February 6, 2019
California Trade Report
Beacon Economics’ monthly analysis of California’s international trade activity
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.
Tariff Wars, Lower Commodity Prices Stagger California’s Export Trade
For the first time in more than a year, California’s merchandise export trade fell in November, according to Beacon Economics’ analysis of U.S. trade statistics released this morning by the U.S. Census Bureau following a lengthy delay caused by the Federal government shutdown.
Foreign shipments by California businesses totaled $15.00 billion for the month, a nominal 2.2% decline from the $15.33 billion recorded in November 2017. While exports of manufactured goods were off by 3.2% to $9.06 billion from $9.36 billion in November 2017, exports of non-manufactured goods (chiefly agricultural products and raw materials) fell by 4.3% to $2.22 billion from $2.32 billion. The value of re-exported goods meanwhile did rise by 1.9% to $3.72 billion from $3.65 billion.
“A nearly 15% drop in exports to China was a major culprit, but a stronger dollar, tariffs aimed at California farm products, and global price declines in commodities like oil and chemicals were not helpful.” said Jock O’Connell, Beacon Economics’ longtime International Trade Adviser.
The Golden State accounted for 10.7% of the nation’s overall merchandise export trade in November, down from 11.3% one year earlier. California exports in the first eleven months of 2018 amounted to $164.43 billion, 5.0% higher than the $156.61 billion at the same point in 2017.
“Given the punitive tariffs slapped on U.S. products by Mexico, Canada, and China, along side an appreciating dollar, a slowing global economy, and the front running of exports, I’m surprised the data is as good as it is,” said Christopher Thornberg, Founding Partner of Beacon Economics.
CALIFORNIA IMPORTS FALL
The U.S. Census Bureau reports that California was the state-of-destination for 17.6% of all U.S. merchandise imports in November, with a value of $37.57 billion, a decline of 10.9% from the $42.17 billion in imported goods one year earlier. Manufactured imports totaled $33.34 billion, down by 13.2% from the $38.43 billion recorded in November 2017. Non-manufactured imports in November were valued at $4.22 billion, 12.8% higher than the $3.74 billion reported last year in November.
For the first eleven months of 2018, California imports reportedly totaled $404.30 billion, a 0.5% gain from $402.42 billion over the same period in 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 trade 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 not be indicative of underlying trends. For that reason, Beacon Economics compares the latest three months for which data are available (i.e. September-November) with the corresponding period in the preceding year.
LEADING EXPORT COMMODITIES
California’s merchandise exports during the September-November period totaled $45.42 billion, a nominal gain of 2.2% over the $44.42 billion in the same period in 2017. Eleven commodity groups posted exports of at least $1 billion during this three-month period.
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 3.7% to $11.74 billion from $11.32 billion.
The state’s exports of Transportation Equipment (automobiles, trucks, trains, boats, airplanes, and their respective parts) edged up by 1.2% to $4.90 billion from $4.84 billion. Shipments of Miscellaneous Manufactured Commodities (a catchall category of merchandise ranging from medical equipment to sporting goods) jumped by 19.8% to $4.19 billion from $3.50 billion.
Exports of Non-Electrical Machinery (machinery for industrial, agricultural and construction uses as well as ventilation, heating, and air conditioning equipment) remained unchanged at $4.06 billion. Exports of Electrical Equipment and Appliances improved by 1.3% to $1.88 billion from $1.85 billion. Exports of Fabricated Metal Products grew by 16.0% to $1.23 billion from $1.06 billion. Waste & Scrap exports increased by 7.2% to $1.22 billion from $1.14 billion.
On the minus side, exports of agricultural commodities fell by 2.2% to $4.05 billion from $4.14 billion, as shipments of fruits, nuts, wines, and dairy products continued to face higher tariffs abroad.
Chemical exports (including pesticides and fertilizers; pharmaceutical products; paints and adhesives; soap and cleaning products; and raw plastics, resins, and rubber) were down by 2.5% to $3.45 billion from $3.54 billion. Shipments abroad of Food & Kindred goods were off by 1.5% falling to $2.26 billion from $2.29 billion. Exports of Petroleum and Coal Products dropped by 10.2% to $1.12 billion from $1.24 billion, as oil prices declined.
