New Tariff in Town

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Lt. Gov. Eleni Kounalakis is Newsom’s trade-war warrior

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 percent 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.

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.

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. Last September, China added a 10 percent tariff on U.S. wine imports, atop a previous 15 percent tariff increase implemented in April 2018.

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.

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 percent tariff on U.S. wine imports, atop a previous 15 percent tariff increase implemented in April 2018.

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.

“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.”

CalMatters is a nonpartisan, nonprofit journalism venture committed to explaining how California’s state capitol works and why it matters.

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