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Prospects that the trade war could rip apart the global auto industry are scary, perhaps even for President Donald Trump. Good thing it could just turn out to be bluster.
Toning down his rhetoric, Trump is expected to give the European Union (EU) and Japan 180 days to agree to a deal that restricts the US’s imports of autos and car parts, Bloomberg News reported. The Commerce Department found that American innovation capacity was at risk; low research and development spending posed a national-security threat; and “imports continue to displace American-owned production,†according to the report, which cited people familiar with the matter.
Companies in the US aren’t notable laggards in comparison to their rivals in Europe and Japan on R&D. Meanwhile, the US is still drawing plenty of investment. Last year, the world’s largest carmakers announced around $4.4 billion of outlays in North America, almost 80% of which was destined for US facilities. Around a quarter of that would be directed towards R&D operations in the US.
That positive trend now risks being reversed. Already around $14 billion of trade a month is being redirected or lost as a result of tariffs, as global suppliers try to avoid or minimize direct duties. Meanwhile, an analysis by the International Monetary Fund (IMF) last October found that a 25% levy on all imported cars and auto parts would have just as serious an effect on the US and global economy as the same tariff imposed on $267 billion of Chinese imports. Together, the measures would reduce US real output by about 0.8 percentage point compared with a tariff-free scenario, and take about 0.4 percentage point off the global economy.
The irony is that the health of the US car market partly depends on foreign companies doing business there. Some 27% of US auto production comes from the local plants of European auto companies, and much of that activity depends on parts imported from across the Atlantic. The US is also the EU’s biggest auto-export market, accounting for about the same volume of trade as the next three countries combined. That puts countries like Germany in a tight spot. So-called “growth shocks†among the country’s six biggest auto firms explain close to 15% of GDP changes in the country, according to Goldman Sachs Group Inc., while only contributing around 10% to output.
It’s a similar picture with Japan. A quarter of Japanese-branded vehicles sold in the US are imports, including the vast majority of Subarus and Mazdas. More than a third of Japanese auto exports go to the US, according to the Japan Automobile Manufacturers Association.
European and Japanese carmakers now have large production bases in the US and Mexico, and they’ve been expanding their capacity over the course of the last year. More than half of production from the US factories of Germany’s big three automakers is exported, improving America’s trade balance as a result.
Despite all this, the balance of trade – in autos and otherwise – has never quite shifted in favour of the US America’s trade deficit has deeper roots in its budget and the Treasury market than can be cauterized by tariff policy alone. That suggests punitive measures from Washington are unlikely to achieve their intended effect. Let’s all hope Trump’s hectoring stays just that.
—Bloomberg
Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia. She previously worked for the Wall Street Journal