Arizona Trade 2019 - A Year to Remember

Two Thousand Nineteen was a year of many uncertainties in the foreign trade arena. First, the ratification of the revamped NAFTA moved very slowly although it was anticipated that all three countries would eventually sign the trade agreement, now under a new name - actually three new names - USMCA in the United States, T-MEC in Mexico, and CUSMA in Canada. Second, U.S. trade relations with China became highly contentious and soon were labeled “trade wars.” There were also signs that the global economy was slowing down. At the end of calendar year, the voices from China, at first subtle but soon rising, started bringing attention to the emergence of COVID-19, which we now know is a global pandemic.

The original aim of this article was to investigate whether these major changes in U.S. trade policies regarding China were reflected in Arizona’s trade statistics. However, by the end of March 2020, it became clear that with all new developments and yet unforeseeable effects of the pandemic, the year 2019 may be long remembered as the end of an era.  In data charts, 2019 will be followed by a drop even deeper than those seen at the outset of the Great Recession of 2008-2009.

A decade of expanding trade through 2018

From 2009 through 2018, Arizona’s trade with the world almost doubled, as shown in Figure 1 . Trade with Mexico and China was the major contributor to the overall increase in trade, although trade with China experienced more fluctuations from year to year. Trade with Canada slowed in the middle of the decade but picked up in 2019 as trade with China embarked on a downturn.

Figure 1. Arizona’s Trade with the World and Major Trading Partners (2009=100)

Source: USA Trade Online

Mexico, China, and Canada -- Arizona’s major trade partners

Mexico has been Arizona’s major trading partner even since time before the original NAFTA was signed in the early 1990s. NAFTA has been widely credited for increasing trade volumes between Arizona and Mexico, reaching close to 40% of Arizona’s total world trade in 2015. Canada and China follow as second and third trade partners, although each contributes just about one third of trade with Mexico. As detailed in Table 1 , trade with China surpassed Canada in the middle of the decade.  This increase in China’s share of Arizona’s trade, together with increased trade with Mexico, resulted in a slightly different configuration of Arizona’s trade patterns in 2018 when compared with 2009, as shown in Figure 2 .

Mexico’s share of Arizona’s total world trade increased from 34.9% in 2009 to 37.1% in 2018; China’s share increased from 8.6% to 10.2%, while Canada’s share declined from 9.8% to 8.4%. Together, the three countries accounted for 55.8% of Arizona’s total foreign trade.

Table 1. Arizona’s World Trade and Major Trade Partners (%)

Source: USA Trade Online

Figure 2. Mexico and China – Increased Shares in Arizona’s Trade by 2018

Source: USA Trade Online

Arizona’s trend in trade with the world differs from the national average

In the second half of the 2009-2019 period, Arizona’s world trade grew at higher pace than the average for the entire United States. In 2019, Arizona’s world trade was almost double the 2009 level, and in fact, it reached an all-time high, while U.S. world trade experienced a noticeable dip over the 2018 volume. ( Figure 3 )

Figure 3. U.S. and Arizona World Trade (2009=100)

Source: USA Trade Online

Arizona’s trade with each of its main trade partners also exhibits different trends from the national average. Interestingly, in trade with Mexico, the U.S. average grew faster than Arizona’s.  This partially reflects the fact that a large portion of Arizona’s foreign trade had already been tied to Mexico.  It was other states that increased their trade with Mexico, such as Michigan and other states in the “auto alley” region . In contrast, Arizona’s trade with China outpaced the national average. However, in 2019, both the U.S. and Arizona show sharp declines in trade with China, although the national decline was relatively larger than Arizona’s. ( Figure 4 )

Figure 4. U.S. and Arizona Trade with China (2009=100)

Source: USA Trade Online

Arizona’s trade with Canada resembles the nation’s average trend except in 2019. While U.S. trade with Canada slowed to a halt, trade between Arizona and Canada experienced the largest spike in the past decade. In 2019 U.S. trade with Canada was 42% above the 2009 level, while Arizona’s was up 85%, Figure 5 .

Figure 5. U.S. and Arizona Trade with Canada (2009=100)

Source: USA Trade Online

Arizona’s trade with China unlike trade with Mexico or Canada

During last ten years, as displayed in Table 1 above, China and Canada were interchangeably in second and third place as Arizona’s trade partners, accounting each between eight and ten percent of Arizona’s word trade. But this is where similarities end. A major difference is that in trade with China, Arizona has continuously imported more goods than it exported to that country, and thus over the entire decade, incurred a negative trade balance.   Figure 6 shows annual trade balances with China in comparison with those of Mexico and Canada. Keep in mind, however, that annual trade balances may not be the best indicator since in highly integrated economies, like the auto industry in Mexico, United States, and Canada, some manufacturing products are shipped back and forth across international boundaries, and after being enhanced or incorporated into other products, their return value is higher. The negative balance in trade of such manufacturing products may be offset when they are further incorporated into finished products or sold worldwide. [1]

Figure 6. Arizona’s Trade Balance with Top Three Trading Partners, 2009-2019

Source: USA Trade Online

To reduce a lag effect that appears when comparing export and import values directly on an annual basis, the trade balances are shown as cumulative results in Table 2 . When summed across the decade, Arizona’s trade with the world shows a positive trade balance of $7.4 billion, which is due largely to an overall positive trade balance with Canada.  In trading with Mexico, Arizona incurred a relatively negligent negative balance of less than $300 million. Trade with China is a totally different story:  from 2009 to 2019, Arizona exported $12.2 billion worth of goods to China while importing $28.7 billion, which resulted in a pretty staggering $16.5 billion negative trade balance over a 10 year period.

