The US administration may be engaged in a trade war aimed at foreign trading partners, but for Californian manufacturers and farmers it feels like a barrage of friendly fire.

California hit with double whammy in global trade war 1

California’s massive $2.7 trillion-dollar economy makes it the fifth largest economy in the world on its own. Despite its unparalleled importance to the US economy, the state has been forced to cope with a “double whammy” of tariff impact on its manufacturing and farming industries due to recent trade actions by the US administration.

As the US administration continues to ramp up trade actions with no signs of slowing down, it is worth considering the price its largest state economy will have to pay as a result.

Manufactured in California

Over 4.8 million jobs in California are supported by trade, according to the US Chamber of Commerce. And the exports threatened by recent tariffs add up to $15 billion dollars for the state, the Chamber says. The bulk of the exports at risk go to China.

In 2017, the Golden State exported over $170 billion worth of goods, with $16 billion worth of those goods shipped to China. California’s top exporting industries were computer and electronic product manufacturing, transportation equipment manufacturing and nonelectrical machinery manufacturing.

While it is typically rust belt states like Ohio, Pennsylvania and Indiana that garner attention regarding manufacturing jobs, coastal California is home to more manufacturers than any other state. California employs 11.5 million manufacturers, more than Michigan (5.8 million) and Pennsylvania (5.4 million) combined.

Manufacturing is key to California’s economy and so are the inputs needed to make its products — including steel and aluminum. In March 2018, President Trump invoked Section 232 of the Trade Expansion Act of 1962 to impose a 25 percent tariff on steel and 10 percent tariff on aluminum imports. While the tariffs were good news for struggling steel and aluminum producers in the US, the US manufacturers who use imported metals as components in their products have to cope with the cost of their inputs rising due to the tariffs, making their products more expensive and less competitive.

Manufacturers in California and across the US are actively seeking exclusions from steel and aluminum tariffs. According to a comprehensive new data tool produced by the Mercatus Center and TradeVistas, US manufacturers have filed over 32,000 exclusion requests with the US Department of Commerce. Companies can choose to file exclusion requests if imported steel or aluminum are critical inputs needed to manufacture their products. After filing a request, it is up to the Commerce Department to determine whether 1) there is no domestic availability of the product and 2) if there are no overriding national security risks with the product.

The most recent TradeVistas data shows that California businesses have filed a total of 2,622 steel tariff exclusion requests as of September 10— trailing only Illinois, Michigan and Texas for highest total number of exclusions. One California company alone filed exclusion requests on 1,390 different steel components.

Unfortunately for California’s economy, manufacturing isn’t the only sector feeling negative effects from steel and aluminum tariffs.

Grown in California

While California’s manufacturers worry about inputs, its farmers are more worried about outputs— including where they’re going to ship their crops. In 2016, California exported over $21 billion in agriculture products, the most of any state in the US.

At the same time manufacturers are feeling the pain from steel and aluminum tariffs, many California farmers are bearing the brunt of the $16 billion in retaliatory tariffs China inflicted on US products. China’s tariffs targeted a number of California’s signature agriculture exports including fruits, nuts and wine.

To add insult to injury, California was largely overlooked when the US Department of Agriculture doled out $12 billion in aid for farmers hurt by tariffs. In July 2018, 10 Californian Representatives penned a letter to US Secretary of Agriculture Sonny Perdue pleading their case on behalf of farmers in their districts and asking for a fair share of the $12 billion in mitigation funding.

“We support the need for free and fair trade with our international partners,” the authors of the letter wrote. “However, United States specialty crops are being significantly impacted by trade tensions and resulting retaliatory tariffs from nations around the globe. Tariffs from these nations are making fruits, vegetables and tree nuts in our districts significantly more expensive than their competitors, threatening the economic livelihood of our business and communities.”

A month after that letter was written, the USDA decided to give the majority of the $12 billion in relief funding as direct payments to farmers of soybeans, sorghum, corn, wheat, cotton, dairy and hogs. California’s signature products like fruits and nuts were only eligible to be purchased by the government until a certain quantity was met.

Double whammy trade war threatens California’s economy

California’s high-powered economy is both an important driver of American growth and employer of American workers. Although the US may be launching tariffs in response to unfair trade practices from China and other foreign nations, these tariffs are leading to unfair collateral damage on its own largest economy.

Author: Lauren Kyger – Research Associate at the Hinrich Foundation.