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As U.S. President Donald Trump's trade war raged against Beijing, Republican states went in search of Chinese money. (Illustrations by Eric Chow)
The Big Story

Red states: Trump Country's love affair with Chinese investment

The US president's heartlands turn to China to revive flagging industries

MARRIAN ZHOU, Nikkei staff writer | North America

JONESBORO, U.S. -- It is late October in Jonesboro, Arkansas, a long way from the White House and a long way from the trade war. A crowd of suits and red ties slowly makes its way through a welcome arch made from red balloons, towards a temporary stage bearing a huge red banner that reads: "Grand Opening Risever Machinery, LLC."

To launch the Anhui, China-based company's 125,000-square-foot facility in Jonesboro, Southern businessmen and their new Chinese colleagues formed an awkward line on stage behind a red ribbon, each holding a pair of golden scissors and looking at each other for the cue to make the cut.

Local politicians were presented with gifts from Anhui, including a traditional painting of galloping horses -- a Chinese metaphor for prosperity and success -- while a giant screen played a video of factory workers in China performing a choreographed marching band routine.

More than 90 American cities competed to attract the factory -- which will supply components to construction giants, such as Caterpillar, Terex, Volvo and Komatsu -- as rural and deindustrialized regions of the country try to bring in foreign money to reverse decades of decline.

"We need to show that we are welcome to this kind of investments that make manufacturing possible here in our country and in our state," Arkansas' Republican Governor Asa Hutchinson said during his speech at the ceremony. Hutchinson told the Nikkei Asian Review that he saw the investment as an opportunity to bring back jobs lost to offshoring.

Besides Risever, Arkansas has seven other ongoing Chinese investment projects -- TY Garments, Dragon Woodland, Shandong Sun Paper, Petwon Pet Products, XinDu Bio-Tech, Suzhou Xindadi Hardware and Shandong Ruyi Technology Group -- according to the Department of Commerce of Arkansas. Other Southern states, including North and South Carolina, Tennessee, Louisiana, Georgia, Mississippi, Alabama and Kentucky all now host Chinese factories.

Risever businessmen present an auspicious painting of galloping horses to their Arkansas counterparts. (Photo by Marrian Zhou)

These are bedrock states for the Republican Party, places that embraced U.S. President Donald Trump's anti-globalist, nationalist rhetoric.

With a "phase one" trade deal due to be signed on Jan. 15, the Trump administration has signaled a tentative and limited rapprochement in its trade war with China, which saw high tariffs placed on Chinese imports and bans on the export of technology products. However, despite those punitive measures and the aggressive messaging coming out of the White House, many of the states and counties that came out for Trump in 2016 have spent the past few years gorging on Chinese money. Their reliance on investment from China only serves to underline how deeply intertwined the world's two largest economies are, and how the president's desire to unwind decades of trade imbalances could put him at odds with his own base as he seeks reelection this November.

Electoral margins in some industrial states, such as Ohio, Pennsylvania, Michigan and Indiana, could be tight. "There will be shifts in the industrial states," said Gary Hufbauer, senior fellow at Peterson Institute for International Economics and former deputy assistant trade secretary. "That's why, in my view, [Trump] cannot afford to escalate the trade war."

"[Those] states ... will be hurt, they'll lose jobs, and he only has to lose one or 2% of the voters," Hufbauer said. "[Then] he has lost those states."

Tariff man

Driving from Little Rock toward northwest Arkansas, where Walmart and Tyson Food have their headquarters, towns and small cities cluster by the roadside; art museums funded by Walmart's founding family do a brisk trade and keep the traffic flowing. In the other direction, to the southeastern delta area, endless woods and farmland fill the landscape, with shrinking small towns scattered throughout the region.

Arkansas is a case study of the hollowing out of the U.S. manufacturing sector. "Textiles, paper mills, lumber mills, all these places in southern and eastern Arkansas," said Mervin Jebaraj, director of the Center for Business and Economic Research at the University of Arkansas. "[We] used to [have] major employment there until those jobs went away in the last 20 years" as supply chains moved offshore.

