Sumner followed remarks of Lt. Gov. Eleni Kounalakis, and was joined bu UC Davis Economics professor Katheryn Russ, who focused on macroeconomic impacts.
Click here for a video of the full assembly committee session.
California agriculture has faced particular challenges from the trade turmoil over the past two and a half years. Open access and stable relationships are important because California agriculture relies heavily on exports. About 25% of what we grow in California exported. The ratio is much higher for some products such as tree nuts. Moreover, imports on which new tariffs have been placed, whether steel and aluminum or other goods, are used as imports on farms and food processing and higher costs, such as for canners, translate directly into lower prices for processing tomatoes and other fruits and vegetables and for other farm raw materials.
Some of this turmoil has been caused by US tariffs and international responses to US tariffs. However, it is important to realize that concerns have been caused as well by responses to threats and counter threats that cause market responses and instability even if the threatened actions do not materialize. For example, when the threat that NAFTA might be revoked was first raised by the new administration, buyers in Mexico and Canada of California dairy and other products began considering diversifying their import sources of supply in case imports from the United States might be disrupted.
The Landscape of California Farm Exports
The UC Agricultural Issues Center (AIC) produces data on exports of farm products from California. Those data document export value of more than $20 billion in recent years. The most recent full year of data is 2017. The three charts on the next page provide basic facts. California farm exports span a large range of products led by almonds, dairy products, pistachios, wine and walnuts. California farm exports are shipped to dozens of significant destinations led by the EU and Canada, with China/Hong Kong now well ahead of Japan. Important industries differ on their export reliance. The tree nuts and rice all have export value more than 50% of farm value of production. For dairy, processing tomatoes, grapes (wine, raisins and table grapes) and oranges, exports are in the 20% to 30% range. Produce items, such as strawberries, and including the other fresh fruits and vegetables, have smaller export shares and export mostly to Canada.
As is evident from these charts, many California agricultural products are vulnerable to export turmoil. This is especially true for products with large export shares and those that tend to go to markets have face new impediments or are likely face new trade impediments. Such concerns are broader than just exports to China. For example, just last week, after concerns about termination of NAFTA had largely faded, the President renewed treats of tariffs on imports from Mexico, which would invite retaliation. Mexico is a major buyer of California milk powder and other products. Again, buyers in Mexico are stimulated to source their dairy imports from New Zealand or other places, even if they have highly-valued suppliers in California.
Impacts of New Tariffs and Trade Impediments
Last summer and fall our group at AIC, prepared some calculations of potential losses to some California commodities based on estimates of lower prices that would be caused by export disruption in markets that had implemented tariff and other trade restrictions in response to US tariffs. These trade disruptions has been broader than China and include important destinations such as Turkey, India and Mexico. We have monitored events that have played out over the course of the marketing year in subsequent months.
Several basic facts and notions are needed to interpret the impact on farm commodities. First, much of what we export from California is commodities from trees and vines that continue to produce even if markets are in turmoil. A farmer cannot layoff an almond tree and turn off a milk cow when market prices decline. Second, it is complicated to rearrange export destinations and that means exporters face lower prices when some markets are removed from effective demand. These two points are well illustrated by the walnut trade situation. Exports to markets for which new import barriers are in place have fallen substantially. As a result, export prices were about 60% higher in 2017/18 than they have been this year (see the chart on the next page).
Different commodities have been affected differently. California hay exports to China have fallen from about 30% of the total export to about 20% for the year from April 1 to March 31, with average monthly export quantities well below the pace of 2016 through early 2018. California wine exports this year are also well below recent years by both volume and value.
Finally, let me use the case of pistachios to illustrate some complexity in the interpretation of agricultural trade data. In the fall of 2018, California had a large pistachio crop with more bearing acreage and good yields. With new tariffs and trade impediments for a crop that relies on exports, and especially exports to China (mostly via Hong Kong and Vietnam), we anticipated low pistachio prices. What was not in those calculations was the subsequent information that Iran, the only other significant exporter, had by far its smallest pistachio crop in many years. Iranian exports have dropped to about zero for this marketing year. The result has been that pistachio prices have been relatively stable.
However, stable prices does not mean that the California pistachio industry has not suffered a loss from trade disruption. In fact, the 2018-19 marketing year would have been far better, but for the government-caused trade disruption. The industry would have been able to recover from the low yields of recent crops and build reserves by capitalizing on the low Iranian exports. Agricultural production and price variability means farm industries must make the most of every good opportunity. The trade turmoil has lowered the revenue of the pistachio industry relative to what it would have otherwise been able to achieve.
The bottom line is that across
California agriculture farm industries face higher cost inputs and diminished
export demand for their products and prices lower than would have prevailed.
The marketing year still have many months to go, so we do not have final
estimates yet, but much damage has already been done.
Walnut Export Unit Values for Three Marketing Years
Current Situation and Final Remarks
Many had hoped that the trade turmoil just summarized would be history by now. But, problems have continued and by some measures have gotten worse. The recent announcement of new U.S. tariffs on Mexican imports into the United States reignited concerns about that crucial market.
The USDA has announced assistance for farm industries that have documented losses and many California industries are in line to receive some benefits. For the industries with losses something is better than nothing, but all the industries from whom I have heard say clearly they prefer trade to aid. Government assistance is no substitute for lost trade opportunities and the loss of their reputations as reliable suppliers.
The basic principle is that prosperity for agriculture is best stimulated by the opportunity to compete for markets with as few barriers and as little disruption as possible. Agricultural in California is innovative and resilient. It can and will adjust to the economic situation, but there are plenty of other issues and adapting to this trade turmoil adds an unnecessary burden.
The United States has legitimate complaints about China’s policies. But, governments can be most effective by using dispute settle processes in now well-established institutions (such as NAFTA and the WTO) that provide frameworks for stability. The United States has had much success in the WTO as in two recent agricultural cases brought against China. The WTO would be a natural forum for the U.S. and its many potential allies to pursue their claims against China.
Impact of the U.S. Trade Dispute with China on California’s Economy
The Assembly Select Committee on International and Regional Agreements and the Standing Committees on Agriculture and on Jobs and Economic Development are convening a joint informational hearing from 1:30 to 4:00 p.m. on June 4, 2019, to provide insights the impact of the U.S. trade dispute with the People’s Republic of China on California and key economic sectors in the state.
I. Welcome, Introductions, and Opening Statements –
- Assemblymember Levine, Chair (International and Regional Agreements)
- Assemblymember Eggman, Chair (Agriculture)
- Assemblymember Cervantes Chair (Jobs and Economic Development)
- Members of the Committees
II. Keynote Remarks — Invited: Lt. Gov. Eleni Kounalakis –
III. State Impacts –
Economic Implications for California
- Prof. Katheryn Russ – UC Davis (Macro-economic): Confirmed
- Prof. Daniel Sumner – UC Davis (Agriculture): Confirmed
IV. Key Sector Impacts –
California Association of Port Authorities – Confirmed: Tim Schott, Executive Director
- California Retailers Association – Confirmed: Pres. Rachel Michelin
- TechNet – Confirmed: Courtney Jensen, Executive Director
- The Wine Institute – Confirmed: Honore Comfort, Vice President, International Marketing
- Western Growers Association – Confirmed: Dave Puglia, Executive Director
- California Labor Federation – Invited
V. Public Comment –
VI. Closing Remarks –
