US Trade poker game in full swing
Since July 6th, both US and China have implemented additional trade tariffs, the result of an ongoing back-and-forth series of threats between US President Trump and Chinese President Xi. A first analysis of the impact of the tariffs leads to believe that the consumer will be differently impacted on both sides of the Pacific, but first, let’s have a look at how we arrived at this point.
Trade tariff timeline
- Jan 22nd 2018: Trump announces a 30% tariff on solar panels, a key Chinese import product
- March 1st 2018: Trump raises import taxes on steel with 25% and taxes on aluminium with 10%
- April 2nd 2018: the Chinese issues tariffs on $2,4 billion worth of American products and agricultural produce
- April 3rd 2018: the US retaliate with a 25% tax on mainly tech products, which are at the core of the “Made in China 2025” economic plan (semi-conductors, medical devices, …)
- April 4th 2018: China produces another list of 106 American products, subject to tariffs of 25%
- April 5th 2018: Trump threatens with taxes on another $100 billion worth of Chinese import
- April 16th 2018: the US Commerce department bans any collaboration Chinese telecom company ZTE, leading to ZTE to withdraw from the US in May. The company becomes a major negotiation tool in later negotiations between China and the US. On June 7th, the ban is lifted temporarily in exchange of a $1 billion payment to US
- June 15th 2018: Trump announces a 25% tariff on $50 billion worth of Chinese goods, mainly parts used in US based production
- June 18th 2018: Trump threatens to implement tariffs on an additional $200 billion worth of products, which, if implemented, would result in almost all Chinese products being subject of trade war related taxation
- June 27th 2018: the Trump administration wants to bar Chinese firms to invest in US technology.
- July 7th 2018: the US activates a 25% taxation on $34 billion worth Chinese goods. China retaliates immediately with an identical taxation
- Update after publication, July 11th 2018: the Trump administration announces 10% levy on another list of $200 billion worth of Chinese products, now submitted for a 2-month review process.
Impact on the car industry
Next to the trade war with China, the US President is also looking into additional tariffs for European cars, but the internationalisation of car manufacturers demonstrates that the impact of the tariffs is not necessarily linked to the nationality of the brand.
Many of the car brands produce vehicles on all continents. When sold in the local markets, these vehicles are exempt of trade tariffs. Within Asia, where high import taxations have existed for a longer time, OEM’s such as Toyota have developed production in most major countries to avoid tariffs and produce vehicles that are appealing to the local buyer (e.g. Toyota Hilux in Thailand, Toyota Innova in Indonesia). In addition, OEMs are also used to shift productions from one country to another. BMW, for example, can shift production of the popular X3 from the US to South-Africa and China, thus avoiding import taxes.
This leads us to an understanding that only few brands will feel the full impact of trade tariffs. Tesla, produced in the US and sold in China, is such an example. A Model S was sold in Beijing for $114.400 in January, but is on the market today for $125.300
A equally interesting aspect is the car part supply, much of which comes from China. Even for vehicles produced and sold in the US, the tariffs will have an impact as the car parts will become more expensive. This price increase is very likely to be transferred to the end customer rather than absorbed by the manufacturer.
The Japanese company Denso, one of the largest tier 1 suppliers for OEM’s, has been preparing to move a substantial part of its production to China and is now confronted with a likely price increase for export to the US. Similarly, Denso also does a lot of cross-border trade between US and Mexico, which could be affected by the US leaving NAFTA or tear up the agreement.
What about the Fleet Manager?
Some of the analysts, such as Mark Boada at Fleet Management Weekly, defend that the consequences of the trade war won’t be as dramatic as depicted in the newspapers. He foresees a rise in the second hand market, takes rightly into account that we won’t be renewing our entire car fleet in the next 12 months and thinks that an increased pricing might accelerate the right-sizing of company cars. He concludes by saying that an increase of lease cost was imminent, regardless of the trade war.
Even if we think Mark might be right from a short-term perspective in the automotive industry, the real issue seems not to come from the automotive industry, which is only one of the directly identified victims. The major problem will come from a combination of 2 giant economies, the US and China, that will potentially slow down, impacting employment, interest rates and gradually touching much more industries. The world economy was never balanced, but the brutality of a trade war is not going to help.