President Trump obviously has strong feelings about China: It should buy more American stuff. We should buy less Chinese stuff. He’s so sure of this he’s willing to spook financial markets by imposing tariffs and threatening a trade war.
Trump has singled out the auto industry as one that’s particularly imbalanced. China imposes tariffs of 25% on auto imports from the United States, while Chinese-made cars imported to the United States face a mere 2.5% tariff. Trump wants China to lower its tariffs and import more American cars, and Chinese President Xi Jinping recently indicated that might happen.
What’s more likely, however, is a surge of Chinese-made cars coming to the US market. Americans bought about 50,000 made-in-China cars in 2017, but that figure is expected to swell to 225,000 in 2019 and 500,000 in 2023, according to forecasts form the Center for Automotive Research in Ann Arbor, Mich. And those won’t be strange-sounding Chinese brands, but cars built in China by well-known automakers such as Buick, Volvo and Ford.
Automakers sold about 267,000 US-made cars in China last year, according to research firm LMC Automotive. So the United States actually has a surplus of trade in automobiles with China, for now. But the number of US-made cars exported to China has been going down, while the number of Chinese-made cars coming to America has been going up, and LMC forecasts a dip to about 240,000 US-made cars exported to China by 2020. So a trade surplus in this one industry could become a deficit before long—exactly the thing that so irks Trump.
The American and Chinese car markets are very different, and most big automakers already have an established presence in both. Since labor and production costs are higher in the United States, it’s cheaper to build cars in China. The Buick Envision crossover, which went on sale in 2016, was the first Chinese-made car exported to the United States. Volvo, now owned by the Chinese automotive giant Geely, also exports a couple Chinese-made variants of its S60 sedan to the United States, though most S60s come from Europe.
Ford will begin making its Focus subcompact in China in 2019, and importing that to the United States, which will account for much of the coming increase in Chinese auto imports. Ford builds the outgoing version of the Focus in Michigan, and originally planned to build the next generation in Mexico—but then moved planned production to China last year. Profit margins on small cars are tiny, and sales have been shriveling. Ford, like most automakers, decided to move small-car production overseas while building higher-margin vehicles like pickups and SUVs at its US plants.
Established automakers planning to import more Chinese-made vehicles to the United States are taking an obvious gamble, especially with Trump in office: Could they face a backlash from American consumers or politicians? Some auto execs point to Apple to make their case: iPhones are assembled in China, and nobody seems to mind. Yet Trump has already attacked automakers for building too many cars in Mexico. China can’t be any better, in his mind.
Vehicles shipped the other direction–from the United States to China–tend to be luxury makes sold to wealthy buyers unfazed by the 25% tariff, such as BMW SUVs made in South Carolina, Mercedes SUVs built in Alabama, and Teslas built in California. Automakers prefer to build cars in the country they sell them in, unless there’s only enough global demand to justify one assembly line—which is often the case with lower-volume luxury makes.
If China does lower its 25% tariff, it’s possible US auto exports to China could tick up. But automakers would still prefer to build high-volume cars meant for Chinese buyers in China, which lowers shipping and production costs, reduces risks related to currency fluctuations and helps avoid the kind of political trouble surfacing now with brewing trade wars. “The US and international-based firms want to be producing in China for the Chinese market,” says Kristin Dziczek of the Center for Automotive Research. “It’s not really rational for US factories to be making mass-production cars for export to China right now.” Lower Chinese tariffs wouldn’t change that.
It’s also worth noting that China is unlikely to do anything to jeopardize the growth of its domestic auto industry, which is one of the high-priority sectors of its economy identified in the “Made in China 2025” plan, which guides official policy in China. That means tariff reductions could end up being nominal, at best – unless China finds another way to protect its home-grown automakers while giving Trump something he can claim as a victory.
Confidential tip line: email@example.com. Encrypted communication available.
Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman