There's a high stakes game of chicken being played in DC right now. The drivers, the Trump administration and China, are on a collision course. One must swerve, or both risk severe injury in the crash.
The analogy is particularly fitting for the automotive industry because a trade war between the US and China - a war that goes back decades but just got a nitro boost – could hold major pitfalls for the 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, making it costlier to import 106 types of American goods into China.
While an all-out trade war would bruise both economies, the tit-for-tat announcements are not equal in strategy, 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.”
As for the Chinese President XI Jinping, they “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, a trade war is always risky business. While tariffs are often imposed to protect domestic industry, the consequences are hard to predict: it's hard to predict how the other side will retaliate, let alone how your tariffs will impact your own economy.
The Trump administrations list of goods - which excludes many Chinese made consumer products available for sale at Target or Walmart - is likely to increase costs for American manufacturers that depend on imported parts. The tariffs concentrate 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, which has worked tirelessly for a generation to penetrate China's economic boom, starts adding up.
For instance, a trade war could upend suppliers such as Lear Corp. and Delphi Automotive plc, 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 likely also suffer, the NYTimes reports. As China's tariffs would double the current levy on U.S. cars, to 50 percent. A Jeep Wrangler used to costs $30,000 more in China, for a hefty total of $71,000. Under the proposed regime, the cost would rise to over a $100,000.
At risk are also foreign firms that produce in the US, like Germany-based BMW, which sends 89,000 vehicles annually from the U.S. to China, or Daimler AG's Mercedes-Benz with their 65,000 shipments.
Bottom line, 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.”
Why things could get worse before they get better?
According to Rick Noack in the Washington Post, team Trump's attacks on 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. The China 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, it's going to have to come from Congress. Because don't forget, The tariffs may never even be imposed if the two sides eventually agree on a deal to open further China to US imports.
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, it has essentially one option: pass Council of Foreign Relations measure with a veto-proof majority that either overturns the action or strips Trump of his authority to impose it.
The odds of this happening are not good. Edward Alden, a senior fellow at the Council on Foreign Relations, a nonpartisan think tank, says "I 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 better brace for impact.
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