State of California Overtakes Japan to Become Fourth Largest Economy in the World

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California’s economy has officially overtaken Japan’s, becoming the fourth largest economy in the world, according to newly released data from the International Monetary Fund and the U.S. Bureau of Economic Analysis. In 2024, California’s nominal gross domestic product (GDP) reached $4.1 trillion, narrowly surpassing Japan’s $4.01 trillion. Governor Gavin Newsom quickly celebrated the milestone, declaring that “California isn’t just keeping pace with the world, we’re setting the pace.”

Only the United States, China, and Germany now stand ahead of California’s massive economic output. The state’s 6% GDP growth rate also outpaced those three nations in 2024. Fueled by tech innovation, strong real estate markets, a thriving finance sector, and massive agricultural and manufacturing bases, California has become a global economic engine.

At the national level, the state’s economy accounted for 14% of the entire U.S. GDP last year. Nearly $675 billion worth of goods flowed through California’s ports, and the state’s ties to major trading partners like Mexico, Canada, and China helped propel its ascent. However, the state’s title as 4th largest economy is now colliding with federal policy that could slow momentum just as the state reaches new heights.

Tariff Pressures Threaten California’s Status as 4th Largest Economy

Despite celebrating the achievement, Governor Newsom warned that California’s growth is at risk. He directly blamed President Donald Trump’s sweeping new tariffs for destabilizing trade relationships and inflating costs for consumers and businesses. Newsom even filed a lawsuit challenging the administration’s authority to impose the levies without congressional approval.

Trump’s tariff strategy includes a 10% levy on nearly all U.S. imports, with additional 25% penalties on goods from Canada and Mexico, and a steep 145% rate on many Chinese products. These tariffs are designed to stimulate domestic manufacturing, but they are also disrupting supply chains critical to California’s technology and agricultural sectors.

The situation creates a complex risk landscape for investors. California’s top industries such as technology, entertainment, agriculture, and manufacturing are all deeply embedded in global trade flows. Higher costs for imported goods, coupled with retaliatory tariffs from trading partners, could strain the state’s export economy. Newsom’s office claims that continued tariff escalation could shrink the broader U.S. economy by $100 billion annually, with a disproportionate impact on California.

Adding to the pressure, Japan’s recent economic struggles stem largely from demographic issues like an aging population and shrinking workforce. By contrast, California’s challenges are more policy-driven. If trade tensions worsen, the state’s record-breaking GDP might plateau or even shrink, which can lead to its status as 4th largest economy being short-lived.

What Investors Should Watch as California’s Growth Faces Headwinds

While California’s new status as the fourth largest economy is impressive, investors should look beyond the headline. Growth sustainability now hinges on how long California can insulate itself from global trade disruption and domestic regulatory shifts. Lawsuits against federal tariffs may gain traction, but even short-term instability could damage business confidence and investment.

Technology firms and agriculture exporters remain particularly vulnerable to higher input costs and trade retaliation. Rising inflationary pressure in consumer goods and reduced foreign demand for exports could slow growth faster than anticipated. At the same time, sustained innovation and strong in-state demand may help California weather part of the storm if global conditions deteriorate.

For now, California’s rank as 4th largest economy is secure. However, the path forward is fraught with uncertainty tied to federal trade and economic policy decisions. Investors should closely monitor trade negotiations, supply chain shifts, and upcoming court battles over executive authority. In a volatile environment, even the world’s largest economies are not immune to sudden change.

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