Can Newsom insulate California from Trump’s trade war?

WASHINGTON — Gov. Gavin Newsom promised action last week in response to President Trump’s dramatic decision to increase tariffs on trading partners worldwide. But does he have any power to protect California’s economy if Trump goes through with them?

Defiance without a plan

His response was swift and forceful, one of the first from a Democratic governor with national ambitions: California “will not sit idly by during Trump’s tariff war,” Newsom said Friday, as markets tumbled over Trump’s new policy.

Trump walked back his most dramatic threats on Wednesday, eliminating new tariffs on many countries for 90 days and substantially lowering others, including those targeting major trading partners like South Korea, Vietnam and Japan. But a tariff rate of 10% remains on many allies — and the president said he would place 125% import duties on all products from China, the third-largest U.S. trading partner.

Newsom now has some time to plan ahead, negotiate directly with global trading partners, launch bilateral negotiations and dispatch trade missions abroad. It is possible those efforts will have positive effects at the margins should Trump proceed with rate hikes: In previous tariff battles with Trump, Canada and the European Union, for example, trained their sights specifically on red states for retaliation.

But economists are skeptical that Newsom’s overtures will meaningfully protect Californian businesses and consumers from the potential fallout, especially as U.S. and California companies brace for impact from a full-on trade war with Beijing.

California industries in the crosshairs

Newsom’s immediate problem is that the value of California’s biggest industries — agriculture, digital, tech and entertainment — is precisely what makes them such tempting targets for trading partners seeking to retaliate against Trump in ways that will hurt.

Newsom said he would make direct appeals to those partners, like China and the European Union, hoping to “exclude California-made products from retaliation.” But the breadth of Trump’s trade war will make it hard to implement such exemptions. To the contrary, Chinese bloggers affiliated with the state are talking about Beijing specifically targeting Hollywood. And before Trump hit pause, French officials had urged their EU counterparts to target digital and streaming services if their negotiations with the Trump administration fail by the end of the month.

Regardless of how foreign countries proceed, Newsom would have little power to alleviate first-order impacts from Trump’s import duties on California manufacturers and farmers, who rely on inputs from abroad to sustain their businesses, from agricultural ingredients to iPhone components. Every California business with a remotely diversified supply chain would face rising costs outside of the governor’s control.

“Newsom can certainly try to seek protection from retaliatory tariffs for goods and services emanating from California,” said Kenneth Rogoff, a prominent economist and professor at Harvard, but “it is not obvious what he can offer sovereign countries in return.”

Economists are skeptical

Chris Thornberg, founding partner of Beacon Economics and former director of the UC Riverside School of Business Center for Economic Forecasting and Development, said Newsom can do “very little” to insulate California from a potential trade war.

“According to the Constitution, the Feds have complete control over foreign relations and the borders. That was true when Texas tried to close their border to the immigrants coming from Mexico as it is when Newsom tries to open our borders to foreign exporters,” Thornberg said.

“This is as much about the price of capital as it is the price of goods — a falling dollar means higher interest rates,” he added. “Nothing Gavin can do to protect us from that.”

Newsom could try to roll back California-specific import regulations, hoping to make the California market more attractive to foreign businesses. But that will only do so much to help the state when those foreign businesses still face historic federal duties.

“States have substantial control over certain goods, like wine, for special historical reasons. For other goods, he can make California regulation less onerous for say, car imports,” Rogoff said. “Otherwise, his ability to bypass Trump’s tariffs is very limited.”

If Trump were to proceed with global tariffs this summer, the new rates are also expected to negatively affect tourism to the United States, where California is the top destination. Already, flight bookings from Canada are down nearly 70% from where they were last year.

A slippery slope

Stan Veuger, a senior fellow in economic policy studies at the American Enterprise Institute and a frequent visiting lecturer at Harvard, called Newsom’s plan “entirely unrealistic.”

“California cannot sign trade agreements or exempt certain products or industries from the new tariff regime,” Veuger said. “I suppose California’s state government could compensate households, firms, and industries for the tariffs. But that would require raising other taxes to continue to meet the state balanced-budget requirement — the distributional implications will depend on the offsetting tax increases, and it is by construction impossible to make everyone as well off as they were in the status quo ante.”

In the unlikely event that Newsom were to try to compensate for the federal policy, Veuger said, California would face difficult questions over what constitutes a California business. Companies out of state would likely attempt to benefit from the policy, ballooning the costs of any state program. And the transnational nature of California’s biggest companies would put an impossible burden on Sacramento.

“Imagine the EU retaliates with a digital device tax on the EU revenues of certain tech firms,” Veuger said. “Would California compensate Facebook for that?”

Daniel J. B. Mitchell, an expert on California’s economy and professor emeritus at UCLA, echoed Veuger’s concerns and said that Newsom’s options are “very limited.”

“In some cases, where a product is made in California, but with inputs from other states, it might be difficult to define what a California product is,” Mitchell said. “It could be easier for agricultural products grown in California. But the governor could not offer some kind of tariff reciprocation for such special treatment.”

A political opening

Newsom may have limited authority to respond to Trump’s trade war — but the potential economic crisis has already presented the California governor with a goldmine of political opportunities.

Democrats struggled for months to respond to a fire hose of developments out of the Trump administration. They now appear to be settling on a message, that Trump has abandoned a core campaign promise to lower prices and responsibly steward the economy.

Goldman Sachs, JP Morgan Chase and BlackRock all warned in the past week of a weakening economy, rising inflation and increased risks of recession as a result of the new tariff policy. It remains unclear how their projections will change now that Trump has hit pause on much of his plan. But Newsom’s initial reaction — to respond with resistance — was yet another sign of his intentions to stand out as a national Democratic figure.

He is not the only Democrat seeking that mantle. Gov. JB Pritzker of Illinois, another potential candidate for president in 2028, returned from Mexico on a trade mission just this week.

“He basically shot the U.S. economy in the foot, and we’re now all going to suffer from this,” Pritzker said in an interview with MSNBC, before Trump reversed course. “It’s exactly the opposite of what his voters voted for, and I think it’s important for us to point this out to people.”

“People are now beginning to see, as prices are going up for the things that they care about,” he added, “they’re voting against Republican candidates across the board.”

What else you should be reading

The must-read: Trump tariffs are another nail in the coffin for Hollywood in China
The deep dive: Trump threats do the unthinkable: transform Canadians into flag-waving, U.S.-booing patriots
The L.A. Times Special: From Bratz dolls to Krusty the Clown: How Trump tariffs are hurting L.A. toy makers

More to come,
Michael Wilner

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