China’s pain on trade with the US will fast become Mexico, India and Southeast Asia’s gain

China’s position as top US trade partner and largest source of American imports may be over as other economies gain from Beijing’s tariff troubles. Mexico and countries across Southeast Asia have already seen their percentage of US imports rise as China’s declines. This change will only accelerate as the trade war continues, and as of now there’s little reason to think it won’t go on for an extended period. If US President Donald Trump raises tariffs on all Chinese imports, as he’s threatened to do, bilateral trade may never be the same.

Shifting trends are already showing up in the trade data. While China continues to be a top source of US imports, sales in the first quarter of 2019 have dropped 14 per cent to US$106 billion from US$123 billion during the same three-month period last year, according to US Census data. This is despite the US dollar strengthening against the Chinese yuan, making Chinese imports even cheaper. Mexico, the No 2 source of US imports, had the largest quarterly gains.

Over the past decade, Chinese manufacturers have also lost market share in four out of its seven top US sectors, including computers, apparel, toys and furniture. Mexico’s share of the lucrative US computer segment grew to 32 per cent in 2018, from only 21 per cent in 2010. The recently negotiated US-Mexico-Canada trade agreement gives Mexican firms an even stronger advantage after Trump raised tariffs on Chinese imports.

Countries throughout Southeast Asia have also increased their market share in other top China categories. Vietnam has tripled its sales of apparel and textiles (non-wool or cotton) to nearly US$7 billion from US$2.25 billion in 2010. Taiwan, the Philippines, Thailand and Vietnam are also gaining on Chinese firms’ sales of computer accessories.

Chinese firms still account for half of all US imports of computer accessories, but other competitors are picking up significant market share. Collectively Taiwan, the Philippines, Thailand, Vietnam, and Mexico captured 28 per cent of this US import sector, up from 15 per cent at the beginning of the decade.

These increases occurred despite Trump abandoning the Trans-Pacific Partnership, an agreement meant to eliminate tariffs among participating countries, which would have accelerated imports from Vietnam even faster.

India, too, is uniquely positioned to reap the benefits of shifting supply chains and its growing domestic market. According to the International Monetary Fund, India is already the fastest-growing major economy in the world and is expected to hit nearly 8 per cent in 2024, up from 7.1 per cent in 2018.

Gems have dominated exports to the US, but several Indian states, including Andhra Pradesh, in southeast India, are now home to mobile phone manufacturing plants. India’s cellphone exports to the US remain extremely small at present, but increases in capacity, rising skill levels and comparably lower wage costs that supply the booming domestic market may support export-oriented growth in the future.

India’s infrastructure projects are also expanding, providing US companies facing difficulties in China with new opportunities. Several cities are being built from the ground up, including Amaravati, the recently established capital of Andhra Pradesh. These projects feature green architecture, smart city technology, alternative energy and large-scale construction of residential and commercial buildings. The World Economic Forum estimates that the automotive and electronics industries in the state alone could present a US$5 billion opportunity.

The capital is one of several new developments in the world’s second most populous country and is emblematic of India’s economic rise as China’s own infrastructure spending comes under pressure. That’s good news for US construction equipment makers that have been caught up in China’s latest US$60 billion of retaliatory tariffs.

Difficulties, of course, litter the road to India becoming a global economic powerhouse. Fractious domestic politics, something single-party China has largely avoided, hobbled India’s potential for decades. Ports, road, rail and power currently lag more developed economies in the region. And the Trump administration has targeted India’s excessive tariffs on many US goods, opening up a possible new front in what is becoming his global war on trade.

Support for economic reform is being fostered by the US business community in India. In marked contrast, the business community in China, a long-time buffer to Washington trade hawks, have begun to sour on Beijing’s promises of change.

The American Chamber of Commerce in China noted in its 2019 report that for the first time US business sentiment has turned from “cautiously optimistic” to “cautiously pessimistic”. That’s a sea change from years of rosy-viewed survey results.

For years they avoided confrontation over policies favouring Chinese domestic companies and forced technology transfer. They accepted short-term losses with the hopes of even greater profits in the future, all while dissuading the US government from more forcefully confronting China. Some now privately support Trump’s efforts to forge a more level playing field, though opposition to tariffs as the tool remains.

Domestic changes to China’s economy also make reclaiming lost market share among US imports increasingly difficult. Central planners in Beijing readily accepted that higher domestic wages would force low-end manufacturing out of the country. Those jobs left and won’t be returning, much as they did for Japan, South Korea and Taiwan, which no longer make the vast majority of plastic toys and clothing for export.

Even for China’s industries of the future, carving out a sustainable portion of US imports will be difficult. Distrust over expansive intellectual property theft will remain a concern over Chinese hi-tech products like networking equipment, artificial intelligence and biotechnology, the principal areas targeted for future growth.

What the tariff fight now represents is a fundamental shift in the trading relationship. China’s pain is a gain for other countries eager to fill the import gap. This shift may turn into a structural change that will be extremely difficult to reverse. As threats rise from both sides of the Pacific, it may already be too late.

Brian P. Klein, a former US diplomat, is the founder and CEO of Decision Analytics, a NYC-based strategic advisory and political risk firm