The loss of manufacturing jobs and the sense of identity that came with them was most likely a factor in Trump's rise to power. Well before his successful run for president in 2016, he had been spinning the narrative that America has suffered from unfair treatment by its trading partners, and in particular by China. On the campaign trail, he vowed to rip up international trade deals and confront China for -- in his words -- "raping" the U.S. with its trade policies, and for perpetrating "the greatest theft in the history of the world."

Trump won 61% of the vote in Arkansas and, buoyed by support in other Rust Belt and southern states, took the White House. He soon began to attack U.S. trading partners, pulling out of treaties, slapping high and rising tariffs on Chinese goods, and eventually, in 2019, imposing wide-ranging restrictions on U.S. technology exports to China.

"I am a Tariff Man. When people or countries come in to raid the great wealth of our Nation, I want them to pay for the privilege of doing so," Trump wrote on Twitter in 2018.

States like Arkansas, though, have seen China less as a raider, and more as a potential savior.

"Chinese investments [bring] some of those jobs back to the parts of the state that are struggling," said Jebaraj.

Looking for new sources of capital and investment, Gov. Hutchinson went on his first trade mission to China in 2015. Since then he has made four trips, usually accompanied by Arkansas Secretary of Commerce Mike Preston and Yee Wong Yam, Hutchinson's trade adviser and longtime personal friend.

That first trip in 2015 was "overwhelming," Preston recalled. "What I realized real quick was that it is hard for a small state like Arkansas, with 3 million people, to really work an entire country the size of China," he said. "So we really wanted to focus on some key provinces that would make sense for us."

Preston and his colleagues concentrated on Shandong and Anhui provinces, because, he said, they have "a lot of synergy" with Arkansas -- strong in agriculture and manufacturing with a good concentration of companies that need to expand and need access to the U.S. market. They met with officials, and over the following years secured several major deals, including Risever -- where the visiting Arkansas delegation was greeted with "God Bless America" played through the headquarters' speakers -- and Tianyuan Garments, a major garment manufacturer based in Suzhou.

"We're just really good salesmen," Preston joked.

But for Chinese investors, the upsides to investing have been clear. Although wages are generally higher in the U.S. than in China, shortening supply chains and being closer to customers was an attractive proposition, even before Trump's tariffs took effect. And, with land and labor prices rising in China, the difference in cost is narrowing.

"The land cost in South Carolina is cheaper than that in a tier-2 city in China," said Su Lian Jye, principal analyst at ABI Research. Chinese companies Haier, Jiangnan Huaqian, Keer Group and Zhejiang Geely Holding Group have set up factories in South Carolina.

States often offer tax breaks and other incentives for foreign companies. Arkansas offers tax benefits linked to job creation, but this is not necessarily its most attractive feature, according to Jebaraj. Neighboring states, such as Mississippi, offer more financial support, he said, but Arkansas has natural resources, including cotton and timber, which helped to bring in investments in textiles and paper mills. Arkansas is also a Right to Work state, like many other Southern states, which means no person can be compelled to join or not to join a union as a condition of employment.

Lai Yonggang, Risever's general manager, said that logistics infrastructure, the distance to his clients' factories, wages and utility costs all weighed in on the decision on where to invest, but Jonesboro's attitude towards Chinese companies clinched the deal.

"Arkansas's sentiment towards foreign investments, especially Chinese investments, is very friendly," Lai told Nikkei in Mandarin. "Gov. Hutchinson came to our factory twice before. This is a very important factor for us -- the willingness to cooperate with us and how much they can support us."

Heifei Risever Machinery was founded by Lai's parents in Anhui Province in 2001. The company now has three factories and more than 1,200 employees in China, supplying equipment and providing fabrication services to clients in North America, Japan and Europe.

