Trumponomics was always a lie

A policy founded on Donald Trump's desire to be popular has done lasting damage to the world's largest economy.

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Voting data from the 2020 US presidential election shows that among the 35 per cent of American voters for whom the economy was the most pressing issue, 82 per cent voted for Donald Trump. Trump has long claimed (despite six Chapter 11 bankruptcies) to be a successful businessman. But for many voters it is likely that his attitude towards American businesses in general – his trade war against China, his opposition to globalisation, his crusade to “bring jobs home” – made him the more appealing economic candidate.

These voters were misled. Trump’s aggressive protectionism masked a failure to address the deep internal divisions in the US economy, which left many of his own voters in a worse economic position than they had been before.

In the summer of 2018, President Trump announced significantly higher tariffs on $16bn of Chinese imports. A week later, China’s ambassador to the US went for dinner at the mansion of Matt Bevin, Kentucky’s staunchly pro-Trump governor.

Bevin lavished praise on US-Chinese relations, downplayed the trade war and told reporters he had no control over national trade policy. “What I do have control over [are]... the connections that we make at [a] subnational level,” he said.

Seven days later, a Chinese company announced the purchase of a shuttered Kentucky paper mill, in a $150m investment that would hire 500 people. With this, Bevin doubled down on his charm offensive.

At a press conference hailing a 2019 Kentucky business mission to China, he strung off ancient Chinese idioms and explained how, at a time of global uncertainty, Kentucky was a safe place for Chinese investment. No mention was made of Trump’s outstanding contribution to said uncertainty.

In a paradoxical state of affairs, many other Republican governors have also scrambled to wine and dine Chinese investors while Trump went about pushing US-Chinese relations to historic lows, “decoupling” 40 years of economic integration, tweet by tweet.

The anti-globalist rage that launched Trump to power is not unfounded. Red states such as Kentucky have lost tens of thousands of manufacturing jobs to China since the 1980s. But China has also, via globalisation, brought thousands of jobs back to these parts of the US in the past decade.

In Kentucky alone, 11 Chinese companies employ almost 9,000 people according to data (from mid-2019) gathered by the state’s Cabinet for Economic Development. More generally, trade and investment with China supports between three and seven million US jobs, depending on what methodology is used, according to the US-China Business Council.

“Americans have historically taken foreign direct investment for granted,” said Aaron Brickman, executive vice-president of the Global Business Alliance, a trade association that represents the interests of foreign investors in the US. “Global companies are integral to the US economy in terms of jobs, high salaries and innovation. We can't risk losing that.”

[See also: Emily Tamkin on why a Joe Biden win is unlikely to improve US-China relations]

Kentucky has the US's highest surplus of foreign direct investment with China, meaning it invests less in China than it receives from it. Between 1990 and 2020, Kentucky welcomed a total of $9.3bn in Chinese investment, while only investing $1.7bn in return, according to data from Rhodium Group.

While Trump encouraged Kentuckians to rail against China’s trade deficit with the US, many of the states that voted for him benefited from an investment surplus that flowed in the opposite direction. Of the 14 states that have a surplus of foreign direct investment with China, nine voted for Trump in the 2016 presidential election.

It is no coincidence that these states are among the US states with the lowest median incomes, according to data from the US Census Bureau. Being economically weaker than other parts of the US economy, they are home to fewer multinational companies, and are therefore more dependent on foreign investment and trade in general – especially from China.

 

While these Red states suffered greatly from globalisation when manufacturing shifted east, they now benefit disproportionately from it. To vote for Trump, the world’s most vocal anti-globalist, has been nothing less than an act of economic self-harm.

Analysis by Investment Monitor shows that some of the key goods traded between Republican states and China, such as grain, have been hit hardest by the trade war’s tit-for-tat tariffs.

 

The economic fallout of Trump’s trade war has been very real. Since Trump took office, Chinese foreign direct investment to the US has decreased to its lowest in almost a decade.

“Chinese investors and tourists don’t want to go to the US. They’ve seen how companies like Huawei have been treated, and have heard Trump’s rhetoric suggesting how all Chinese businesses and individuals are spying on behalf of the Communist Party,” said Yu Jie, a senior research fellow on China at Chatham House.

This forms part of a wider trend. Over the past five years, as Trump and other anti-globalist populists came to power, foreign direct investment around the world has severely decreased.

 

Sun Xinhua, an economic and commercial attaché at the Chinese Embassy in France, said the US must “avoid treating international trade and investment as a zero-sum game”.

China, too, has put its own interests ahead of those of the international community, but Trump’s actions have been especially damaging. He has sought to reap the rewards of globalisation – trade and investment – through weapons that simultaneously destroy globalisation, such as tariffs, without seeming to realise that the two are interdependent.

In Trump’s world, no economic factor is above his media strategy. His claimed opposition to globalisation is more important than that much of his personal wealth is delivered by globalisation. His supporters wear ‘Make America Great Again’ hats that are made in China.

US dominance over the global economy has allowed Trump to “get away” with such hypocritical protectionism, said Sultan Salem, a lecturer in economics at the University of Birmingham. But the US has not escaped the consequences of these actions.

“There are real losses to the US from pursuing wantonly protectionist policy. An open, globalised America is what made the US and its dollar so powerful in the first place,” said Max Hess, head of political risk at Hawthorn Advisors.

Central to Trump’s “America first” philosophy has been bringing manufacturing jobs back to the US, known as “reshoring”. But this has done little to draw US manufacturers, especially those already established in China, home. Data from Panjiva, an arm of S&P Global that tracks supply-chain movements, shows that the main winner of the trade war has not been the US but south-east Asia, particularly Vietnam.

A recent report from Bloomberg shows that Trump failed to stop factories from offshoring. One of the companies moving production out of the US this year is an auto-parts business founded by Trump’s Commerce Secretary, Wilbur Ross – an illustration of the Trump administration’s endemic hypocrisy.

Nor has Trump had much success in attracting foreign manufacturers. Foxconn’s multibillion dollar investment in Wisconsin, announced in 2017, was meant to be one of his great victories, generating 13,000 new jobs in high-tech manufacturing. It has created fewer than 300 so far.

But the greatest shortcoming of Trumponomics is its failure to recognise the real problems in the US economy.

Firstly, explained Alexis Crow, who leads the geopolitical investing practice at PwC, it uses a decades-old idea of American economic progress: “The trade war has focused on the goods deficit, a part of America's economy that grew rapidly in the 1950s. Today, it's the US’s export of services that are the growth engine.”

This move from old to new economic growth has produced sharply growing inequality within advanced economies. Bolstered by educational inequality and automation, some Americans have become very wealthy while others have been “left behind“.

Trumponomics ignored this central truth of the US economy, disregarded its possible treatments – which Crow summarises as “large-scale investments into education, job creation and vocational training” – and laid the blame for the hollowing-out of the American middle class solely on the globalisation of labour markets. For a politician who built his career on sowing racial division, the idea that Chinese people have taken American jobs was a vote-winner. But those votes came at the cost of American businesses, and the toll incurred will take many years to pay off.

[See also: Jeremy Cliffe introduces an NS special on US-China decoupling]

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