Note: We’re not making any political proclamations here. Rather, our interest lies in presenting complicated concepts in understandable terms as it specifically relates to the automotive industry.
It seems as if you can’t turn on the TV or open a paper—wait, does anyone read the newspaper anymore? Well, it seems like you can’t open your laptop or fire up a news-related podcast these days without hearing buzz about the current tariffs debacle. But for those who haven’t been following the drama from the beginning, it can be easy to lose track. (And trust us, there is PLENTY of drama.) How exactly did this trade war start? Where do we sit now? And what do these restrictions mean for the auto industry, as well as enthusiasts like you?
If you’re familiar with the timeline, or have little to no interest in those details, then skip ahead to **Us, guys. They’re passed onto us.
But first, just how did we get here?
Perhaps you remember that shortly after Trump took office, he placed a 30% tariff on foreign solar panels and a 20% tariff on washing machines. This may seem inconsequential, but these are two products that China heavily exports to the United States. Shortly thereafter, a tit-for-tat began between the US and China with each side imposing strategic tariffs amid empty trade talks.
The big doozie though, came in June. The Trump administration declared that it would levy a 25% tariff on $50 billion worth of Chinese goods—$34 billion of which was to go into effect the next month. China responded immediately, threatening its own tariffs, to which the US said “Cool. Here’s a list of 10% tariffs on another $200 billion.”
(You can imagine how that was received.)
So, after the last round of tariffs hit this summer, China clapped back with a 25% charge on $16 billion worth of US-made goods. In that list of 333 items were about $10 billion worth of automobiles and motorcycles slated for Chinese markets. Obviously, that spelled trouble for many automakers as they found themselves carefully adjusting production numbers to avoid layoffs and lost profits. Adjustments that seem to have failed for GM at least, who just last month announced it will be shutting down production at four US factories.
Why is the US suddenly being so (passive) aggressive?
These economic strikes are part of Trump’s campaign promise to put the squeeze on China for its unfair trading practices. Unfair practices that have dragged on for roughly four decades.
China has grown into a world superpower at a rate no one really predicted. And while much of that success was kickstarted by Western nations opening trade, the Chinese insist on playing by their own rules. Even after joining the World Trade Organization in 2001, China continued to flout expectations by refusing to engage in true market competition.
“The US and other countries complained that China was not opening its markets enough and keeping the value of its currency artificially low, to make Chinese exports more attractive,” says the New York Times. “The [Chinese] government owns, influences, or subsidizes major industries, giving them an artificial competitive edge. There are heavy restrictions on foreign investment and foreign companies are pressured to share their technologies,” the publication continues.
So, yea, frankly speaking, trade with China has been a painful thorn in the US’s backside for a while now. And since protectionist trade policies were a cornerstone of Trump’s platform, these few rounds of tariffs have placed us in a burgeoning trade war with the Chinese.
Where do we sit now?
The last few months have seen the tariff threats come into effect. But despite Trump’s tweets that “Billions of dollars are pouring into the coffers of the U.S.A. because of the Tariffs being charged to China,” that’s not entirely true. Some money is coming in, yes. But the tariff-targeted goods all have foreign substitutions. So, while Chinese goods go up in price, purchasers in the US just switch to an alternative supplier who doesn’t have a tariff hitch attached. The substitute undercuts the potential tariff revenue.
Is this still a bump in the road for China? Of course. Now Chinese firms have to run around seeking out new customers as they lose US buyers. But it also hurts US companies who now have to re-source materials, potentially paying more from alternative suppliers than they did before the tariffs landed. And who, exactly, do you think those rising costs are passed onto?
**(Us, guys. They’re passed onto us.)
In the game of tariffs, “Consumers are the losers,” says Columbia University professor and international trade expert David Weinstein in an interview with NBC News. “There’s a bigger game than just the tariff game,” he adds, as domestic prices go up to absorb costs and US producers get slapped with retaliatory tariffs from other countries, further hurting business. Additionally, very few products are manufactured without some sort of foreign component, meaning even a narrow tariff scope has a wide berth.
Consider the auto industry.
