement that involves all parties, the process of ratification by three legislative bodies will certainly be fraught with controversy. Barring a precipitous blow-up in negotiations, we do not believe California’s shipments to Mexico and Canada will be substantially harmed over the next few months. That is not the case, however, for the state’s third largest overseas market, China, where there has been little evident progress in dealing with Chinese officials. Now that President Trump has signaled his intention to impose new tariffs on some $200 billion worth of Chinese imports, the outlook for California exports to China and Hong Kong is not favorable.

For all of 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 first seven months of this year, the state’s exports to China/Hong Kong fell by 6.7% to $15.43 billion from $16.54 billion during the same period last year. As a result, the China/Hong Kong share of California’s overall merchandise export trade fell to 14.9% so far this year.

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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