Despite electing a president who trades on anti-China rhetoric, Republican states in the US have the most to lose from deteriorated relations with China.
Little Rock, Arkansas, is no stranger to Chinese investment. In early 2017, a delegation of businessmen from Tian Yuan Garments announced the construction of a $20m t-shirt factory, hiring 400 people. Billed as the first Chinese company to manufacture clothing in the US, the Governor of Arkansas Asa Hutchinson said: “We welcome textile jobs back to Arkansas.”
Like many other ‘Republican’ states that voted for Trump in 2016, Arkansas lost dozens of manufacturers in the 1980s and 1990s due to competition from low-wage workers overseas. The state’s textiles and clothing factories employed 10,000 people in 1998; a decade later, there were only 2,000, according to Census Bureau figures.
Ironically, many of these jobs were lost to China. How the tables have turned. Tian Yuan Garments is just one of many Chinese companies that have created jobs in Arkansas in recent years, and its project was a modest one.
Chinese foreign direct investment (FDI) to the US has grown exponentially since the 1990s. After the global financial crisis, it went on nothing short of a spending spree, culminating in 2016 with an all-time high of $46bn of capital expenditure within the 12 months.
Of this wave, Republican states have been the main beneficiaries.
Republican states need Chinese investment most
Overall, more US states run an FDI deficit with China than the other way around – or rather, they invest more in the country than they receive from it.
However, a recent report from Rhodium Group shows that of the 14 states that have an FDI surplus with China – those that receive more from the country than they invest in it – nine are states that voted for Donald Trump in the 2016 presidential election.
While these parts of the US may rail against China’s trade imbalance with the US, they are guilty of the same with regards to FDI.
Kentucky leads with the highest deficit, having received a total of $9.3bn in Chinese FDI in the period from 1990 to June 2020, while only investing $1.7bn into China. It is followed by Kansas ($4.7bn incoming and $1.8bn outgoing); Oklahoma ($3.7bn incoming and $929.5m outgoing); and South Carolina ($1.8bn incoming and $295m outgoing). The remaining five Republican states to have an FDI surplus with China are Alabama, Wyoming, Louisiana, West Virginia and Mississippi.
It is no coincidence that the aforementioned nine states are among those with the lowest median incomes in the US, according to data from the US Census Bureau. As they make up the weaker parts of the US economy, they are home to fewer multinational companies investing in China and are more dependent on foreign investment and trade in general, but especially from China.
Although many of these states suffered from globalisation when manufacturing shifted east in the 1980s, they are now the ones that arguably benefit from it the most. Voting for Trump, the world’s most powerful anti-globalist, could therefore be seen as an act of self-harm.
“One reasonable interpretation is that [Trump supporters] in those states understand the personal ramifications but are not dissuaded from voting for Trump because they are not single-issue [i.e. China] voters, or because they view the costs of decoupling from China as acceptable given other objectives,” says Rhodium associate director Adam Lysenko.
“But I don’t think things are quite that rational or intentional, and it will be interesting to see where votes shift in 2020 now that the personal implications of Trump’s China positioning are more obvious to voters,” he adds.
Republican state exports have suffered
The “personal implications” of Trump’s trade war have most certainly been felt by Republican states, but China is a very significant business partner for both blue and red states.
Some of the key goods traded between Republican states and China have been hit hardest by tariffs, according to data from the US Census Bureau (see charts below). For example, oilseeds and grains – including crops such as soybeans – have dropped from an average of export value of $8.5bn a year between 2012 and 2016, to a post-Trump average of $4.4bn between 2017 and 2019.
Retaliatory Chinese tariffs have pummelled US agricultural commodity sales, especially soybeans, which have become something of a symbol of the US-China breakdown.
One might wonder whether such losses will drive voters in those states away from voting Trump again.
“Business provides a pragmatic elixir that can serve as an antidote to toxic politics,” says Doug Barry, senior director of communications and publications at the US-China Business Council. “Farmers in red states are globalists, mainly because one-third of the protein they produce can’t be consumed in the US.
“Whether it is dairy, meat or alfalfa, farmers want to sell it – and China has been an excellent market for them,” he adds. “They are generally hostile to tariffs and to the trade war, which has badly hurt them. Yet their elected representatives, while pro-agriculture, are generally not pro-China. That is a paradox for which there is no easy solution; but the ballot box could play a role in November as farmers vote with their feet and ploughs.”
Although there is bipartisan support among Democrats and Republicans to ‘get tough on China,’ presidential candidate Joe Biden would find better ways of preserving the US’s economic openness, according to president of the National Committee on US China Relations Stephen Orlins. At the very least, inflammatory anti-China rhetoric would decrease.
On the other hand, Dr Yu Jie, a senior research fellow on China at UK-based think tank Chatham House, contends that voters in Republican states will follow their wallets.
“At the end of the day, the largest consumers for those American farmers are the Chinese,” she says. “Money makes the world go round. And honestly, whatever happens, they would prefer to have the consumer.”
She also concedes, however, that Trump is waging a charm offensive that casts his trade war in a very positive light.
“One of the most glaring aspects of the phase one trade deal is China’s promise to purchase a gigantic amount of agricultural products from the US,” she says. “I think that is part of the reason why Trump would like to use this deal to win the hearts and minds of American farmers.”
However, when it comes to the hearts and minds of US investors already in China, they seem unfazed. Indeed, Trump’s repatriate campaign has not produced significant material consequences from that part of the world.
The 2020 China Business Report by the American Chamber of Commerce in Shanghai (AmCham Shanghai), in collaboration with consultancy firm PwC, shows that US businesses in China continued to be profitable in 2019 amid the trade war.
Not only that, but as little as 3.7% of the 200 respondents surveyed are moving some production out of China to the US, while 70.6% showed no intention of shifting production out of China.
Richard Paullin, executive director at the International Trade Association of Greater Chicago, explains that while US companies are looking to diversify supply chains away from China by mostly going into other Asian countries or considering near-shoring to Mexico, leaving the country completely can be rather complicated.
“To legally extricate your China operations can take one to two years and is quite expensive,” he adds. “I know of a number of local companies who have literally frozen any decisions about the near to medium-term future. There is just too much Covid uncertainty.”
However, should the US-China trade war intensify, US companies may very well look to leave China en masse. Whoever is in charge of the White House will have a great deal of influence on this. Although the US elections could go either way, one thing is clear: Republican states will suffer the most from another four years of trade wars.
This article is part of a wider special New Statesman Media Group feature on the US-China decoupling. On Investment Monitor we have a feature on how FDI flows between the US and China are being affected by the trade war. In the New Statesman, Jeremy Cliffe examines the geopolitics of the situation, Emily Tamkin reports on its impact on the US election, and Ido Vock charts the social ties between the two countries. In Tech Monitor, Ed Targett reviews the growing impact this shift is having on technology supply chains.