International trade in goods is a little bit like water; it often flows around barriers put in its way.
You might think that putting high taxes, or tariffs, on goods exported from China in an effort to reduce U.S. purchases of Chinese goods would reduce our trade deficit by the same amount that our purchases from China fell.
And you also might think that companies producing goods in China — both American and foreign — would move their production to America in order to avoid the high tariffs.
But you would be wrong. The real world sometimes serves up surprising results.
American and foreign manufacturers making products in China won’t necessarily shift their production to America to leap over high tariffs at our border. Instead, they may well look for other nearby countries offering lower costs of production than we have in America.
Indeed, that is exactly what we see happening.
While tariffs imposed by President Donald Trump are beginning to reduce our trade deficit with China, other countries are filling the gap and are actually increasing their exports to America.
Vietnam and other Asian countries in particular have benefited from our trade war with China, as has Mexico. An analysis by the Financial Times newspaper showed that Vietnam’s trade surplus with America rose nearly 46% in the first three months of 2019 compared to the same period last year.
Vietnam also saw foreign direct investment into the country surge an astounding 81% over the same period, with new investment concentrated in processing and manufacturing — which will augment Vietnam’s manufacturing and export capacity even further.
Vietnam’s exports to America are increasing in the same product areas that have seen high tariffs imposed against Chinese exports.
Other Asian countries enjoying increased exports and larger trade surpluses with America include South Korea, Taiwan, Cambodia and Bangladesh. Their gain is China’s loss.
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Mexico, too, has sought to capitalize on America’s trade conflict with China by encouraging manufacturers to relocate their production facilities from China to Mexico, with some success. Mexico recently surpassed China as our largest trading partner.
Moreover, while the overall U.S. trade deficit in goods with all countries has fallen in recent months — a metric that Trump often uses to measure our prowess in trade — it has been accompanied by an overall reduction in exports as well as imports.
Foreign retaliation against a wide range of American goods, including agricultural products, is reducing U.S. exports and harming those businesses, farmers, and ranchers that depend on foreign markets for increased sales. And ironically, China is lowering its trade barriers for other countries’ exporters, even as it raises them against Americans.
The net result is that America is losing market share in China and other countries that have increased their trade barriers against U.S. exports. Reduced U.S. exports translates directly into reduced U.S. jobs and income from those exports.
And while the outcome of Trump’s trade skirmish with China and other countries remains unknown, the uncertainty generated by America’s rapidly shifting trade policies is discouraging foreigners from investing in our country.
Even though America remains the largest recipient of foreign direct investment — i.e., investment in plants, equipment, distribution centers, and other “bricks and mortar” outlets — foreigners reduced new investment in our country by 9% last year.
Compare that to Vietnam’s 81% increase. Other countries seeing large gains in foreign investment include Thailand, Bangladesh, India, Singapore and Indonesia.
Why does that matter? Because foreign investment, just like investments by American companies on American soil, creates jobs and increases the income of American workers — with benefits for the economy as a whole.
The bottom line is that in a world of highly mobile capital, in which countries compete on the basis of labor costs and other factors; and in which companies can fairly easily move production facilities, it can be very hard, if not impossible, to force a particular desired outcome in international trade and investment, as Trump is trying to do.
And while U.S. manufacturing jobs have increased recently — they’ve rebounded to levels last seen before the 2008 global financial crisis and recession — those jobs stem more from the overall strength of our economy and not from any shifting of manufacturing production from China to America.
China poses a unique and growing challenge to the rules-based international trade regime that America led the way in creating after World War II. Unfortunately for America and the world, Trump’s unilateral approach based mostly on border tariffs is unlikely to solve the problem.