What are implications for California in Trump's trade deal?

Jan. 17, 2020 8 AM PT

The list of Chinese goods Trump imposed tariffs on since launching a trade war two years ago seems like it runs forever: catfish, bird eggs, natural sponges, pearl onions, mushrooms, chestnuts, copper springs, tungsten wire, thermometer parts. These are just a few.

“It’s mind-boggling to go down the list,” said Jock O’Connell, international trade adviser at Beacon Economics. “It goes on for dozens and dozens of pages ... and covers a lot of goods you can’t even imagine.”

The trade deal inked Wednesday doesn’t do much to clear up that complexity, or relieve the impact of tariffs on California businesses and consumers. Trump’s deal with China was touted by his administration as a victory, but experts say that deal is only a first step toward eased tensions, bringing some immediate benefits but leaving some of the thorniest issues unresolved.

The vast majority of tariffs — which escalated a trade war and delivered higher costs to consumers and uncertainty to the U.S. auto industry and agricultural and manufacturing sectors — remain in place.

In a preliminary agreement last month, Trump canceled 15% tariffs on about $160 billion of Chinese imports scheduled to be rolled out Dec. 15. Levies on about $120 billion of goods from China were cut in half, to 7.5%. But the deal kept in place 25% tariffs on another $250 billion of imports as a bargaining chip for further negotiations.

“We’re keeping the tariffs on because we’ll use that for another one,” Trump said at a Jan. 9 rally in Toledo, Ohio.

California’s economy has weathered the trade war relatively well compared with other parts of the country slammed by declines in manufacturing and farming, said Lynn Reaser, chief economist of the Fermanian Business & Economic Institute at Point Loma Nazarene University. California’s economy grew at a 2.6% rate through the first 10 months of 2019, according to the UCLA Anderson School, compared with 2.1% growth for the entire U.S. in the third quarter.

However, Reaser said the state would have seen higher levels of technology exports to China and more Chinese investment and spending on California education if not for the trade tension. Uncertainty and tariffs have also disrupted supply chains and plans for capital spending.

While China has not explicitly committed to removing some of the retaliatory tariffs that hurt California industries, the state could see gains from China’s commitments to buy an additional $200 billion of American goods and services by 2021.

“What is likely to happen administratively is that waivers will be granted in cases where the Chinese decide to import U.S. products that remain subject to higher retaliatory tariffs,” O’Connell said in an email.

“It’s not a lot of progress. The U.S. is still imposing high tariffs on a still large volume of goods we would import from China,” O’Connell said. “We’ll have to wait and see.”

Here’s how some key California industries may be affected.

Wine

Over the summer, China imposed a 93% tax on American wine, up from 48% before the escalation of tensions, according to the Wine Institute, a trade group for some 1,000 California wineries and related businesses.

As a result, sales of California wines to China were down just over 20% by volume last year through November compared with the year before, said Honore Comfort, vice president of International Marketing at the Wine Institute.

The tariffs remain in place. However, the trade deal prevents tariffs from increasing, which is positive for the industry, Comfort said.

Wine is included in the list of China’s buying commitments. Comfort said the Wine Institute was evaluating details of the trade agreement and could not draw any conclusions.

“We will continue to support California wine in China. ... We are hopeful we will be able to resume our trade position with them,” she said.

Agriculture

As Trump piled on tariffs, China retaliated by canceling purchases of soybeans, one of the biggest U.S. exports to that country. It also hit wheat and corn with tariffs. The Trump administration gave farmers a $28-billion bailout.

Beijing imposed a 50% tariff on U.S. almonds, one of California’s biggest crops; that remains in place. The state supplies 82% of the world’s almonds, and exports to China fell by about one-third, according to the Almond Board of California.

In the deal, China commits to agricultural purchases that will mostly benefit states specializing in soybeans and pork, Reaser said. However, California should see some gains in exports of citrus and nuts, she said.

“We’re glad to see agreement and China’s commitment to purchase more ag products,” Julie Adams, vice president of global technical and regulatory affairs at the Almond Board of California, said in a statement. “But for almonds and other specialty crops, the question is whether China will reduce the retaliatory tariffs that have been imposed since April 2018, as a means of encouraging our Chinese customers to purchase more almonds.”

Technology

American companies have long accused their Chinese rivals of stealing valuable technology. Under the trade deal, Beijing says it will ban those practices and increase protection of intellectual property. Experts say this could benefit tech companies in Silicon Valley and Southern California — provided China holds up its end of the deal.

China also pledged to cease requiring the transfer of technology as a precondition for companies to gain access to their markets. But it remains to be seen how strictly China will enforce these provisions, Reaser said.

China has shown that it can acquire technology and, with government support, build competitive rivals to American firms. The technology wall between the two countries solidified further over the course of the trade war. China’s Huawei was forced to find alternative supply chains after the Trump administration cut off critical components from the likes of Intel and Qualcomm.

For more than a year, as the trade war waged, Apple avoided damage. The round of 15% tariffs that Trump threatened to impose in December would have included mobile phones; Apple’s iPhone is made almost entirely in China. Those tariffs have been suspended indefinitely.

Reaser said American companies will likely continue to search for alternative supply chains to China as uncertainty and the administration’s national security concerns persist.

“The technology wall has a huge impact on California,” she said. “The paranoia and the fear does represent a significant constraint.”

Consumer goods

In September, 15% tariffs were slapped on $120 billion in Chinese imports that included consumer products such as smart watches, TVs, shoes, diapers, sporting goods, meat and dairy products. That round hit American households directly, as many U.S. firms said they would be forced to pass the elevated prices on to customers. Under the agreement reached in December, the levy imposed on those imports is reduced from 15% to 7.5%.

Ports

Los Angeles and Long Beach ports, which handle roughly half of U.S. maritime trade with China, will likely see increased business from the trade deal, O’Connell said.

However, Executive Director of the Port of Los Angeles Gene Seroka does not think the deal will do much to improve matters. Seroka said the port has not seen any noticeable uptick in exports yet, and he doesn’t believe there will be significant gains over the next few months. He said it could take months or years for trade volumes to snap back, and he’s not sure they will ever manage to return to pre-trade war levels.

“It’s been 14 consecutive months of declining export business,” Seroka said “The damage that has been done over the past 18 to 20 months has been so hurtful.”

Seroka said many American firms have shifted their supply sourcing to Southeast Asian nations, which adds complexity to previously long-established routes and reduces business for the port.

If an American company decides to move its manufacturing to Vietnam from China, for example, it might become easier to ship the products to the East Coast via the Suez Canal, and then inland to destinations such as Chicago, Memphis and Dallas. “We’ve basically given a sales lead to every other trading nation,” Seroka said. “We have officially been left behind.”

The port needs more specificity on which commodities will benefit from increased purchases under the deal, he said, and which tariffs remain in place in order to figure out supply chains and transit paths.

“The details are very slim,” Seroka said. “We’d like to see some specifics.”