Mexico handily maintained its status as California’s top export market during the September-November period. Shipments south of the border grew by a robust 12.4% to
$8.10 billion from $7.20 billion. Canada claimed second place among the state’s leading export markets, increasing its purchases of California products by 6.7% to $4.82 billion from $4.52. China placed third with $3.67 billion in imports from California, down 9.6% from $4.06 billion. Japan came in fourth with imports of California goods totaling $3.30 billion, a gain of 3.2% over the $3.20 billion it imported during the same quarter a year earlier.
Exports to fifth-place Hong Kong slipped by 0.9% to $2.98 billion from $3.01 billion.
Golden State exports to the economies of East Asia inched up by 0.2% to $16.04 billion from $16.01 billion. Meanwhile, California’s exports to the European Union edged up by 1.1% to $8.08 billion from $7.99 billion.
California’s stake in the USMCA or NAFTA2.0 (the revised North American Free Trade Agreement), is manifest in the fact that Mexico and Canada together accounted for 29.1% of California’s entire merchandise export trade in the September-November period, up from a 25.3% share one year earlier.
MODE OF TRANSPORT
The latest three-month period saw 47.7% of the state’s $44.42 billion merchandise export trade depart by air, while waterborne transport carried 28.3% of the outbound trade. The balance of the state’s exports moved overland, with Canada and Mexico being the principal destinations.
“The trade picture was better than expected through most of last year, so the weakness in the November numbers may be a sign of things to come,” said Robert Kleinhenz, Executive Director of Research at Beacon Economics. “While we expect 2019 to be another year of growth, the tariffs imposed to date along with uncertainty about the long term trade picture will temper growth this year.”
Indeed, every major economic forecasting organization has lately ratcheted down their estimates of global economic growth in 2019. On January 25, the International Monetary Fund said it expects the world economy to grow by 3.5% this year, a downward revisions of its earlier 3.7% forecast. Earlier in January, the World Bank revised its global economic growth forecast from 3.0% to 2.9%.
The outlook for California’s export trade over the next several months most immediately hinges on the outcome of two sets of negotiations: those currently underway between U.S. and Chinese officials and those between the White House and Congress over ratification of the U.S. Mexico Canada Agreement. In both cases, outcomes are far from certain.
We hear mixed messages about progress in the China trade talks, which to an uncomfortable extent involve issues that touch on some very basic ideological differences. As was made clear in the just-released 183-page report from the U.S. Trade Representative on China’s lack of compliance with World Trade Organization rules, American negotiators are seeking not just a reduction in the U.S. trade deficit with China but also fundamental revisions in the way Beijing runs its economy. Chinese leaders, who seem bent on promoting their authoritarian capitalist model as superior to Western prescriptions for economic growth, are unlikely to accede to such far-reaching demands.
At their meeting in Buenos Aires just after last Thanksgiving, President Trump and Chinese President Xi Jinping agreed to a 90-day cease-fire in the tariff wars. The White House has warned that, unless trade talks meet with President Trump’s expectations, he will follow through on his threat to raise duties from 10% to 25% on already targeted Chinese imports on or about March 2. The President has also indicated that he would broaden the scope of Chinese goods that are subject to higher U.S. import levies.
It is impossible to say what President Trump will do three weeks from now since it is not evident what his benchmark for success in negotiating with China really is. Even his own aides are reportedly worried that his single-minded focus on deficits as a measure of the benefits of doing business with trading partners may lead him to accept a Chinese commitment to substantially increase their purchases of U.S. goods and services.
However, that would not address a host of more serious issues such as intellectual property protection, economic espionage, and the role of state-owned enterprises, President Trump may find that promises to buy more from America a sufficient reason to declare a win.
At least equally troubling is the uncertainty surrounding the future of the new NAFTA. For all the media attention devoted the U.S.-China trade battle, it’s worth keeping in mind that Canada and Mexico are both larger export markets for California goods. Ratification of the revised rules of North American trade is by no means a given, especially with trade-skeptical Democrats now controlling the House of Representatives.
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.