A Year into Trump’s Trade Turmoil, an Iconic California Industry Struggles to Resist

The old joke about the California lieutenant governor’s office has been that its occupant’s main duty is to wake up in the morning, see whether the governor is still alive and, if so, go back to bed.

But that was before Gov. Gavin Newsom made Eleni Kounalakis his point woman on President Donald Trump’s trade wars.

Now, California’s lieutenant governor is among the busier officeholders in Sacramento—hustling to meet with members of Congress, federal agencies and trade organizations and deploying whatever influence she can to protect California’s place in the world market.

She has her work cut out for her. It has been a year since Trump sent a collective shudder through California’s economy, imposing taxes on imported steel and aluminum that in turn prompted China to impose new tariffs on agricultural products.

India and other countries soon followed suit, setting tariffs as high as 100% on some of California’s high-value crops. Since then, the Trump administration has engaged in trade brinkmanship on many fronts—including on-again, off-again threats to close the Mexican border. Meanwhile, a bevy of signature California products—almonds, pistachios, walnuts, wine grapes, oranges, dairy—have teetered on the verge of becoming collateral damage.

So far, the worst-case scenario has not come to pass, and some products, such as pistachios, have survived relatively unscathed, at least for now. But the damage has not been insignificant, either.

In a report last August, Daniel A. Sumner, an economist with UC Davis’ Agricultural Issues Center and Department of Agricultural and Resource Economics, projected that higher tariffs could cost major U.S. fruit and nut industries $2.64 billion per year in exports to countries imposing the higher levies; the economic blow could rise to as much as $3.34 billion because of lower prices in alternative markets.

And some fears have been entirely realized. Sales of California oranges to China are off by more than half, broader problems in the state dairy industry have been exacerbated by trade tussles, and the almond and wine industries have struggled to cope with price pressures and punishing tariffs.

“Whenever you have an atmosphere of uncertainty, it creates a chilling effect,” Kounalakis said in an interview. “Customers in Asia will look for alternatives elsewhere.”

And, she added, if customers find suppliers in other countries—say, Turkey for pistachios or New Zealand for wine—it could be hard for California to win them back.

‘America First’

As he had vowed on the campaign trail, Trump since taking office has hewed to an “America first” protectionist stance, pushing back against Republicans’ traditional embrace of open markets. He pulled out of the 12-country Trans-Pacific Partnership and pushed for a reboot of the North American Free Trade Agreement. The resulting United States-Mexico-Canada Agreement (USMCA)—what some describe as NAFTA 2.0—faces an uphill battle for ratification in the now Democratic-controlled House.

In January 2018, Trump—saying he wanted to protect U.S. manufacturers from unfair trade practices and to reduce the $375-billion trade deficit with China—slapped steep tariffs on imports of washing machines and solar energy cells and panels from nations including China and South Korea. He warned of and subsequently delivered on tariffs on steel, aluminum and other products from China.

China ratcheted things up by imposing bruising tariffs on agricultural products, including commodities such as soybeans and corn (which come primarily from the Midwest) and products for which California is revered.

To ease the burden on hard-hit farmers throughout the country, the U.S. Department of Agriculture has paid out billions of dollars in aid, mostly to producers of soybean, corn and other commodities. Most California growers did not qualify for direct payments, but some sold products to the federal food-purchase program, which feeds needy U.S. residents; some grower groups received funds to help market their products overseas.

When it comes to trade with China, a huge and growing market, billions of dollars and tens of thousands of jobs are at stake in California. According to the UC Davis Agricultural Issues Center, the state’s top five agricultural exports in 2017 just to China and Hong Kong amounted to more than $1.6 billion.

Overall, almonds are California’s leading agricultural export, with a value of nearly $4.5 billion in foreign sales in 2017; 70% of the almond crop grown in the state is exported. Almond exports now face a 50% tariff in China.

California has 6,800 almond growers, most of them small to medium-size, family-run enterprises. A study by the Almond Board of California found that the crop generated more than 100,000 jobs, mostly in the Central Valley. The industry contributes about $11 billion annually to the state’s economy.

Because China is the state’s third-largest export destination, the industry is seeing ill effects, said Julie Adams, vice president of global technical and regulatory affairs for the Almond Board of California.

“A 10 percent tariff went to 50 percent,” she said. “The uncertainty and concern about how long these retaliatory tariffs would be in place caused the industry to be more cautious in commitments and purchasing.”

Lost Hours, Lucky Breaks

Monte Vista Farming Co. in the Central Valley town of Denair, Calif., is a vertically integrated company that grows, hulls, processes and markets almonds and almond products.