"Compared to all the skyscrapers in China, Arkansas seems a bit quiet," said Lai. "But it has its unique features, such as the natural resources. I felt the local people are very honest and friendly."

Risever announced its $20.5 million investment in October 2017, with initial plans to hire 130 staff, and to start production in early 2020. It has made a feature of its background as a family-owned enterprise, which has helped to assuage some of the locals' worries.

Newly-hired plant manager Chris Taylor said that he was initially concerned about working for a Chinese company. "I ain't gonna say I didn't think about it, but it was very clear to me that this [factory] is an American company," said Taylor in a husky Arkansas drawl. "It's a huge investment by the Risever family. This is going to be an American-run company, with our general manager living in Los Angeles."

Political pressure

The local welcome for Chinese companies, and Chinese money, is not shared at the Federal level. The president's public attacks on Beijing have emboldened China hawks. High profile figures in the Republican Party, and individuals who are part of Trump's outer circle, have continued to voice their antipathy towards dealing with China.

"Most governors, in the South and elsewhere, are eager to court Chinese investment in their states," said Jeffrey Wright, an analyst at Eurasia Group who focuses on trade and presidential politics. "[But] U.S. political opinion has turned intensely against China, meaning that finding the political support for these projects has gotten harder."

Steve Bannon, former White House chief strategist and senior counselor to Trump, told Nikkei at an event in New York that he also has "big concerns" over Chinese companies investing in the U.S.

"Everyone is focused on jobs and the economy and [governors] have made a full-blown effort to bring Chinese capital here," said Bannon. "But before these investments are made, they have to be reviewed -- who actually are the controlling entities and backers, are they really corporations or are they somehow controlled by the Chinese Communist Party or People's Liberation Army."

"Not just technology companies but also manufacturing companies, we have to review all these," he added. "If that means certain factories are not built, so be it."

Even Rick Crawford, who represents Arkansas' First District in the U.S. House of Representatives, is a critic of Chinese investment. In an interview with an Arkansas news site, Talk Business & Politics, he blamed the decline of the local textile industry on the World Trade Organization -- another target of the Trump administration -- and said that welcoming Chinese companies was not the solution to industrial decline.

"The answer is not to bring in Chinese investment and give over everything we have in the hopes that the Chinese are going to be fair and deal in good faith with us, because the answer to that is 'no, they're not.' They're not here to help us."

A Chinese trade delegation looks over a soybean field in Missouri: U.S. exports of soy to China have slumped during the trade war.   © Reuters

Crawford's own congressional district has three Chinese investment projects -- Risever, Shandong Ruyi Technology Group and Dragon Woodland.

Dragon Woodland owns a sawmill in Helena-West Helena that employs 53 workers. In 2017, the company exported 90 containers of logs every week. Since the trade war began, the company's exports dropped to roughly 20 to 30 containers every month, according to Shane Martin, operating manager of Dragon Woodland and a Tennessee native.

"I think both presidents from China and the U.S. are doing what they can to protect their countries, so what's happening is probably good for the long term of business," said Martin. "But the problem is, you have to sustain it to be able to make it to the other end."

In 2017, Ruyi announced a $410 million investment in Forrest City, a former Sanyo manufacturing facility. The project planned to process more than 200,000 tons of local cotton and spin it into yarn for textile use, creating 800 jobs. It has now been delayed "indefinitely until the trade war is resolved," because the additional tariffs imposed will drive up the costs on factory equipment and machinery, as well as products that need to be shipped back to China, according to Arkansas Secretary of Commerce Preston.

The U.S. received over $180 billion in Chinese investments from January 2005 to June 2019. But the volume plunged after 2016, with investments in 2019 on pace to reach just $5 billion, compared to $9.7 billion in 2018 and $24.6 billion in 2017, according to the American Enterprise Institute's data.

Beyond Arkansas, the trade war has hit the volume of exports for many U.S. states. Only 14 states increased their exports to China in 2018 over the previous year, while 25 states had double-digit declines in exports during the same period, according to a report published by the U.S.-China Business Council; although China remains one of the top five export markets for 44 states.

