Who Do Auto Tariffs Help? Germans or Americans
Washington imposed tariffs on Chinese goods. Beijing responded with new tariffs on U.S. goods arriving in China (a.k.a. counter-tariffs). These tariffs make it more expensive for Chinese people to buy certain American products. China has selected sectors that will be painful to the United States like cars, soybeans, and liquefied natural gas.
Producing and selling autos is a global business. The tariffs are wreaking havoc on the automotive supply chain. Steel and aluminum tariffs are raising the cost of car parts. New free trade agreements are increasing labor costs. And counter-tariffs are making finished cars and SUVs built in the U.S. more expensive for non-American buyers. It will take a few posts to unpack all of these angles.
Today, we are looking at the impact of Chinese tariffs on U.S. autos, since China is the world’s largest car and SUV market. General Motors (GM) sold four million cars in China last year, making it GM’s largest market for six straight years. And Ford sold over one million cars in China in 2017.
That’s a lot of cars. So naturally, Trump insists that China lower their auto tariffs to help U.S. car manufacturers. Since Beijing is trying to put pressure on the United States it put counter-tariffs on autos and is using those duties as a negotiating tactic.
Before the trade war started, China had a 25 percent tariff on cars and SUVs from the United States. In May, Beijing dropped the duty to 15 percent trying to defuse trade tensions. It didn’t work. Washington imposed new tariffs on July 6th and Beijing responded by increasing the auto duty to 40 percent. As part of the trade truce, Beijing has proposed going back to a 15 percent tariff.
The problem with this approach is that the auto tariffs do not benefit or harm Ford and General Motors very much. Both companies have joint ventures in China. Meaning, they have Chinese businesses that make the cars locally. Their cars are not imported from America even though they are American brands. They are made in China and don’t pay the import duty, making the tariff rate moot.
It doesn’t matter where the brand is headquartered, only when the car or SUV is produced. Imported goods face tariffs, not imported brands.
Companies have historically avoided paying tariffs by moving their manufacturing. For years, GM and Ford have made their cars in China and therefore they don’t pay the duty. In fact, less than 10% of the 1.2 million cars imported by China in 2017 came from U.S. brands. Lincoln exported 65,000 cars, Ford exported 18,000 cars, and Tesla exported 17,000 cars, for a total of 100,000 cars. Even though GM and Ford sell 5 million cars annually to Chinese drivers.
The Other 90%
In 2017 BMW and Mercedes-Benz were the biggest auto exporters to China, exporting more than 370,000 cars from their German and U.S. factories. Their sedans are from Europe, but BMW has an SUV facility in South Carolina and Mercedes-Benz has an SUV facility in Alabama. The SUVs from the United States will face the U.S. tariff rate when they arrive in China. While the sedans from Europe will face the EU tariff rate when they arrive in China.
Lower tariffs on U.S. cars will benefit BMW and Mercedes-Benz more than Ford and GM because they make SUVs in the United States that are ultimately sold in China. This has resulted in news headlines that imply that Trump’s trade war is benefiting Germany more than the United States, which is a bit misleading.
Lower import duties might help German brands sell more SUVs in China. However, these companies are multinationals. They employ people and pay taxes in many countries. In this case, the lower tariff on the U.S. manufactured SUVs will keep those factories open in Alabama and South Carolina, keeping jobs and tax revenues in those states. Lower tariffs will help Americans that work for German auto companies in Alabama and South Carolina.
The Trade War Could Help European and Asian Auto Companies
So far, Trump’s negotiations have not provided an outsized benefit to Germany or Japan. That could change. The idea of a Most Favored Nation (MFN) is a fundamental part of modern international trade. MFNs give each other better trade terms, normally in lower tariffs or higher tariff-free quotas. Part of the MFN deal is that a country must treat all of its MFNs equally.
The World Trade Organization (WTO) is an international body that regulates trade. Its members include the United States, Germany, Japan, and China. WTO members give each other MFN status. The MFN status with China means that if China lowers the auto tariff rate to 15 percent on Japanese cars, then German and American cars must also be eligible for that rate.
After the G20 meeting on Dec. 1st, Trump reported that China would drop the U.S. tariff rate to zero. If this were true and China wanted to comply with its WTO obligations, China would also have to drop its tariff rate to zero for German and Japanese cars. Based on Chinese auto import data, eliminating auto duties would benefit European and Asian car companies significantly more than American companies.
Instead of reducing the tariff to zero, China has publicly said that it will lower the U.S. tariff from 40% back to 15% as part of the current trade talks. This is in line with the rate applied to other MFNs.
Bonus Question: Why Can China Impose a 40 percent tariff on U.S. autos right now?
Are you wondering why China is allowed to ignore MFN status and impose a higher tariff on American cars than Asian or European? Because that 40 percent number is part of a Chinese counter-tariff package in response to U.S. tariffs enacted on July 6th. China is arguing that the United States did not follow WTO rules and has formally challenged all of the new U.S. tariffs to the WTO.
These cases take a long time to work out. Ultimately, if the United States wins the WTO case then the tariffs will remain. If the United States loses then the tariffs must be repealed and China will be able to place new tariffs on U.S. goods to make up for the economic loses it experienced during the trade war. It is also possible that the U.S. does not like the decision and withdraws from the WTO. But that is a topic for another day!