04 May U.S. and Chinese companies fear Trump’s coming trade war on car industry
Politico, April 17, 2018
This story is part of an ongoing series on U.S.-China relations produced jointly by the South China Morning Post and POLITICO, with reporting from Asia and the United States.
If President Donald Trump decides to slap tariffs on the global car industry, suppliers like Jack Sun, who runs a 30-person operation in northeast China, would be the first to feel the financial pain.
Qingdao Ray Machinery and Technology doesn’t sell directly to the U.S. Rather, it exports molds and tools for a Chinese tire company in the Middle East, which in turn supplies automakers in U.S. and Europe.
Although Trump may think he is aiming his tariffs at big European luxury brands and Asian giants like Toyota and Honda, the additional duties could send shock waves throughout a global supply chain, hitting small cogs like Qingdao Ray particularly hard.
“The U.S. is one of the largest auto markets in the world. If it puts tariffs on the rest of the world, the impact will be significant,” Sun said. “It will affect my client first and then definitely me. It is difficult to find an export market as big as the U.S.”
Such tariffs would harm the world economy much more than the current battle between Washington and Beijing. The U.S.-China trade war directly affects 3 percent of global trade, but the automotive industry accounts for 8 percent, according to World Trade Organization figures.
Trump is sitting on an explosive report from the U.S. Commerce Department that is expected to recommend tariffs as high as 25 percent on vehicles and car parts on the grounds that such imports threaten the national security of the United States.
The report was submitted to Trump in mid-February. He has 90 days from then to decide whether to launch a new chapter in the trade war, although he may take longer.
If the president ultimately follows through with the recommendations, a conflict that had been between two countries would go global, drawing in the European Union, Japan and other auto production hubs that the U.S. considers allies.
For the U.S., attacking car exports would be an effective way of pummeling China, which is at the heart of an elaborate and intricate car industry supply chain. But it would also penalize U.S. companies reliant on Chinese parts, which are often difficult to source at home and find their way into America via third nations.
China’s role in the global supply chain
China does not export many finished cars to the United States. According to data from the Commerce Department’s International Trade Administration, it sold just 51,062 new passenger vehicles to the U.S. last year, worth $1.3 billion. This was just 0.6 percent of total imports by volume — less than the amount sold by Slovakia, Spain or Sweden.
But China is the second-biggest supplier of car parts to the United States, after Mexico, accounting for 12 percent of all imports in 2017, according to the Michigan-based Center for Automotive Research.
The research group warned that “due to the automotive industry’s reliance on complex cross-border supply chains, any new barriers to trade will have a significant impact on the U.S. automotive industry, consumer prices, and U.S. sales, employment, and economic output.”
Many of those Chinese parts suppliers are already feeling the squeeze as they grapple with the 10 percent duty on exports to the U.S. that Trump imposed on Chinese goods based on another section of U.S. trade law, known as Section 301 of the Trade Act of 1974.
Among those exporters is Chongqing Bona Auto Parts, which sells the full range of car parts to American buyers.
“Of course there is an impact on our exports from the existing U.S. tariffs,” said Rita Xiao, the company’s export manager. “The U.S. market accounts for around 20 percent of our total exports, and our exports have decreased by around 20 percent since last October” after a big portion of U.S. duties on Chinese imports took effect.
“Our U.S. clients have requested a lower price, 10 percent off the current price, which sounds impossible to us. For some products, we can lower the price a little bit, but 10 percent off is impossible,” she added.
Chongqing Bona is one of hundreds — if not thousands — of companies in the car-parts sector based near Chongqing. The sprawling metropolis in China’s southwest is home to Changan Ford, a joint venture of state-owned carmaker Changan Automobile and Ford Motor Company. It employs more than 23,000 people and sells mainly to the Chinese market.
“If there are new U.S. tariffs on the global auto industry, there will definitely be further impact on us. U.S. partners and clients from other countries will all ask for a lower price, which is not feasible,” Xiao said.
Actions that boomerang back to U.S.
The tariff burden has not fallen solely on Chinese companies: U.S. businesses are also losing out from the 10 percent duty added last year and stand to suffer more should Trump follow through on new duties on the automotive sector.
Foreign Parts Distributors, a 105-employee company, mainly imports car parts from China, where it has various offices employing management staff and engineers who work with Chinese factories producing steering and suspension parts.
