25 Sep 19

US – China: weaponization of car tariffs

CNBC reported, a few days ago, that the American auto industry was hit the most by US and China tariffs. This unsurprising conclusion was the outcome of a survey, released by 2 American Chambers of Commerce (Shanghai and Beijing). Expressed in percentages, 80.5% of respondents in the auto industry say being affected by the US tariffs, whilst 75% say the Chinese duties have affected them. These companies complain about “dual headwinds”, suffering from both US and Chinese tariffs, and confirm that they reduce profit and increase production cost. OEMs are pulling out of China and the US, to the benefit of South-East Asian countries mainly.

Global Automotive Trade

At USD 744.7 billion, the automotive export business is the third largest category worldwide, only topped by crude oil and refined petroleum. The main players are Germany, Japan, the US, Mexico, Britain, Canada and South-Korea. Until now, the trade war seems to have affected essentially US or China based manufacturers and others only collaterally, at least for now.

It’s however important to state at this time that not only car manufacturing, but also parts manufacturing is targeted by the tariffs; even if not significant in international car exportations, China is a major player when it comes to parts. The country exports over USD 20 billion annually in auto parts to the US.

Finally, the US industry reacted positively to the White House’s tariffs on steel and aluminium, but were “alarmed and dismayed” by the tariffs imposed on the car industry. Especially it’s impact jobs, consumer pricing and investments in the US were put forward as potential risks. Current predictions on car sales figures in the US – if the additional costs were to be passed on the consumer to their full extend – are pessimistic and would cost 2 million sales.

The bigger threat

Tariffs on imported cars to protect domestic markets have always existed and, to be transparent, were rarely fair. Nevertheless, there has always been a way to avoid techniques that could paralyze competing countries. The shift that has been introduced now by the White House – aka the “weaponization of car tariffs” – opens doors for uncensored threats of punitive tariffs, cajoling business partners to counter with other unreasonable tariffs, leading to an unhinged and uncontrollable import/export market.

Irrespective on how people stand on this, there needs to be an understanding that the US/China approach moves away from the principles of how global trade is organised. So, if this is the way forward, let’s at least understand its implications. Knowing that the US is considering a global 25% tariff deal on imported cars and car parts, we might just be in a warm-up phase before a real trade war.

Authored by: Yves Helven