The U.S.-China Trade War Hits Consumers in Both Countries

By Michael Coates

Long-term Impact Uncertain, But Car Production Could Shift

Photo Tesla

Photo GM

In the ping-pong of tariff threats and retaliations of the past few months, automobiles have appeared to be the ball, knocked back and forth in the crossfire, and customers on both continents are likely to suffer the consequences. Cars and trucks are big ticket items central to the economy of many countries, particularly the United States and China, the two biggest auto markets in the world.

The first salvo came from the Trump Administration, launched as a campaign promise and push-back to the massive trade imbalance with China and its relatively closed market. It started with $34 billion in new tariffs. China retaliated, adding a 25 percent tariff on imported cars, bringing the total tariff up to 40 percent. The impact was swift, for example, with Tesla raising the price of a Fremont, CA-built Model S to Chinese consumers by $22,600, boosting the retail price to more than $128,000 for a car that costs almost half that in the U.S.

There was more potential impact since the U.S. last year exported 267,000 vehicles to China, most from BMW, Daimler, and Ford (Tesla’s two models were way down the list). In the auto sector, the U.S. has a $6.2 billion trade surplus with China. Several brands are likely to

see price hikes like Tesla’s. The American imports are only a small part of the 28.8 million car market (2017), but represent some highly sought-after (mostly SUV) models, such as the BMW X5, Mercedes GLE, and Lincoln MKC.

On the other side of the tariff coin, relatively few Chinese-made models are imported into the U.S., but those numbers are expected to increase with the growth of Chinese companies like Byton, Nio, and BYD. Currently in the U.S., you can buy a Chinese-built Buick Envision, Cadillac CT6 plug-in hybrid, or Volvo S60. Of course, Volvo is owned by Geely, a Chinese company. Soon, Ford will be importing Ford Focus models from China.

Round two of tariff back-and-forth added $16 billion to goods being traded between the two countries, though cars weren’t a big part of that round. While nothing additional has been announced as of now, the White House has said it’s willing to up the ante further.

As a result of these trade tensions and concern about similar tariff tiffs with Europe and other Asian countries, reports came in recently that importers on both the Pacific and Atlantic sides of the U.S. were stockpiling cars in expectation

of further escalation. That may protect some future purchasers from price increases, but ultimately the trade issues will need to be resolved or other moves may be prompted.

According to some analysts, the ongoing tariff battle may lead to producing not more cars in this country, but in China. Because the Chinese market is so large, it makes sense to find the lowest cost production location. Factoring in tariffs can tip the scales toward producing the cars where they are sold, something that’s gone on for some time in the U.S. More than 50 percent of the vehicles sold in the U.S. are produced here. Another 24 percent come from Canada or Mexico, covered by the NAFTA agreement that eliminates tariffs between the three countries.

According to Automobility, a Shanghai-based consultancy, we could expect to see some of the American production moving to China to dodge the new tariffs. Another study by the Peterson Institute for International Economics found that if the 25 percent tariffs on cars were implemented by both sides, U.S. automotive production could drop by 4 percent and cost 624,000 jobs. This looks like a war nobody seems likely to win. ■