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Bracing for Impact: Trade Chicken and the Auto Industry

April 5, 2018 Robert Fischer, GTiMA President

There’s a high stakes game of chicken being played between DC and Beijing right now. The Trump administration and the Chinese government — the drivers — are on a collision course. One must swerve, or both risk severe injury in the crash.

I’m using the car analogy with good reason. A trade war between the US and China — which goes back decades, but just got a nitro boost –- could hold major pitfalls for the automotive industry.

The Trump administration said Tuesday that it will place tariffs on $50 billion worth of Chinese products, outlining more than 1,300 imported goods. China, in turn, hit back Wednesday with their own $50 billion tariff plan, which would make it costlier to import 106 types of American goods.

While an all-out trade war would bruise both economies, the tit-for-tat announcements are not indicative of similar strategies, writes Christopher Balding for Bloomberg View. “Trump’s [tariffs] list was notable for how hard it worked to minimize the pain felt by American consumers and Chinese businesses. It avoided disrupting major sectors, and seemed to focus on products that could easily be substituted.”

Conversely, Chinese President Xi Jinping’s administration “produced a heavily concentrated list that targeted politically sensitive industries such as planes, beef, and soybeans. Covering only a little more than 100 products, but worth about the same as the US list, these tariffs seemed designed to place severe pressure on key companies and constituencies,” Balding writes.

No matter what the strategy may be for each side, a trade war is always risky business. While tariffs are often imposed to protect domestic industry, the consequences are hard to predict: there’s no telling how the other side will retaliate, and the impact on your own economy can be equally uncertain.

The Trump administration’s list of goods — which excludes many Chinese- made consumer products, like those available for sale at Target or Walmart — is likely to increase costs for American manufacturers that depend on imported parts. The tariffs focus heavily on machinery and high-tech components.

Combine that with China’s retaliation, and the downside on both supply and demand for the US automotive industry starts adding up.

For instance, a trade war could upend suppliers like Lear and Delphi Automotive, which rely heavily on the Chinese market. China accounted for about 25 percent, or $4.3 billion, of Delphi’s $16.7 billion in revenue in 2016, and nearly 12 percent of Lear’s $18.6 billion in revenue last year, according to Automotive News.

Demand for US cars in China would also suffer, according to the New York Times, as China’s tariffs would double the current levy on US-made cars to 50 percent. Under current levies, a Jeep Wrangler costs $30,000 above its US sticker price in China, where it sells for a hefty total of $71,000. Under the proposed regime, the total cost of a Wrangler would rise to over $100,000.

Also at risk are foreign firms that produce in the US, like German-based BMW, which sends 89,000 vehicles annually from the US to China, or Daimler AG’s Mercedes-Benz, which ships 65,000 a year.

The bottom line is that prices will go up for everyone. Jack Hollis, Toyota Motor Corp’s North American head of sales and marketing, said tariffs would mean “we’ll all just have to raise prices … because there’s no way you can absorb” all that extra cost.

And it looks like things could get even worse before they have a chance of getting better.

According to Rick Noack’s reporting in the Washington Post, Trump’s team has been attacking the WTO – the very organization that would usually be expected to calm things down. “In the past, most ordinary trade disputes have been solved through the WTO’s dispute settlement process, which relies on member states to refer their cases to the organization to work out a solution.”

And even though China has used the WTO to accuse the United States of unfairly imposing trade restrictions over the last months, Trump does not appear interested in being dragged into the dispute settlement process. In fact, Noak writes, “Trump appears to be deliberately undermining the legitimacy of that process by saying that his tariffs plan was based on ‘national security’ concerns.”

The Chinese, at this point, don’t seem to be backing down. Their state-backed Global Times struck a hawkish note in an editorial following the US tariffs announcement. “Some US elites stubbornly believe that the Chinese economy’s dependence on the US market is much higher than the US economy’s dependence on the Chinese market. They are pushing Washington to change its trade policy with China based on their vague understanding. But the truth is that the total size of China’s consumer market has already surpassed the US. The logic that China is more dependent on the US is untenable.”

So it looks like if there is to be a détente – and a détente is what we hope for – it’s not going to come from the WTO or China, it’s going to have to come from Congress.

To implement the tariffs on Chinese imports, President Donald Trump is relying on Section 232 of the Trade Expansion Act of 1962, which allows the president to bypass Congress and impose tariffs by executive order.

If Congress wants to stop the tariffs, Edward Alden, a senior fellow at the Council on Foreign Relations, a nonpartisan think tank, says it has essentially one option: pass a measure with a veto-proof majority that either overturns the action or strips Trump of his authority to impose it.

Unfortunately, Alden “would be astonished” if Republicans in Congress banded together with Democrats “to rescind a core policy of the president.”

So it looks like in the meantime – ladies and gentlemen, spectators and drivers – we’d better brace for impact.

Rob Fischer is President of GTiMA and a senior advisor to Mandli Communications’ strategy team. GTiMA and Mandli Communications are both proud partners of the Wisconsin Autonomous Vehicle Proving Ground.

Follow Rob on Twitter (@Robfischeris) and Linkedin.