China car tariff win irrelevant for US automakers

Employees work on a production line manufacturing light trucks at a JAC Motors plant in Weifang, Shandong province. (Photo via Reuters)

The "will they, won't they" chatter over China's car tariffs misses where the real action is for automakers.

Confusion has abounded over the deal struck between US President Donald Trump and his Chinese counterpart Xi Jinping. Mr Trump tweeted that China was reducing and removing its 40% tariffs on US car imports -- two very different things. Car stocks rallied on the news on Monday, only to give up gains the next day after Larry Kudlow, Mr Trump's top economic adviser, backtracked on the president's assertion. Treasury Secretary Steven Mnuchin said China has agreed to eliminate tariffs, without giving specifics.

To recap: China lowered import tariffs to 15% on autos and components, from 25% for passenger cars and 20% on trucks, starting July 1. It then raised the duty to 40% for American autos in retaliation against Mr Trump's trade actions. The US has a 27.5% tariff on Chinese car imports, and 25% on trucks.

Whether China reduces or removes tariffs is largely immaterial because the vast majority of vehicles in the world's largest auto market are made there. China imports about 1 million cars a year -- less than 5% of a market that totals an annual 27 million vehicles.

Ford Motor Co brought just over 30,000 US-made cars into China last year. BMW AG has been reducing imports and recently doubled down on making more vehicles locally. Daimler AG is also considering raising its stake in its Chinese joint venture, Bloomberg News reported on Tuesday. Granted, some foreign-made models such as the Benz GLE and those sold by Tesla Inc would get a bump if tariffs were cut. But the opportunity for overseas automakers lies mostly in manufacturing in China.

What matters more for the industry are the US import tariffs of 25% on steel and 10% on aluminum that went into effect in March. Given Mr Trump's political commitment to revive the US steel industry, these are probably here to stay. Temporary exemptions for Mexico and Canada ran their course in May.

The broad goal was to push up prices of the metals by capping imports. Mr Trump's executive order set an 80% capacity utilisation target for US aluminum and steel, and if one country gets a waiver from the tariffs it would be at the expense of others, as Nomura Holdings Inc analysts note. Prices have risen relative to those in China and Europe, driving up earnings at US steel producers. Some have raised wages while others have announced new greenfield mills.

But all this has come at a big cost to the auto industry. How much steel or aluminium goes into a car depends on the type of car and its construction: Sedans are lighter, with the chassis and bodywork more or less one piece, whereas SUVs and pickups are frame-based and heavier. That means steel content could be as much as 70% of an average car's weight. Total raw material costs have risen from around US$800 (26,500 baht) per average unit to over $1,000.

For the likes of General Motors Co and Ford, this will be painful. GM, which produced more than 2 million vehicles last year, could see operating profit reduced by $500 million while the impact on Ford could be close to $510 million, according to an analysis by Nomura. American carmakers are expected to take the biggest hit, with Japanese and South Korean peers less affected.

These tariff-related costs will only rise. In the plateauing US car market, more than 70% of vehicles sold are now SUVs and pickups. Given rising cost constraints, carmakers will try to push people back to sedans or find themselves under pressure to take shortcuts (read: faulty airbag pumps, wiring issues and recalls).

Mr Trump's tariffs will hurt most at home. The likes of GM have already had to announce restructurings and job cuts. Ford may have to make even larger reductions, analysts have said. For all the jobs that may be created for steel workers, more will be lost by autoworkers.

Anyone hoping lower tariffs in China will save American automakers should think again. - BLOOMBERG OPINION

Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia. She previously worked for the Wall Street Journal.


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