If the recent trend in the US stock market is any indication, there are straws in the wind that Trump will win. In October, the stocks owned by Trump, performed much better than the stocks listed in S&P 500. There is a perception that, because Trump is being funded by major corporations and is supported by White Protestants and Catholics, he is likely to succeed in this election.
Historically, the US business leaders have consistently supported Republicans. Between 2007 and 2017, 57 per cent of S&P 1500 companies contributed politically to the Republican Party, 19 per cent gave to the Democrats, and the rest split their contributions between the two parties.
In fact, big businesses support Trump’s plan to cut corporate taxes. More importantly, a few of the American corporate houses like the idea of Trump protecting them by imposing tariffs, especially on Chinese goods.
On the economic front, the US accuses China of unfair trade practices related to forced technology transfers and intellectual property theft. The business elites are supported by the political elites who are concerned that China is leveraging its newfound dominance in electronic exports for espionage, prompting the US to place leading Chinese firms like Huawei, ZTE Tech, on its trade restriction list in 2019.
The China bashing initiated during Trump’s presidency continued, with the US criticising China for human rights abuses in Xinjiang, the draconian security law in Hong Kong, its handling of Covid-19, and even taking steps to ban the social media app TikTok.
Post Covid, the US trades more goods and services with the European Union, Canada, and Mexico than it does with China. Indeed, the views on banning Chinese tech firms are similar among Democrats and Republicans. The CHIPS Act 2024 prohibits US firms from expanding semicon manufacturing in China. Basic economic theory states that while the government generates revenue by imposing tariffs, it is the domestic consumers who ultimately bear the burden of those tariffs. A new paper from the Peterson Institute for International Economics finds that presidential candidate Trump’s proposed 10 per cent across-the-board tariffs and 60 per cent tariff on imports from China would cost the average American household around $1,700 a year.
Consumers hit
These tariffs could lead to increased prices for consumer goods, making it challenging for the Fed to meet its inflation target of 2 per cent. On tariffs, the difference between Democrats and Republicans lies in the extent of tariffs imposed, with Trump promising harsher measures if elected. Contrary to the popular rhetoric surrounding job creation, higher tariffs actually have a negative impact on domestic employment and income. A study finds that job losses from trade retaliation surpass job gains from tariff protection.
In 2019, the US exports to China supported 1.2 million jobs, while 197,000 people were employed by Chinese multinationals — both affected by tariff escalation. Another related study pointed out, the job losses due to cheap imports are significantly less than the benefits to the US consumers in terms of lower price and income generation.
What policymakers fail to understand is that in an age of globalization, trade has become increasingly fungible. To avoid US tariffs, Chinese manufacturers are now using Mexico as a backdoor. For the first time in two decades, Mexico has overtaken China as the largest exporter of goods to the US.
In 2023, US imports of Mexican goods totalled $475 billion, approximately $20 billion more than in 2022.
During the same period, US imports of Chinese goods amounted to $427 billion, about $10 billion less than the previous year.
An estimated $3.7 billion Chinese FDI flow came to Mexico in 2023, which is significantly higher with an average flow of $1.3 billion during the previous decade. Chinese companies are relocating their raw materials and manufacturing to Mexico to capitalize on the nearshoring trend, as Mexico is a partner country in the United States-Mexico-Canada Agreement (USMCA), formerly known as NAFTA. At least 30 Chinese firms now operate out of Mexico.
For example, Chinese car manufacturers BYD and Chery International are establishing operations in the country. Container traffic from China to Mexico has surged in recent years, with a 22 per cent increase in 2024 compared to the previous year.
In 2023, the increase was even more pronounced, at 33 per cent over 2022. The years 2022 and 2023 also marked the highest volumes of exports from Mexico to the US.
To take advantage of increasing volume of US-Mexico trade, freight companies like Uber Freights, Maersk Line, and DHL are setting up logistics and warehouse facilities on both side of the Mexico-US borders.
Bipolar world
Whatever the electoral outcome, the world is likely to become more bipolar, with China poised to gain economically. Protectionism and jingoism are likely to divert investment into a wasteful war economy, rather than towards more productive activities like addressing climate change.
According to Australia’s Lowy Institute, in 2001, the year China joined the World Trade Organization, over 80 per cent of countries with available data had a larger volume of trade with the US than with China.
By 2018, that figure had decreased to just over 30 per cent with two-thirds of countries (128 out of 190) trading more with China than with the US.
Over the last decade China has spent more than a trillion dollars in over 140 countries on infrastructure, thereby building an economic relationship.
High-speed railways in Indonesia, ports in Pakistan and Sri Lanka, bridges in Zambia, and intercontinental highways in Central Asia are all examples of how China is increasingly strengthening its economic and financial ties around the world.
A more protectionist US will only further alienate the US and its economy.
The writer is Professor, Mahindra University, Hyderabad