Table 2.  Arizona’s Cumulative Trade Balances 2009-2019 ($ millions)

Source: USA Trade Online

Imports from China more diversified than exports

During last decade, computer and electronic products were consistently the number one export and import commodity in Arizona’s trade with China.  However, they differ in relative importance in the overall composition of exports and imports. Among exports, computer and electronic products accounted for more than 50% of the total value until 2018. In 2019, their share dropped to 46.2%, but stayed far ahead of other commodity groups.  In the import composition, computer and electronic products accounted for smaller percentage of the total import value, about 25% in 2018 and 2019, although in dollar terms, exceeded Arizona’s exports of the same commodity. In 2019, Arizona exported to China $501.8 million worth of computer and electronic products and imported $759.1 million. [2]

Aside from computer and electronic products (NAICS 334), Arizona’s top exports to China included transportation equipment (336), machinery (333), electrical equipment, appliances and components (335), and chemicals (335). Together, these five commodities accounted for 81.8% of total export value, shown in Figure 7 , left side. Arizona’s imports from China are more diversified. Figure 7 right side shows top five commodities: computer and electronic products (334), electrical equipment (335), fabricated metal products (332), miscellaneous manufactured products (339), and furniture and fixtures (337). These five accounted for about 65% of total import value. Arizona also imported  machinery (333), plastics (326), textile (314,) and transportation equipment (336).  Together these nine commodity groups accounted for 83.3% of total imports in 2018.

Figure 7. Top Commodities in Arizona’s Trade with China, 2018 (%)

Source: USA Trade Online

2019: A year of profound changes in trade with China

Arizona’s trade data for 2019 show indisputable effects of the trade “war” with China that were set in motion by executive orders of the U.S. president. Imposed on an original $350 billion in U.S. imports, the tariffs averaged about 20% throughout 2019. [3] These tariffs fell particularly hard on imports of parts and components used by U.S. manufacturers, and in turn caused declines in U.S. exports of manufactured products. Partly due to this effect of disturbed two-way trade flows, but also due to retaliatory actions by the China government, U.S. exports to China declined not only in manufacturing products, but also in other sectors, most notably agriculture.

In 2019, Arizona imported $169.5 million (or 5%) less from China than in the previous year. Most of this decline was a result of reduced imports of computer and electronic products (about $116 million or 13.3%), while import of furniture and fixture products together with machinery shrunk 40.1% and 18.8%, respectively. Arizona’s exports to China suffered more than imports from China, both in terms of absolute dollar amount and percent-wise.  Total exports declined 9.1% from a year ago. The largest dollar loss of $199.5 million was in computer and electronic commodities (decline of 28.4%), while Arizona’s exports of agricultural products declined 43.9%.

Trade and jobs

Although the two sets of data – employment by NAICS classification, and NAICS classified goods traded with China - may not correspond perfectly, they may nevertheless provide the best possible glimpse into what might be at stake when drastic changes are imposed on established trade flows. Table 3 provides employment numbers in Arizona’s manufacturing industries that correspond with the top five manufacturing products exported to China. [4]

Table 3. Arizona’s Jobs in Top Manufacturing Industries Exporting to China

Industry	Exports to world ($mill)	Exports to China ($mill)	Exports to China as % of world	Total employment	Estimated empl. related to exports to China
334 Computer & Electronic Products	6,341.2	701.2	11.1	19,273	2,131
336 Transportation Equipment	3,986.0	105.7	2.7	25,265	670
333 Machinery, Except Electrical	1,655.7	67.2	4.1	6,656	270
335 Electrical Equipment	2,163.4	53.7	2.5	2,398	60
325 Chemicals	979.4	48.9	5.0	7,365	368
Top exporting industries (Total)	15,125.7	976.8		60,957	3,499
Manufacturing (Total)	19,470.7	1,109.5	5.7	149,174	8,500

Sources: Exports from USA Trade Online for 2018; Employment from County Business Patterns for 2017.

Data in Table 3 suggest that close to 3,500 employees might be directly impacted in Arizona by changes in exporting of the top five manufacturing products to China. The majority of those manufacturing jobs are in computer and electronic products manufacturing, where about 11 percent of jobs dependent on exports are related to exports to China. [5]

The sensitivity of Arizona’s economy to changes in importing from China is more difficult to gauge, because it is not easy to distinguish between intermediate goods, i.e. supply chain products, and products for final consumption, i.e. products for wholesale and retail. However, since computer and electronic products are both the major export and import commodity, it may be concluded that this is where the largest direct economic impacts are likely if the trade war with China continues.

Conclusion

Arizona’s trade with China in 2018 reached 10.2 % of Arizona’s total world trade, significantly less that the U.S. average of 15.7%. Depending on perspective, one may find comfort in “less is more” approach, meaning that because Arizona’s economy depends less on trade relationships with China in comparison with the national level, the state has incurred relatively smaller negative impacts of reduced trade. This, however, might be a small and short-lived comfort. Firstly, in a highly interconnected global economy additional negative impacts are caused by waves of ripple effects as each sector starts buying less from each other. Secondly, in reality it is not the state that exports and imports goods, but rather a variety of businesses and their employees that are engaged in production and trade. The impacts of changes imposed on trade with China will also be unevenly distributed within each industry depending on size and type of production relationships in the supply chain frameworks. For example, Arizona’s computer and electronic industry (NAICS 334) consisted of 255 establishments, of which the overwhelming majority (80.8%) had less than 50 employees. [6] Meanwhile, more than a half of all jobs (57.1%) were concentrated in eight largest companies. [7]   Without further data it is difficult to gauge what had been the actual impact of $199.5 million loss in exports in 2019 from a year ago, and which jobs might have been particularly sensitive to any further changes in trade relationships with China.