Texas economy at risk in escalating trade war

In 2017, exports from Texas exceeded $264 million, equivalent to 16 percent of gross state product and more than California and New York combined. According to a recent analysis, Texas companies are now paying about $424 million in tariffs each month, a 163 percent increase.

Earlier this month, President Donald Trump and Chinese President Xi Jinping declared a 90-day truce in a mounting trade war that has seen both sides impose tariffs on a wide range of goods. Because import tariffs are basically a tax on U.S. companies, American-made products have become more expensive for domestic consumers while becoming less competitive in the global marketplace. Americans are already paying higher prices for washing machines, electronics and many other appliances while U.S. manufacturers are paying more for steel, aluminum and semiconductors.

With growth in both countries slowing and financial markets skittish throughout the world, most economists believe further escalation of the U.S.-China trade spat will inflict serious harm to both countries and could well precipitate a global recession.

Texas has much at stake. In 2017, exports from Texas exceeded $264 million, an amount equivalent to 16 percent of gross state product and more than California and New York combined. China is the state’s No. 2 trading partner after Mexico, with two-way trade of more than $59 billion last year. According to a recent analysis by the Heartland Institute, a conservative, public policy think tank, Texas companies are now paying about $424 million in tariffs each month, a 163 percent increase over a year ago.

The state’s energy sector is especially vulnerable, with more than 583,000 energy workers —18 percent of the nation’s total — located in Texas. The 25 percent tariff on steel imports, along with the 10 percent rate on aluminum, is hitting hard at all segments of Texas’ energy industry.

According to U.S. Census data, Texas accounted for more than $8.3 billion in steel and aluminum imports last year, twice as much as any other state. Many of these imports are used for pipelines, drilling rigs, refineries, gas liquefaction and petrochemical plants. Because steel accounts for such a huge share of drilling expenses, the cost of well completions has jumped an average of 10 percent in recent months. With oil prices 30 percent lower than they were last summer, higher steel prices are boosting break-even costs while reducing cash flow for most drillers in the Permian and Eagle Ford shale plays.

Six months ago, China was the No. 2 purchaser of Texas’ oil exports, buying an average of 350,000 barrels per day. But since August, oil shipments to China have been close to zero. A year ago, China was the No. 3 buyer of Texas’ liquefied natural gas. In response to the Trump tariffs imposed in September, China immediately retaliated with a 10 percent tariff on LNG imports and has purchased virtually no gas from the U.S. in recent months.

ExxonMobil has stated that increased costs from steel tariffs may affect plans to add a crude oil distillation unit at its Baytown refinery, while the CEO of Plains All American Pipeline, which transports crude oil from the Permian Basin to the Gulf Coast, has expressed concerns about escalating costs for $1.5 billion in steel-intensive pipeline projects currently underway or planned.

Other sectors of the Texas economy are also paying the price of higher tariffs. For example, Toyota Motor Corp. , which recently relocated its North American headquarters from California to Texas and assembles 200,000 pickups annually at its plant near San Antonio, has predicted higher prices for cars and trucks as a result of higher tariffs on steel and aluminum.

In 2017, U.S. farmers and ranchers recorded $141 billion in foreign agricultural sales, the third highest on record. According to the U.S. Department of Agriculture, these exports generated 20 percent of U.S. farm income and supported more than a million American workers. At $22 billion in sales, China was the largest purchaser of U.S. farm exports last year.

As the No. 3 state for agricultural exports, Texas farmers are feeling the brunt of higher Chinese tariffs on cotton, corn and sorghum. Nearly half of U.S. cotton exported to China comes from Texas while the state accounts for more than 25 percent of America’s sorghum exports to China. Not surprisingly, China’s new 179 percent tariff on sorghum from the U.S. has put a halt to Texas exports.

Texas is home to four major ports for waterborne commerce: Houston, Corpus Christi, Galveston and Beaumont. They all stand to be adversely affected if trade conflicts escalate further.

With its export-oriented economy, Texas has the most to gain from a resolution of the ongoing trade disputes with China and other countries. One way or another, compromises must be found that can avert a global trade war and the serious economic consequences that would follow.

Weinstein is associate director of the Maguire Energy Institute and an adjunct professor of business economics in the Cox School of Business at Southern Methodist University.