“Nice car industry you have. Shame if anything happened to it.”
Readers may recall that Trump was all gung ho to give China an even bigger bop on the nose when China threatened to make a tit-for-tat response to Trump’s scheduling $50 billion of Chinese goods for tariffs. Trump claimed he was going to up the ante to as much as $400 billion in Chinese goods, with the centerpiece being the high-tech sectors given prime billing in the Made in China 2015 plan.
US soyabeans, one of the Chinese targets, swooned, and the US stock market wasn’t too happy either, although the averages eked out a meager gain despite the trade headwinds (due perhaps to tax cut fueled buybacks).
But have no fear! Trump’s response is to double down, and say that his next big trade idea is to slap 25% tariffs on auto and auto parts imports. And he probably likes that Asian markets, including China’s highly leveraged stock market, are taking a nose dive. From the Financial Times:
A key index of major stocks in Shanghai and Shenzhen tumbled in one of its worst days this year on Monday, leading broad declines across Asia amid rising fears the US-China trade dispute could spread into a global trade war.
The CSI 300 shed 2.9 per cent with the financials segment taking the biggest hit, dropping 4.1 per cent, as all market sectors lost ground. The fall was the fifth worst day for the index this year, according to Reuters data, and more than wiped its 2.6 per gain on Friday — a rally that softened the index’s sell-off last week but left it still off 2.7 per cent in the period.
The Topix in Tokyo fell 2.1 per cent and in Seoul the Kospi sank 2.4 per cent…
The Chinese currency also continued to weaken on Monday. By 3.00pm in Hong Kong, the onshore renminbi was down 0.5 per cent at Rmb6.6497 against the dollar and heading for its worst close since November.
Now Trump does have a point, even though he’s not been articulating it very well. The US has lower tariffs on many EU and Chinese goods than they do on ours, such as on cars. As Wolf Richter explained:
Another purpose [of tariffs] is to persuade other countries to lower their own tariffs. It has been an uneven playing field for decades, stacked against US workers.
The EU imposes a 10% tariff on all cars, SUVs, compact SUVs, vans, and pickups imported from the US. The US imposes a 2.5% tariff on imported passenger cars, SUVs, compact SUVs, and vans from the EU and a 25% tariff on imported pickups (a tiny segment of the EU market).
China imposes a 25% tariff on all imported vehicles but offered to cut this to 15% as a goodwill gesture in the trade war. To get around the Chinese tariffs and sell vehicles to the 1.3 billion Chinese consumers, all global automakers have invested billions of dollars in China, have set up large manufacturing facilities in required joint ventures with often state-controlled Chinese companies, and have submitted to the required technology transfers. GM now makes and sells more vehicles in China than it does in the US.
The problem with slapping tariffs on any good that are important to extended supply chains is that it’s like using a sledgehammer to try to defuse a bomb. The results are not likely to be pretty.
GM made clear last week that it was Not Happy about Trump’s plans to increase tariffs on cars and car parts. From the Financial Times on Friday:
General Motors has joined the corporate backlash against Donald Trump’s trade wars, warning that the US president’s threatened tariffs on imports of cars and parts would hurt the US economy and could lead it to reduce its manufacturing in the country.
In a letter to the US Commerce Department filed on Friday, the US carmaker said the tariffs being contemplated by the Trump administration would raise the prices of its vehicles by thousands of dollars, undermine its competitiveness against foreign producers and lead to a loss of US jobs….
The US imported more than $300bn in cars and parts last year, more than 10 times the value of the steel brought into the country.
A study by economists at the Peterson Institute for International Economics said if the Trump administration goes ahead with its auto tariffs it would lead to the direct loss of 195,000 US jobs. If that escalated and other countries retaliated in kind, more than 600,000 jobs would be lost, it found.
Donald Trump’s threat to hit car imports with punitive tariffs risks sparking global retaliation against as much as $300bn of US products, Brussels has warned.
The warning is the first time that the European Commission, in a written submission to the US Department of Commerce seen by the Financial Times, has set out a detailed response to Mr Trump’s threat to slam punitive tariffs on imported vehicles, with EU capitals increasingly convinced that the unpredictable US president will act soon…
EU officials stressed that no decision had yet been made on how to retaliate. But the document warned that the EU and other major economies would be “likely” to apply countermeasures to “a significant volume of trade”, with as much as $294bn — accounting for 19 per cent of US goods exports in 2017 — potentially in the line of fire. The measures could apply “across sectors of the US economy”….
This week global automakers warned that imposing the tariffs on car imports would raise prices of imported vehicles by up to $6,000 per car and lift prices of locally made cars.
The commission document said that, according to its “internal analysis” and other expert studies, the tariffs would be an “own goal” for the US economy even before other economies retaliated. The interconnectedness of the car industry, and its high degree of regional specialisation, mean that imposing additional 25 per cent tariffs on imports would cause a hit to US gross domestic product “in the order of” $13bn-$14bn, according to the document.
Apparently trying to drown out reports on the EU submission, Trump is defending his approach, as the Journal recounts in Trump Cites Car-Tariff Threat as Biggest Trade Leverage:
President Donald Trump said he sees his threat to impose global auto tariffs as his biggest weapon to extract concessions from trading partners, shedding more light on his broader trade policy strategy.
“You know, the cars are the big one,” Mr. Trump told Fox News in an interview broadcast Sunday. “We can talk steel, we talk everything. The big thing is cars.”…
Mr. Trump has repeatedly complained about Europe’s 10% tariff on car imports compared with the 2.5% imposed by the U.S., but he hasn’t mentioned the 25% tariff the U.S. imposes on imports of light trucks…
The Trump trade team has tried to use the metals tariffs as broad leverage—to get big concessions on Nafta, to get Europe to slash its autos tariffs and boost military spending, and to get Japan to promise to buy more U.S. goods.
But so far, those countries have called the U.S. bluff, absorbing the U.S. tariffs and, in the case of Canada and Europe, fighting back with penalties of their own.
Canadian retaliatory tariffs took effect Sunday. And Europe has claimed a victory of sorts in that tiff, when Harley-Davidson Inc., the Milwaukee-based motorcycle maker, said last week it would shift some production outside the U.S. to avoid the cost of European tariffs.
And if that isn’t enough excitement for you, Trump is trying to get out of the WTO too. From Axios (hat tip John C):
Axios has obtained a leaked draft of a Trump administration bill — ordered by the president himself — that would declare America’s abandonment of fundamental World Trade Organization rules.
Why it matters: The draft legislation is stunning. The bill essentially provides Trump a license to raise U.S. tariffs at will, without congressional consent and international rules be damned.
Trump is so fabulously unpredictable that it’s futile to try to game out his antics out. At a minimum, he wants to have something he can spin as a accomplishment by the midterms. The wee problem he has is various US businesses like lobstermen, are already taking hits. US automakers and foreign firms with US operations can and will get plenty of press coverage as they make noise about how much Trump tariffs on cars would cost in terms of US jobs. So it isn’t clear how he gets what he wants out of this sparring, unless he deescalated and declares victory, taking credit for things that didn’t happen or weren’t related to his theatrics.