“What China has been for our industry for a long time was a sponge to absorb additional supply,” Monte Vista Chief Executive Jonathan Hoff said in an interview. “We can typically rely on them to take large amounts of volume in a short time when we have excess volume to ship. So not knowing whether or not we’ll be able to rely on that market … really influences our forecast for net earnings on the farm.”

Moreover, he said, because China did not take large amounts of volume during the September-to-December selling window, Hoff’s company has been forced to rent warehouses and buy additional storage bins to hold unsold crop. The company has also reduced employees’ hours at hulling facilities. The circumstances have put pressure on pricing, and Hoff expects the average return per acre to decline significantly.

California pistachio growers, who produce 99% of the nation’s crop, bemoan the ongoing uncertainty, but they got a couple of lucky breaks. China for years had imposed a 5% tariff on the state’s pistachios. In retaliation, it raised the level to 15% and then 45%.

For unknown reasons, China left the tariff on roasted pistachios at 15%. Meanwhile, Iran, another source, lost much of its crop to a freeze. Although Chinese buyers typically prefer to buy raw pistachios and do the roasting themselves, they switched their allegiance. Shipments to China from California were up 9.5% for the start of the new fiscal year, said Richard Matoian, executive director of the American Pistachio Growers, a trade group in Fresno.

Orange growers weren’t so fortunate. China started with a 15%tariff that hit apple, cherry and grape “guys right between the eyes,” said Joel Nelsen, strategic advisor and past president of California Citrus Mutual, an advocacy group in Exeter for the state’s 2,500 family citrus growers. Then the Chinese added hefty tariffs to oranges and other commodities. Prices headed out of sight, with the result that business is off by more than half.

For wine grape growers, tariffs have been a double whammy. U.S.-imposed levies have raised significantly the cost of steel products—wire, stakes, metal posts—needed to establish vineyards.

Under the Trump administration, “things have gotten a lot more bumpy,” said John Aguirre, president of the California Assn. of Winegrape Growers in Sacramento. “We see a much softer market for wine grapes.”

The industry is concerned about continued access to China, which had been a growing market. Last September, China added a 10% tariff on U.S. wine imports, atop a previous 15% tariff increase implemented in April 2018.

Then there’s the uncertainty surrounding the renegotiated North American Free Trade Agreement, given that Canada is the industry’s largest export market. “Our thoughts have been: Do no harm,” Aguirre said.

A State Trade Policy?

Since trade policy is mostly determined at the federal level, California officials such as Kounalakis have only a limited ability to make a difference. Still, the lieutenant governor—a former ambassador to Hungary during the Obama administration—notes that the state’s size and stake in the market make it critical that California strive to be heard.

Officially, Kounalakis will head a new interagency committee on state development on trade and work with Newsom’s economic advisor, Lenny Mendonca, “to strengthen our foreign relations and advance our interests abroad,” as Newsom put it in announcing her post.

Practically, what that means is that she has been meeting with the California congressional delegation and officials from the U.S. Department of Agriculture and other relevant agencies to educate them about the importance of the state’s agriculture and to lobby for free-flowing markets.

Among her priorities will be improving coordination among state agencies that deal with trade and reopening a trade office in Mexico to expand California’s presence.
And, she notes, she has a vote of confidence that Newsom didn’t get when, during California’s 2011 climb out of the recession, he put forward his own statewide economic plan as Gov. Jerry Brown’s lieutenant governor. (Brown, consumed with a statewide budget deficit, took issue and appointed a statewide jobs czar, pre-empting Newsom’s plans.)

But the economic landscape under Trump is a far cry from the one California faced in 2011, with even more uncertainty in the near future. Will the president continue to waffle on his threat to close the southern border with Mexico, a move that observers say could wreak havoc with daily economic back-and-forth? Will Congress, with its new Democratic House majority, approve the USMCA? Will Trump and Chinese President Xi Jinping come to terms?

“We don’t know what the long-term strategy is,” said Sara Neagu-Reed, associate director of the California Farm Bureau Federation’s federal policy division. “There is some sense of hope with future trade negotiations. … The more markets we can open up, the better. … With that said, [we must] continue to present the administration with the impacts our growers are seeing in China, Canada and the European Union.”
That, says the Almond Board’s Adams, is why California needs all the help it can get—even from historically underutilized statewide offices—and why “the fact that the governor is making trade a focus of the lieutenant governor is important.”
Kounalakis agrees.

“For anyone who thinks that this international portfolio is, you know, having tea and going on trips,” Kounalakis recently joked during a panel discussion in Sacramento, “that’s not what this is about.”

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