Trump’s 2024 Tariff Proposal: Winners, Losers and Shifts in Global Trade

The trade stand-off between the world’s two largest economies began more than a decade ago. The United States, at the time, had just witnessed China’s accession to the rank of second-largest economy. Barack Obama, in a bid to preserve US economic interests in Asia, signed the Trans-Pacific Partnership (TPP). The TPP was a free-trade deal covering North-America and several countries such as Japan, Vietnam, Singapore, Malaysia, Oceania and others (China, of course, was not included).

The US eventually pulled out of the deal once Donald Trump took the reins, but the tensions intensified and culminated in the form of tariffs on Chinese steel, aluminum, electronics, solar panels and various other goods, affecting more than $380 billion of imports and amounting to nearly $80 billion of tax increases. This was to be expected, given Trump’s outspoken animosity of China (heard through his countless jibes at either the country, the CCP or Xi Jinping himself). Joe Biden did not reverse these tariffs but rather increased them, imposing higher tariffs on semiconductors, EVs, batteries and other goods (granted, this round of tariffs only affected $18 billion worth of goods).

Donald Trump’s agenda if he is re-elected includes 10% tariffs on all foreign-made goods combined with 60% tariffs on all Chinese imports. These are on top of tariffs already imposed in the last 8 years. The goal of these tariffs is two-fold, firstly, to weaken the Chinese economy (experts suggests that the shock could initially bring down the growth of the Chinese economy by half); and, secondly, to counterbalance the fiscal deficit caused by individual income tax cuts (another promise of the Trump 2024 campaign). Some economists and financial experts have voiced their concern about the soundness of such a plan, with Goldman Sachs forecasting a 1.1% increase in inflation growth rate combined with a 0.5% decrease in next year’s GDP. The true potential effects on the US economy are yet to be fully ascertained, but here let’s focus on the global impacts, the beneficiaries and the main losers.

Winners:

1) Mexico, Indonesia, Vietnam, Morocco and Brazil:

Anticipating direct trade sanctions, China has in recent years set up gigantic industrial complexes in a few intermediary countries to bypass potential tariffs: such countries include Mexico, Indonesia, Vietnam, Morocco, and Brazil. The first four of these were singled out by Bloomberg as “connector” countries of global trade (Brazil misses out due to its distance to both the US and China, and due to its relatively more expensive workforce). China’s objective in picking these countries is to achieve market penetration into western markets while both avoiding direct sanctions and benefitting from advantages of commercial partnership with the EU/US. For instance, both Morocco and Mexico have free-trade agreements with the United States as well as a cheaper workforce. Brazil currently enjoys some exemptions from sanctions. What’s the common link between the three countries? They all are automotive powerhouses (Brazil and Mexico were established giants for many years while Morocco has recently become the largest car producer in Africa and is aiming for 1.4 million cars annually by 2027). China is betting on EVs, EV batteries and component factories in these countries. The equation is simple: any EV sold to the US from Mexico and to the EU from Morocco will qualify for IRA/EU Green Deal benefits. As for Vietnam and Indonesia, the US could offer preferential treatment as it must carefully tread their relationship with the two. There are after all, great benefits to have partners in the South China Sea and the Strait of Malacca, two key chokepoints of China’s maritime trade.

Obviously, this would be different (especially for Mexico and Brazil) should the GOP decide on a clause targeting China’s use of “third countries”. But as of now, and until any changes to the initial proposed policy, these countries can be seen as winners.

2) Traditional US allies with FTAs:

Other winners include traditional economic partners with FTAs that have been historically much closer economically to the US than China, and would more easily distance themselves from China to obtain preferential treatment from Washington. These include Canada, Australia and Panama. This has already happened in 2018, when Canada became an important supplier of minerals to the US following Donald Trump’s first wave of tariffs aimed at China.

3) High-growth African countries (but not all):

For reasons explained below in the “losers” section, China is set to face an issue of oversupply with sluggish growth in demand from its traditional partners. Stimulating demand requires time and China is likely to look at countries in Africa as the continent is the fastest growing in both population and GDP. However, looking at GDP and population alone won’t give the full picture. Some countries have seen these numbers grow yet it did not translate in significant increase in imports. This can be due to a combination of various factors from political instability (i.e: Somalia, Sudan), geographical isolation and inability to access ports (i.e: Sahel countries), severe inflation (i.e: Angola, Egypt), mismanagement (i.e: Botswana), etc. With that in mind, when looking at GDP growth, population growth, and imports growth altogether, we can identify three African countries with potential for importing more Chinese goods: Nigeria, DR Congo and Madagascar. This logic follows a causality between population and GDP growth with import growth.

Losers:

1) China:

China obviously stands to lose the most. The first wave of tariffs in 2018 targeted solar panels, kitchen electronics, and various metals. China retaliated but suffered. Its suffering though didn’t last more than a couple of years as the COVID-19 pandemic drove up consumer demand worldwide for electronics and other home goods, effectively reversing the damage of the past two years. This time, on the back of already decelerating growth, China stands to see its next GDP growth numbers halved. But the brunt of impact could take a few years to show: Obviously the logical reaction of Beijing would be to re-route some of its exports to other countries. But there are two obstacles with this:

-    Rerouting major export lines involves finding new demand in other countries, which takes several years to stimulate, especially for non-technology goods. China could offer a discount but then comes up against the second obstacle:

-    One main driver causing China’s recent economic slump has been the stubborn housing crisis: Facing an overpriced housing market (more expensive than any US or European city relative to median household income), the CCP imposed debt limits in 2020. The effect was a historical drop in prices, causing equity to shrink to dangerously low levels versus debt, leading to economy-wide distress. How that relates to trade is that this issue is forcing Chinese households to focus on paying down their mortgages thus dragging down domestic demand and pushing China to export even further to compensate.

Because of these two reasons, China faces pressure to export more and to partners outside of the US, which, would take a long time and would leave Beijing with a mountain of unsold goods at the onset.

2) The EU and the UK:

The European Union stands to lose from another Trump presidency. Divergent views of foreign policy, especially regarding Gaza and Ukraine are stretching the union. A Trump2.0 foreign policy will likely exacerbate the current situation. On the trade side, we’ve already seen a trade face-off between the two blocs in 2018, when the United States imposed tariffs on steel and aluminum on the EU, the latter retaliating by imposing tariffs on certain US goods (a memorable example being Harley Davidson motorcycles, leading the manufacturer to have to relocate abroad to keep its operating expenses from rising).

3) The United States:

The US economy is also likely to suffer. Tariffs on China have always proven to be a double-edged sword and the US economy stands to suffer from two sources: the initial squeeze in corporate profits and subsequent wave of layoffs and drop in consumer confidence; and the inevitable retaliation from Beijing. So why would the GOP bet on this? It is likely that the main goal, while in a spirit of local economic protectionism, is more rooted in protecting US offshore economic interests. As mentioned before, the US must keep a steady influence on the countries bordering key Chinese maritime routes, the Strait of Malacca being one, but also equally any country part of the Belt and Road initiative which could be swayed.

The Bottom Line:

Ultimately the China tariffs don’t help either side (although he US is set to lose “less”) and instead benefit those countries connecting the two blocks. Retaliation is of course expected but the level and nature of which is uncertain. What is common in most economists’ consensus however is that such tariffs will inevitably cause inflation to rise in the United States. All these are, of course, expected, but it is likely that Donald Trump is betting on this program hurting China more than the US economy. It could be a case of picking the “less worse” poison.