President-elect Donald Trump has recently been scoring big political points with his anti-China rhetoric. Doing business with China is a very big deal for the L.A. region, which is why Angelenos should be alarmed by where this tough talk might lead. Still, there is a potential silver lining to the incoming administration’s tone.
Trump has been blaming China (along with Mexico) for the plight of Midwestern factory workers. Whether such blame is appropriate (or even if such a crisis truly exists) is irrelevant. Even a cursory glance shows the vast difference in access Chinese firms enjoy in the U.S. market relative to what American firms enjoy in the Chinese economy.
Although most economists agree that despite the imbalance trade between the two nations is still a net positive, the “fairness” factor dominates public discourse. As such, many Americans applaud Trump’s threat to impose high tariffs against imported goods from China and his questioning of the “one-China” policy.
So what’s at stake for Southern California if Trump follows through on his rhetoric? Plenty.
For one thing, the Los Angeles Customs District handled one-third of U.S. merchandise trade with China – our largest trading partner – through the first three quarters of last year. The neighboring ports of Los Angeles and Long Beach handled half of all containerized goods traffic between the two nations.
All that cargo traffic supports an enormous number of logistics jobs throughout Southern California, from dockworkers to the armies of employees in the sprawling warehouses and distribution centers of San Bernardino and Riverside counties. Clearly, any steps that would interrupt or diminish the volume of trade with China would imperil many thousands of those jobs.
As much as it supplies us with a vast array of products, China is also a customer for exporters in the L.A. area. Statistics on exports produced in the region suggest that $5 billion to $6 billion in locally produced merchandise exports are shipped to China each year. China is California’s third-largest export destination after Mexico and Canada.
China is also a growing source of investment capital flowing into the L.A. area. A June report from World Trade Center Los Angeles ranked China 13th as a source of foreign direct investment in Southern California, supporting 16,800 jobs and involving 340 firms – a steep increase from a few years earlier. The true number is likely much higher given the variety of under-the-radar ways Chinese nationals move money out of China to avoid capital controls imposed by their government and given the enormous local Chinese diaspora.
And then there are services – a frequently overlooked element of trade. While the United States last ran a merchandise trade surplus in 1975, we continue to enjoy a sizable surplus in our trade in services. In 2015, the U.S. ran a merchandise trade deficit of about $750 billion, but a tidy $262 billion surplus in services.
All of this is under threat if Trump should push the two nations into a major trade war.
Clearly the Trump view of Sino-American trade is dangerous for the L.A. economy. But the good news is that China’s economy has far more at stake than L.A.’s if there is a substantial slowing of trade between the two nations. The Chinese economy is far more export dependent than the U.S.’, and U.S. markets dominate many important Chinese industries. As such, the Chinese have, for the most part, responded cautiously to Trump’s provocations. They recognize the danger better than we do.
So here’s that silver lining. The pressure exerted by the Trump administration’s rhetoric could force the Chinese to play fairer when it comes to trade between the two nations. As much as a slowing of trade would hurt Los Angeles, clearly better access to Chinese markets, not to mention better protection for U.S. property rights, would be very beneficial to L.A. businesses.
Ultimately, the question is whether Trump’s hardball tactics will push this to a better place, rather than a worse one. And as with so many aspects of the new administration at this point, we simply don’t know the answer.
Christopher Thornberg is founding partner of Beacon Economics and director of the UC Riverside School of Business Center for Economic Forecasting and Development. Jock O’Connell is international trade adviser at Beacon Economics.
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