Are we on a no boat to China?
First it was Brexit, then NAFTA, now it’s a potential trade war between the United States and China, the two largest economies in the world. And the consequences for the automotive industry could be pretty dramatic. This all started when US President Donald Trump announced that he was introducing 25% tariffs on a host of Chinese exports. Did he really expect China to take this lying down? That there would be no tit-for-tat retaliation? If he did, then he was wrong. China has reacted strongly, and predictably, by threatening its own increased tariffs on over a hundred US-produced products including cars.
The irony of the situation is that American carmakers would be relatively unharmed by such retaliatory moves. Many of the major US car companies including Ford, General Motors and Chrysler have already entered into deals to manufacture locally in China with Chinese joint partners. Tesla is a notable exception, of which more later. No, the OEMs most likely to be affected are BMW and Mercedes. Between them they will export over 100,000 vehicles to China this year, vehicles which are built in BMW’s plant in Spartanburg, South Carolina and Mercedes’ plant in Vance, Alabama. This export business is estimated to be worth more than $7 billion.
Tesla could end up being a big loser in all of this. All its cars are manufactured in the United States and China is reckoned to be an export market accounting for some 15,000 cars, around 9% of Tesla’s total revenue. Already, Elon Musk’s company pays import duties of 25% on the Model S and Model X vehicles it sells to Chinese consumers. Today, this makes them accessible only to the wealthiest customers. Imagine if a further 25% tax were to be levied. Even the wealthiest of Chinese might baulk at such a purchase.
If the US was to respond by including cars in its package of products on which the increased import tax would apply, it would surely mean the end for any hopes China may have of developing its export business in that direction. This would affect companies such as Geely with its Chinese-built Volvos but also the likes of General Motors which already exports vehicles from China back to the US.
No-one wins in a trade war. Indeed, they can lead to much more horrifying scenarios. To what degree was the attack on Pearl Harbor caused by the US adopting a succession of increasingly restrictive trade sanctions on Japan? Whoa. Let’s not go there. Let’s not even think about it.
Simon Duval Smith
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