The company’s import duties soared from 2.5 percent to 12.5 percent in September last year after the Section 301 tariffs Trump imposed took effect.
That increase was a big deal in an industry that “generally works with very tight margins,” said Kevin Feig, executive vice president of the company, which was started by his father in 1972 in Miami.
“We and most other companies in our industry are not in a position to just absorb a 10 percent cost increase without passing it forward,” Feig said. “We were forced fairly quickly to raise our prices to our customers and in turn our customers raised their prices to their customers.”
Although other industries have been able to move sourcing out of China to avoid tariffs, the complexity of the products Foreign Parts Distributors sells makes that harder.
“I don’t import towels, so it’s not like I can just say, ‘well the costs went up out of China over 10 percent, so I’m going to buy my yellow towels from Turkey’,” Feig said.
“I’m dealing first of all with a safety item. If you’re driving 80 miles per hour on the highway, if your control arm fails, you’re in big trouble,” he said. “The type of product we work with is not something that’s very easy just to immediately find alternative sourcing. It takes a great deal of research and vetting.”
Feig said that thus far, he had not seen the front-loading of export orders that happened last year, ahead of the potential increase in tariffs on a broad range of Chinese goods including automotive parts.
His view is that further tariffs would “have damaging ripple effects, not just in the automotive sector, but throughout the U.S. economy.”
“New cars would be collecting dust on dealer lots, and owners of older vehicles — badly in need of service to maintain safe operation — would delay necessary repairs due to the increased cost of replacement parts,” Feig said.
Jobs not flocking back
The aim of Trump’s tariffs is ostensibly to stop car companies from producing in or sourcing from China. “Get the damn plants open,” he told a rally in Michigan in March, the latest in a long line of comments directed at large carmakers that manufacture overseas.
But, the tariffs have forced some companies to stop building in the U.S. and buy from China instead.
Brad Kraft, president and CEO of Hopkins Manufacturing, which makes and distributes vehicle accessories like trailer hitches and ice scrapers, said existing and potential tariffs had led him to import more from China.
The company, based in Emporia, Kansas, operates plants in the U.S., Canada and Mexico, but imports many components from China.
It tried to manufacture ice scrapers in the U.S. using foreign-sourced components but because of the items’ tariff classifications, it has been cheaper to import finished goods from China.
The complexity of the auto-parts supply chain also means that electronic components assembled in its Mexico plant contain enough Chinese-made content to be considered of Chinese origin and therefore subject to a 25 percent tariff.
“Now we are in a position where we have to move work out of the U.S. and into China and we will have a lower cost position because the finished good is not subject to a tariff,” Kraft said. “I shared that one with my U.S. senator and he had to shake his head.”
Hopkins Manufacturing has a team in Ningbo, Zhejiang province, that does sourcing, quality control, logistics and other work there. Kraft visited in March and noticed “a fair amount of apprehension.”
“Our own suppliers are very concerned because they don’t know what will happen,” he said.
China’s car industry has been in sharp decline amid weaker economic growth in the nation. Vehicles sales fell for the ninth straight month in March, according to the China Association of Automobile Manufacturers.
During the combined January-February period, when China’s industrial production slumped to a decade low, car manufacturing was the worst performer, falling by 5.3 percent.
Separately, a survey by insurance company Coface found that along with the construction industry, Chinese automotive companies’ invoices are paid later than those in other sectors. Any further pressure on the sector could reverberate throughout the Chinese economy.
“If we look at the national retail value, car sales value is around 10 percent of that. The car industry is labor-intensive. It impacts a lot of things like taxes and employment,” said Patrick Yuan, a Hong Kong-based automotive analyst with Jefferies, an investment bank.
Still, China remains the biggest car market in the world, and international companies will not abandon a shot at such a lucrative customer base. Many have decided to produce in China for consumption in China, taking advantage of just-in-time manufacturing by having their supply chain cluster nearby.
“The tariffs are not making companies export vehicles to the market, but increasing investment in the country,” Russo said. “They’ve weakened companies exporting cars from the U.S. to China, including Tesla, Chrysler’s Jeep brand, Ford’s Lincoln brand and all of the German [carmakers] who manufacture their SUVs in the southern U.S.”
Finbarr Bermingham reported from Hong Kong and Adam Behsudi reported from Washington. Cissy Zhou in Hong Kong and Sidney Leng in Shanghai contributed to this report.