How China tariffs may harm California's economy

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LOS ANGELES — The California economy and its ports may face increasing pressure as the U.S.-China trade war continues.

U.S. agriculture has been in the spotlight as China imposes its own tariffs to retaliate for those the Trump administration has imposed on its exports.

But there's more at stake in California.

In a recent report, Moody's Investors Service noted that agriculture only makes up 2% of the state's gross domestic product.

But the West Coast — and the twin ports of Los Angeles and Long Beach and the Port of Oakland — are heavily dependent on trade with Asian countries, according to Moses Kopmar, a Moody’s analyst.

Los Angeles and Long Beach rank first and second in terms of volume in the U.S., Kopmar said. Their competitive position rests on their location relative to East Asia.

“To reach the continental U.S., it might take 14 days to sail from Shanghai to Los Angeles,” Kopmar said. “It would take an additional 10 days to pass through the Panama Canal to the Gulf Coast or the East Coast ports.”

Fresh off an eight-day trade mission to several Asian cities, Los Angeles Mayor Eric Garcetti was optimistic about the agreements reached to support city companies that trade in Asia.

"A lot of people we met with were asking what our commitments for trade were," Garcetti said. "I didn't speak for America, but for Los Angeles."

The mayor had 59 different meetings during his visits to Japan, South Korea, Hong Kong and Vietnam, he said. The People's Republic of China was not on the itinerary, but Garcetti said he traveled there in 2014 and 2016.

Threats of tariffs and other restrictions have been flying between the U.S. and China for several months, raising uncertainty for American exporters.

Tariffs of 25% on $34 billion of Chinese goods took effect in July, and are scheduled to take effect this month on another $16 billion, but both lists include a relatively low number of consumer products, according to the National Retail Federation's Port Tracker.

Another round of tariffs on $200 billion in goods from China that would include a broader array of consumer items is currently under consideration and is expected to be finalized in September. Imports, meanwhile, have been at record levels this summer as retailers bring merchandise into the country before the tariffs take effect, according to NRF’s Global Port Tracker report.

The Port of Los Angeles processed 723,141 Twenty-Foot Equivalent Units of container traffic in June, a dip of 1.1% from last June, according to port officials. It is the second fiscal year period the Port has surpassed the 9.1 million TEU mark, marking 24 months of record-breaking cargo movement.

Six months into 2018, overall volumes have decreased 3.9% compared to 2017, when the port set an all-time cargo record.

“We closed our fiscal year on June 30th with 9,169,779 million TEUs,” Port of Los Angeles Executive Director Gene Seroka said in a statement. “Looking forward, a continued shuffling of alliance services in the San Pedro Bay, coupled with potential impacts from recently imposed tariffs, provide a level of uncertainty and potentially softened trade flows through our port during the second half of 2018.”

One in nine jobs in Los Angeles could be affected by the tariffs, said Garcetti. The logistics industry continues to be a major regional economic driver.

The tariffs on steel could also slow the $120 billion in projects that Los Angeles County Metropolitan Transportation Authority has in its 20-year master plan, Garcetti said.

"As the price of steel goes up, those projects could slow or fall off," he said.

Oakland is often the next stop after the ships drop off cargo in Long Beach and Los Angeles, Kopmar said.

“A typical vessel service from Shanghai will first stop at Los Angeles or Long Beach,” he said. “It will unload cargo and pick up some exports — and the next stop it makes before it goes to Asia, is back to Oakland.”

California economists are still studying the potential multiplier impact on the state from the trade war.

“One thing that consistently shows up is that it is a state where there is a tremendous prevalence of infrastructure built around trade and shipping,” said Kevin Klowden, a senior economist with the Milken Institute.

Though there is not a lot of data on the multiplier effect on ancillary industries, Klowden pointed to what happened to the Los Angeles economy during the work stoppage at the twin ports in 2015.

Milken creates an index ranking the best performing cities in the U.S. The Los Angeles metropolitan area dropped to 47 from 42 despite the fact the economy was improving, Klowden said.

“We found that wage and salary growth had taken a hit and a lot of the decline in the Metro’s ranking was because of the port slowdown,” he said. “It wasn’t an official strike by the dockworkers, but there was a massive loss of shipping to the ports, because there was backup at the port.”

The entire L.A. Metro region took a real hit in terms of job and wage growth, he said.

“That is something we would expect to happen again,” Klowden said.

The California economy is more dependent on the global economy than other states, which is why, he said, the California economy stalled sooner after the 2008 recession hit than did other states.

The No. 1 and 2 exports to China are aerospace and electronics, but agriculture is significant as well, he said.

Though California exports many of its agricultural products to other U.S. states, the growth in the industry has mainly come from increasing exports to Asian countries, particularly for particular products like nuts, Klowden said.

“Agricultural may only be a certain percentage of the local economy, but it makes up a larger part of exports – and China has been growing the market for agricultural goods,” Klowden said. “That is not something that anyone wants to change.”

China is targeting agricultural products, which accounted for more than 18% of goods exported to China in 2016, in its trade dispute with the US, according to Moody's. China is the largest export market for US agriculture, accounting for $21 billion of US exports, or about 15% of total agricultural exports, the ratings report said.

State Assemblymember Cecilia Aguiar-Curry, D-Winters, who owns an 80-acre walnut farm with her brothers, said the uncertainty is causing problems for their farm.

Growers like Aguiar-Curry and her brothers have postponed planting new nut trees because they aren't sure how tariffs will impact their ability to export their crop to China and other Asian countries. If retaliatory tariffs from China increase prices, competing countries like Australia and Chile could take over those markets, she said.

It's not just almond and walnut growers in northern California that are being harmed by the uncertainty.

"I also represent Napa Valley and the wine industry is concerned about the potential loss of export customers," Aguiar-Curry said.

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