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TOWARDS WHERE ARE THE COMPANIES AFFECTED BY THE TAXES IMPOSED BY THE USA? TO CHINA?

In January 2018, the Donald Trump government imposed tariffs on various essential inputs for the manufacturing industry. In July of the same year, he applied a tariff of 25% on various goods imported from China valued at 50,000 MDD.

The objective of taxes through tariffs is to protect national jobs and / or punish bad business practices such as: currency manipulation, massive export subsidies and fraudulent restrictions on imports or foreign investment. In the case of the measures taken by the Donald Trump government, the tariffs are intended to reduce the US trade deficit and discourage the consumption of imported goods, mainly Chinese. It goes without saying that the Chinese government imposed tariffs on US products in retaliation for the measures taken by that country.

The intention of the US government UU is to modify the commercial behavior of China. Logically, it is intended to be for the benefit of the manufacturing industry in the United States. However, the consequences of these policies are not benefiting Americans, as Trump expected.

The corporations established in China and that have been affected by the tariffs imposed by EE. UU They are redistributing their production chains to other Asian countries, but not to the United States. The Political Risks team found two fundamental motivations for this phenomenon: economic and geopolitical.

Economics

First, labor in the United States is more expensive than in many Asian countries. Chinese operations require, for the most part, labor-intensive inputs. While in the USA UU., Labor inputs are increasingly intensive in capital and technology.

Chinese production chains are, on an aggregate level, much more flexible in the short term. Those of the United States, on the other hand, are configured for the export of high-tech goods , which require much more specialized labor than that required for manufacturing jobs, which are the ones that Trump intends to protect.

Geopolitics

In recent years, US foreign policy has retreated. It is enough to see the unusual increase in military spending and the meetings with Asian ministers that Japan has had to realize the withdrawal of the Americans in Asia. Thus, EE. UU it is increasingly oblivious to the struggle to gain regional influence among the main economies and Asian powers.

For its part, China’s foreign policy has opened new channels, particularly in developing regions, in order to expand its project to create a new Silk Road . President Xi JinPing has proposed an investment project of more than one trillion dollars in infrastructure for the economic integration of all of Asia. The goal is to commercially link the Asian continent with the rest of the world under the leadership of China. The implementation of this project means reviving ancient trade routes west of the Asian giant.

Diversifying its trade to the west will allow China to stop relying on trade via the Pacific, a region of influence in the United States. In addition to the commercial benefits, this project of cultural expansion and capital to the west will benefit the Chinese influence in the region

Unlike what the Trump administration expected, the trade war is not causing China to give way. On the contrary, it is encouraging you to diversify your commercial activity and, thus, accelerate your plan for the creation of the New Silk Road .

CNN Business reported that this diversification is already happening. Of the companies affected by the commercial war, less than half are considering moving their operations out of China (of which, some have expressed their intention to move their operations to Mexico). Only 6% of the companies affected by the imposition of tariffs are considering moving their operations to the United States, according to this CNN article. 

Thus, we can see that the commercial policies of EE. UU they have effectively modified the behavior of some of the corporations that have operations in China, however, it has not been the one expected by President Trump. Like any measure that interweaves political interests with economic ones, the side effects are usually unexpected and invisible in the short term. In this case, US policies are benefiting other Asian countries and -tangencially- to Mexico. China gives incentives to consolidate the New Silk Road.

At Riesgos Políticos, SC, we can help your company establish effective mechanisms for risk management and crisis management to face geopolitical changes and changes in global trade.

Contact us at info@riesgospoliticos.com.mx .

Photo by wu yi on Unsplash

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