"State governors are typically much more enthusiastic about inward investment than the national government is. They see the jobs [and] the new establishment," said PIIE's Hufbauer, "So they will be aggrieved."

In Arkansas, Hutchinson has been trying to make the case to the government that its policies are damaging business in the state. He and Preston went on another trade mission in November, where they planned to focus on strengthening the relationships with their existing investors, and on trying to find new markets for the state's rice exports.

"I've spoken to the [Trump] administration on numerous occasions," Hutchinson told Nikkei. "[The trade war] is a challenge for a state like Arkansas that depends on exports, whether it's agricultural products or other manufacturing products. I recognize there are issues that have to be dealt with that we want China to address ... But in the end, it's very important that we resolve these trade differences and get back to normal trading relationship."

On the ground in Arkansas, the dichotomy for Trump supporters run deep. In Springdale, Nikkei met Yang Luo-Branch, president of the Arkansas Association of Asian Businesses, and Cheng Chen, a member of AAAB. Both were Chinese international students who settled down in the state after graduation and married Arkansas men, and both their husbands are Republicans who voted for Trump in 2016.

"Their conservative values are focused on traditions and gun control, but they're very open to capitalism and free trade," said Luo in Mandarin. "My husband is very supportive of me organizing AAAB, he very much supports Chinese companies investing in Arkansas because he thinks this is boosting the domestic economy."

Luo and Chen both said that they support Beijing's stance in the trade war; their husbands support the U.S. president's trade war with China.

U.S. employees of Chinese factories now routinely visit the country, and seem largely positive about the experience. Dragon Woodland's Martin took his first trip to China this March for a flooring convention, where he visited the Great Wall, Tiananmen Square and dined with Chinese business colleagues almost every evening.

"The seafood was good, but some of it was too authentic for me," he said. "I had some turtle, that was a little too much for me."

Brandt Smith, a state representative for Jonesboro in the Arkansas House, who lived in Kunming, China for six years, said that hostility to China in the state is more often than not based on a lack of understanding.

"We're a warm and friendly state, it's just that sometimes we're not as warm and friendly if we're given misinformation," said Smith. "[The factories are] going to employ people from Northeast Arkansas, so I think we need to get to know each other better before we come to the wrong conclusion."

Looking ahead to 2020, “there will be shifts in the industrial states,” said Gary Hufbauer, senior fellow at Peterson Institute and former deputy assistant trade secretary. “That’s why, in my view, [Trump] cannot afford to escalate the trade war.”    © Reuters

Campaign trails

Trump will be seeking reelection in November, and will hope that states like Arkansas will come out strongly for him, like they did in 2016. According to pollster Morning Consult, Trump's net approval in Arkansas has decreased 20 percentage points since taking office.

Many agricultural and industrial states have unquestionably suffered from the trade war so far and, while the administration in December announced the first phase of a deal with Beijing, a comprehensive reversal is not likely before the 2020 election.

Whether the economic damage is enough to sway voters who support other aspects of the president's agenda -- such as immigration and tax reform -- is unclear. The midterm elections suggest that they might.

"The trade war probably cost Republicans five seats in the 2018 congressional election," said Hufbauer. "Those seats that were lost were basically in industrial states where the tariffs or Trump's trade war caused retaliatory tariffs by China."

The left wing of the Democratic Party, which has been ascendant over the past couple of years, are "not free traders by any means," Hufbauer said, but they have not been "as noisy" on the topic as the president.

On the ground in Arkansas, the president's supporters -- including factory workers, soybean farmers, Luo and Chen's husbands -- said that they do not agree with everything Trump has done, though few are yet to see an alternative to the "tariff man."

"[My husband] said previous U.S. presidents were too weak when it comes to foreign policy," Luo said as Chen nodded in agreement. "Although he doesn't like many things about Trump, the direction Trump is taking to put America first, my husband supports it."

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