GM builds Chevy vehicles in China
GM
Donald Trump fired a broadside Saturday against China in his ongoing trade war, but it was felt more acutely in the U.S., which has extensive investments in the country that could be at risk.
Trump asserted Saturday at the meeting of the G7 countries that he has the authority to force all American businesses to leave China, citing a national security law that has been used in the past to target terrorists, drug traffickers and pariah states like Iran, Syria and North Korea.
Trump posted a message on Twitter citing the International Emergency Economic Powers Act of 1977, a law written to allow a president to isolate criminal regimes. But Trump is suggesting he could use it to sever economic ties with China over tariff fdisputes opposed by most companies and even many members of his own party in Congress.
“For all of the…Reporters that don’t have a clue as to what the law is relative to Presidential powers, China, etc., try looking at the Emergency Economic Powers Act (EEPA) of 1977,” Mr. Trump wrote. “Case closed!” By Sunday, he was softening his rhetroric.
For automakers already whipsawed by Trump’s chaotic tariff strategy against China, that threat is worrisome.
China is the world’s largest car market, with about 28 million vehicles expected to sell in 2018, according to IHS Markit. That is compared with about 17 million expected in the U.S., the world’s second largest car market.
Conventional wisdom would dictate that Trump will not exacerbate the chances of plunging the U.S. and potentially the global economy into a Recession in an election year. But there is nothing conventional about Trump and the U.S. Congress, even the Republican Senate, seems to have no check on the White House.
General Motors sold 3.64 million vehicles in China in 2018 and earned almost $2 billion. Ford and FCA are weaker in China than GM. And it is unclear how the EPPA would be applied to FCA since the company is incorporated in The Netherlands. It’s also unclear how the EPPA would effect the alliances that GM and other automakers have with local Chinese automakers.
The Trump White House is in a game of chicken with China on trade. China is punishing U.S. farmers, distilleries, motorcycle makers and more in retaliation. And China is threatening to worsen the tariffs on U.S. cars that are imported into China.
Tesla and Ford probably have the most to lose among U.S. automakers. The two companies are the top sellers of U.S.-produced vehicles in China, according to research firm LMC Automotive. GM builds almost all the cars it sells there inside China. Ford sells 20% of the 230,000 U.S. produced vehicles sold in China, while Tesla accounts for 7%. Daimler and BMW combine for 57%–vehicles built in the German automakers’ U.S. plants.
Trump rails against the 25% tariffs charged on U.S.-built vehicles entering China, but the vast majority of vehicles from U.S. companies are built in China, and thus exempt from tariffs. China is only charged 2.5% tariffs on vehicles entering the U.S., but China exports almost no vehicles to the U.S. But if China tried to export pickup trucks to the U.S., it would pay 25%.
China decades ago imposed the tariffs so that U.S. companies would partner with local Chinese companies and build vehicles inside China, creating jobs and schooling Chinese workers on Western ways. Volvo, which is now owned by a Chinese car company, has built a plant in South Carolina. So, Chinese companies are beginning to make reciprocal investments.
It’s worth noting that Trump, while hailed as a “business man” has actually been a real estate developer. Investing in hotels and golf courses is nothing like running a global manufacturing business with a global supply chain. His knowledge and appreciation of businesses outside of the real estate game are riddled with failures and bankruptcies.
The other threat from China impacting the outcome is that the U.S. budget deficit, worsening by $1 trillion a year under Trump despite economic growth, is financed heavily by China buying U.S. Treasury debt. The U.S. does not have a similar cudgel to wield against China, making tariff warfare the White House’s only car to play unless it turns to other non-trade weapons like restricting or cancelling visas granted to Chinese college students–there were more than 360,000 Chinese students in the United States in the 2017-2018 school year, according to the Institute of International Education, more than triple the count from nine years earlier.
However this scenario shakes out, it will be ugly.
