Swing States and Trade Tactics in 2020

By:  Jay Foraker and Ilan Solot

Whether we have reached peak globalization or not, US trade policy in general – and protectionism in particular – should continue to be a source of volatility and opportunity for investors in years to come.  Strategically, we view trade conflict as but one theater in a broader geopolitical rebalancing, with implications for domestic and international markets.  Tactically, short-term electoral priorities this year – followed by the lack thereof in 2021 – will motivate and constrain Congress and the President.

In short, we have three main takeaways from our analysis:

(1) While relatively small in GDP terms, the export sector of Swing States is big enough to matter in the 2020 elections.  This confirms the view that Trump will be more restrained in trade policy this year, a risk positive factor.

(2) The EU is a far larger destination for exports from Swing States than China. This suggest a smaller near-term risk for US-EU trade conflict, and clear outlook for tariff-threatened sectors such as EU automobiles. Even if smaller, China is important enough to matter, especially if the voting margins are as narrow as they were in 2016. Specific sectors within these states, such as agriculture, minerals and automobiles, have concentrated export exposure to China.

(3) Conversely, the EU and China have a degree of leverage over trade negotiations with the U.S. this year that they will not have again until the next electoral cycle. This is not to say that they will use the leverage, but once the electoral guardrails on the Administration come off in 2021, they will be in a weaker negotiating position.

The table below presents a high-level overview of the international trade orientation of the 10 Swing States. Note that we define “Swing States” as the 10 states won by a 5% margin or smaller in 2016.  Together they command 130 Electoral Votes, just 5 shy of half of the 270 needed to win the 2020 election.

 

Swing states have a relatively low export to GDP ratio, but enough to matter.  Only Michigan, with 11% export/GDP, is at the national average; most other swing states have about half of that.  That said, Trump’s margin of victory in 2016 was so slim that even the relatively small number of jobs directly linked to the export sector in these states could make a difference.  For example:

  • Wisconsin: Trump won by 23K votes; the export sector supports 111K jobs.
  • Michigan: Trump won by 11K votes; the export sector supports 271K jobs.
  • Pennsylvania: Trump won by 44K votes; the export sector supports 177K jobs.

 

The biggest trading partners of most swing states are Mexico and Canada.  Unsurprisingly, USMCA/NAFTA 2.0 was passed with relative ease and we don’t expect any friction on this front.  Only one Swing State Senator (Pat Toomey, R-PA) voted against final passage of the USMCA in January 2020.[1]

The EU is also an important export destination for many Swing States. Data released last week indicates that America’s trade deficit with China shrunk 18% during 2019, while the trade deficit with the EU reached an all-time high.[2]  The EU (UK included) is the largest export destination for New Hampshire and second largest (after the NAFTA countries) for the nine other Swing States.  This means that the administration will probably tread lightly in dealing with the EU this year. For example, it may raise questions about the credibility of Trump’s threat to levy tariffs on the region’s auto sector in response to threats over the Digital Tax and Carbon Tax.  But it may also mean a higher risk of escalation next year when the administration – whoever holds the White House – is not constrained by immediate electoral concerns.

China is an important destination for exports from many Swing States, but it’s far more important in terms of imports.  Imports were six times larger than exports ($54 bln of imports, versus $9 bln of exports in 2018), according to U.S. Census data.  This is consistent with the overall pattern for all 50 states, whose 2018 imports totaled $539 bln, while exports to China were $120 bln.

Exports to China: Nevada, New Hampshire and Minnesota are the Swing States most exposed to potential loss of export markets in China, while Colorado, Florida and Pennsylvania are the least exposed.  Export sectors most exposed are minerals and agriculture.

  • The state with the most concentrated single sector of exports to China is Michigan, whose automotive industry accounts for nearly all of its $2.1 bln in exports to China.
  • Minerals are another significant export sector to China, specifically coal and non-ferrous metals from Pennsylvania and metal ores from Nevada.
  • Expanding Agriculture exports to China under the Phase One deal protects Trump’s electoral flank, in that most large agricultural exporting states are safely in the GOP’s electoral column. That said, wood/timber exports are significant exports of North Carolina and Pennsylvania to China; while the Oilseeds and Grains (i.e. Soybeans) sector accounts for the largest group of agricultural exports to China from Wisconsin and Minnesota.

Were China to seek to strategically curb US exports of these sectors, its leverage over the economies of this limited number of states would be meaningful.

Imports from China:  Of the 10 Swing States, Nevada, Minnesota and Wisconsin are the most exposed, while Colorado, Arizona and New Hampshire are the least exposed.  Imports from China are highly concentrated in just three sectors:  Technology Products ($21.0 bln), Consumer Goods ($18.4 bln), and Industrial Goods ($12.6 bln).

  • Nearly three-quarters of imports (or $39 bln) are comprised of computer, electronic and consumer goods, showing how entrenched China’s status as a manufacturing center for the U.S. market has become. That said, these goods are substitutable and supply chains can be diverted to alternative production locations as a contingency.  Such diversion is evident in the 2019 reduction in the US-China trade deficit noted earlier.
  • The next most exposed import sectors from China are the apparel manufacturing machinery and leather and allied products industries of Pennsylvania, Minnesota and New Hampshire. If China were looking for opportunities to disrupt economic activity in Swing States, it may target these imports as well as imports into Michigan’s automotive supply chain.  All other categories of imports, it would appear, are too diffuse to have an impact on a targeted domestic constituency within the U.S.

Conversely, if the U.S. Congress or Administration were seeking to levy additional tariffs on Chinese imports, it may look to apply them to sectors where costs can be shared across the economy, rather than disproportionately by specific sectors in individual states.

 

[1] The Hill, January 16, 2020: https://thehill.com/policy/finance/478636-here-are-the-10-senators-who-voted-against-trumps-north-american-trade-deal

[2] Politico, February 5, 2020: https://www.politico.com/news/2020/02/05/trump-cuts-china-trade-deficit-as-us-buys-more-from-other-nations-110810