How China, India will navigate Trump’s bid for ‘tariffs, and tariffs alone’

During his first term, Trump initiated a trade war with China in 2018, imposing tariffs on $250 billion worth of Chinese goods. (AP file Photo/Rick Scuteri) (AP)
During his first term, Trump initiated a trade war with China in 2018, imposing tariffs on $250 billion worth of Chinese goods. (AP file Photo/Rick Scuteri) (AP)

Summary

US-China trade relations are fraught with tension. It could get worse in Trump’s second term, as he is keen to push the pedal on tariffs.

As Donald Trump returns as the US President on 20 January, the world will closely watch his trade policies. On 3 January, referring to a chart showing tariffs as a percentage of federal revenue, he posted on Twitter: “The Tariffs, and Tariffs alone, created this vast wealth for our Country." 

"Tariffs will pay off our debt and, MAKE AMERICA WEALTHY AGAIN!" he added.

Trade relations with China are already fraught with tension. In December, the outgoing Joe Biden administration imposed export controls on more Chinese companies and launched an investigation into China's semiconductor sector. China, in turn, announced a ban on exports of gallium, germanium, antimony and materials important to the electronics industry. Such acts of retribution could intensify under Trump, who had promised 10% tariffs on Chinese imports and threatened levies up to 60% during his election campaign.

During his first term, Trump initiated a trade war with China in 2018, imposing tariffs on $250 billion worth of Chinese goods, including steel, aluminium, solar panels and washing machines. China responded with retaliatory tariffs on $110 billion of US products, including agricultural products.

Between 2019 and 2023, US imports from China averaged $470 billion, lower than the $539 billion in 2018 and $505 billion in 2017. US exports to China, on the other hand, averaged $137 billion between 2019 and 2023, higher than its 2017 and 2018 numbers.

Globally, however, demand for Chinese exports has only been growing. China's trade surplus stood at $785 billion for the first 10 months of 2024, and was estimated to cross $950 billion by the year end, a new record. 

Also Read: Vivek Kaul: Trump’s tariffs won’t kill the dollar’s exorbitant privilege

Subsidy lever

While China's global trade has shown resilience, it recognises that a tariff war with the US will not help its economy. In a meeting with heads of financial institutions last month, Chinese President Xi Jinping said there would be no winners in tariff, trade and technology wars. For the US, it's not just about tariffs, it is also about investments. Many US businesses—including Elon Musk, an influential figure in the new Trump administration—have manufacturing plants in China. American businesses invested about $34 billion as foreign direct investment in China 2023, up 38% from their previous five-year average.

Also Read: The good, the bad and the uncertainty of the US economy under a Trump presidency

However, the US wants to increase its domestic capacities. It is investing heavily in domestic chip manufacturing to reduce reliance on Asian suppliers, and offering subsidies to TSMC and Samsung to build chip fabrication plants in America. Trump is expected to push harder on such domestic investments.

Rerouting concerns
A reason why additional US tariffs have not hurt China is its exports to other countries have picked up. For example, China’s exports to Vietnam stood at $138 billion in 2023, up 64% over 2018, when Trump imposed the tariffs. Similarly, its exports to Mexico jumped 85% to $81 billion in this period.

The US is concerned that China has been rerouting exports through these countries. Vietnam has a trade surplus of $105 billion with the US, up two-and-a-half times over 2018. Mexico became the biggest exporter to the US in 2023 for the first time in 20 years. In November, Trump said he would slap a 25% tariff on Mexico, too (along with China and Canada). The president-elect sees tariffs as a way to increase government revenue."

Also Read: Will the second Trump boom go bust?

Derisking benefits
India's concerns with the new administrations are currently around H-1B visas, which are primarily used by Indian software companies. If Trump's preference of tariffs as a tool to shore up federal revenues leads to universal tariffs, it could impact India, which had a trade surplus of $37 billion in 2023-24 with the US. The US is the only one among its top 10 trading partners with whom India has a surplus. Tariffs could hurt that.

However, American businesses see India positively, relative to China. As some of the large businesses move their operations out of China to diversify risks, a trend that started with the US-China trade wars in 2018, and intensified with covid-19, India could benefit. Total FDI received by India has been dropping since 2020-21, despite some high-profile investments. Meanwhile, India's dependence on Chinese goods has been increasing, despite its efforts to bring it down. Trump could move the needle a bit.

www.howindialives.com is a database and search engine for public data 

Also Read: Trump’s approach to trade could be disruptive without doing much for America and the world

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