Already combating the rise of autonomous and electric technologies, automakers have had to become even more nimble in responding to Trump’s tariffs. In November, Ford and GM stated that aluminum and steel tariffs would add $1 billion to their expected raw materials costs. Imported car parts—of which there are billions of dollars’ worth—now face price increases because of border tariffs. And as American companies face 40% duties at Chinese ports, they lose their edge in what has become the world’s largest automotive market.
This has translated into raising prices, sweeping layoffs, and closing plants. And while OEMs may run a little leaner from cutting costs, bumping stock prices and profit margins in the process, the devastating effect on working families, factory towns, and the greater economy cannot be ignored. Additionally, those who wrench for a living, a hobby, or just to save money on repairs, will see aftermarket prices increase as well.
Cummins reports that it’s seeing $250 million in annual impact according to Bloomberg. Similarly, Harley-Davidson has cut its profit margin forecast, Polaris and Winnebago are raising prices to compensate for tariff-related costs, and auto-parts chain O’Reilly Automotive has already begun passing parts of tariffs onto consumers.
Pistons manufacturer MAHLE faces roughly $1.7 million in increased costs alone. The company also intends to pass some of the burden to consumers. “In general trying to create fair trade agreements in the U.S. is a very positive thing. It’s the deployment of those polices and having an understanding of how they impact industries,” says Jim Sexton, MAHLE senior director and plant manager in an interview. “I think we used quick judgment trying to do the right thing and now it’s snowballing on us. The challenge will be long term. If it continues, it could be negative and far-reaching.”
Why Are Tensions Particularly High Right Now?
On December 1, a truce was negotiated wherein the US agreed to hold off on imposing tariffs on Chinese goods for 90 days to allow time for new trade talks.
A truce sounds like progress, right? Well, it was. Until it came out that while Presidents Trump and Xi Jinping ate dinner, Canadian prosecutors acting on behalf of the United States, arrested Meng Wanzhou, the CFO and daughter of the founder of China’s major telecommunications company, Huawei. They allege she used an unofficial subsidiary company, Skycom Tech, to sell Huawei equipment (that uses American components) to Iran, thereby violating US-unilateral Iranian sanctions.
Why is that important? Because Huawei is essentially China’s version of Apple. That is, if Apple were buddy-buddy with military intelligence in a country where the government can spy on, arrest, detain, and imprison people with carte blanche. As the second-biggest smartphone manufacturer in the world (above Apple, below Samsung) and the largest maker of network telecoms equipment in the world, Huawei is also at the forefront of developing the upcoming 5G network.
So, it’s a pretty big deal.
With doubts already popping up about the viability of a “truce,” detaining one of China’s most important tech executives doesn’t do much to convince your opponent that you’re negotiating in good faith. Acting swiftly, China demanded Washington withdraw its arrest warrant and Canada release Ms. Meng—or else.
While that didn’t happen, she was released on $10 million Canadian dollars bail. But China stayed true to its threats, and recently detained two Canadian nationals for allegedly engaging in activities that would undermine Chinese national security. We have yet to see what will come of this retaliatory strike, but the last time China pulled a stunt like this a Canadian man sat in prison for two years.
The US-China trade war is troubling, no doubt. And make no mistake, if negotiations regarding Ms. Meng aren’t met, China will fight back. We can only hope that, much like the reworking of NAFTA into the United States-Mexico-Canada Agreement, international threats will remain just that—threats.
The auto industry managed to step away from that debacle largely intact. It saw mandates on increasing the use of North American-made parts and a higher-paid workforce, but Mexican and Canadian tariffs were taken off the table. While that will definitely translate to higher prices for you and me, as well as a drop in new car demand, it most definitely could have ended worse.
But China is not Canada or Mexico. With two men in prison and a woman on house arrest, the stakes certainly feel higher. Arresting a Chinese citizen in Canada for US-arrest of US-imposed sanctions feels sneaky, but so does refusing to play by international trade rules to manipulate markets in your favor. How exactly this particular fiasco plays out is anybody’s guess.
But while the bigwigs negotiate, you and I will be footing the bill.