How Trump helps German automakers by pushing China's tariff cut

Reporter
Yahoo Finance

The timing seems perfect — President Donald Trump tweeted about the “stupid trade” between China and U.S., in which American cars face a 25% tariff when sent to China while Chinese cars coming to the U.S. are subject to a 2.5% tariff. Within 24 hours, China’s President Xi Jinping told the world that China will “significantly lower the tariff on imported vehicles” this year during his speech at Boao Forum for Asia.

While Trump applauded the move with a new tweet, it’s not a done deal as China just proposed retaliatory tariffs of 25% on U.S. cars if the U.S. ever imposes tariffs on Trump’s target list of Chinese imports. But if China imposes a reduced tariff on imported vehicles, U.S. carmakers like Ford (F) and GM (GM), don’t stand to benefit that much — German automakers will.

German carmakers are the biggest winners

Evercore ISI analyst Arndt Ellinghorst says a potential China tariff cut is pretty much irrelevant for American iconic automakers like GM and Ford, based on the current export volume. “The primary beneficiaries would be German carmakers and the German economy as a whole,” he writes in a note on Tuesday.

Germany-based BMW and Daimler export about 115,000 vehicles to China from the U.S. each year, while Fiat-Chrysler and Ford (both based in the U.S.) collectively export fewer than 30,000 vehicles to China, Evercore ISI data shows. BMW would gain the most among automakers if China implements tariff cuts, followed by Daimler.

German carmakers have been investing in the U.S. for more than a decade. When the euro was strong. Mercedes and BMW set up factories in the U.S., in which they make larger and heavier models to cater to U.S. consumers. As China advances to become the world’s largest consumer market, it makes sense for automakers to export high-end cars to China.

In 2017, imported cars account for only 4.6% of China’s market, most of which are sports utility and high-end luxury vehicles. Ford, for example, ships Lincolns to China from the U.S. For regular passenger cars, American automakers have largely localized the production within China to avoid tariffs and take advantage of the lower production cost.

GM has set up 10 joint ventures with its Chinese counterparts, a practice required by the government. This has helped GM capture the booming demand for cars in China, which has been its largest retail market since 2012. Those made-in-China GM products will not be affected by any tariff.

Tesla and American workers could benefit

While a lower China import tariff on cars will have a limited impact on the U.S. economy, Brad Setser, a senior fellow at the Council on Foreign Relations, says there will be some benefits. 

“I think it’s important to differentiate between what’s good for U.S brands and what’s good for U.S. workers,” Setser told Yahoo Finance. “U.S. workers benefit if a German company makes cars in the U.S. to sell to China and U.S. workers stand more to gain from increasing German-owned but U.S.-made SUV exports to China.”

But the impact will be minimal,  Volkswagen, the world’s largest automaker, hires around 3,000 workers in its Tennessee plant. BMW has created 10,000 jobs in its plant in Spartanburg, South Carolina, according to the company website, while Ford alone hosts more jobs here than those two automakers combined — it has 28,000 workers in its three factories in the U.S.

Another big winner is Palo Alto, Calif.-based Tesla (TSLA), which makes all of its electronic vehicles in the U.S. With the steep tariff, it faces headwinds in competiting with China’s domestic carmakers. Tesla CEO Elon Musk has tweeted to Trump his frustration over China’s tariff, noting that  “it’s like competing in an Olympic race wearing lead shoes.”

But that may not last long, Tesla has been in negotiations with the Chinese government on setting up a plant in Shanghai. Musk said the new plant could begin production in three years.

Krystal Hu covers technology and economy for Yahoo Finance. Follow her on Twitter.

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