The US-China trade war could be a warm-up act for the real conflict over auto tariffs
- US tariffs on auto parts from major players such as Germany, Japan, Mexico – and even China – could provoke retaliation that would dwarf the damage caused by Washington’s current conflict with Beijing
Automotive trade is massive, so the stakes here are high. Total global automotive exports were a staggering US$744.7 billion in 2018. That’s the third largest product category worldwide, trailing only crude oil and refined petroleum. The top seven automotive exporters – and those who would be hit hardest by tit-for-tat auto tariffs – are: Germany, Japan, the US, Mexico, Britain, Canada and South Korea.
The disruption caused by an initial application of US automotive duties (expected to be in the range of 25 per cent) would then be multiplied by retaliatory actions taken by the leading auto exporting countries.
When assessing the potential impact from automotive tariffs, the mind naturally tends to gravitate towards BMWs, Toyotas and Hyundais. And rightly so – these companies and countries are among the major suppliers of foreign cars in the United States. But don’t forget about China. The automotive investigation includes not just finished motor vehicles, but also automotive parts.
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And although China does not have a robust indigenous auto industry that provides finished Chinese vehicles to the US in significant numbers, it does have one of the largest automotive parts industries in the world.
Unlike the Section 232 tariffs on steel and aluminium products, which were widely supported by US industries, automotive tariffs are not supported by the domestic US industry at all.
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Congressional leaders and rank-and-file members of both parties are also lined up in opposition to the tariffs. This would therefore be a broad protectionist measure without a discernible domestic constituency, raising further questions and potentially emboldening the response from other countries.
The Section 232 automotive investigation reinforces an important component of the administration's trade policy approach: the use of punitive tariffs – or the threat of punitive tariffs – as leverage to cajole trading partners into negotiating hard or soft quotas on their level of exports in particular product categories.
Reasonable people can debate the wisdom or folly of such an approach. After all, the global automotive sector is rife with discriminatory and market-distorting policies which have defied resolution through conventional means.
But irrespective of where one lands on that debate, there should be a baseline recognition that such an approach represents a fundamental shift away from the ostensible principles upon which the existing global trade system was established. If this is the road we’re going down, let’s be sure we understand what it means.
Finally, keep in mind that, given how abruptly the tone and tenor of US trade policy has shifted under the current administration, 180 days is a very long time.
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The global trade landscape, along with the individual bilateral trade relationships with the most impacted trade partners, could look dramatically different in 180 days. It is entirely possible that agreements to obviate the auto tariffs could be reached with key trade partners in the interim.
But one thing is clear: if the US does move forward with global automotive tariffs, the US-China trade war might eventually come to be seen as just a warm-up act for the real trade war, spawned by automotive tariffs.
Stephen Olson is a research fellow at the Hinrich Foundation