Trump Trade War Will Hurt GM, Tesla in China

In response to Trump’s new trade policies, China has announced it intends to impose an additional 25% tariff on cars imported from the United States, which could bring the total levy to 50%. The existing 25% import duty is scheduled to go away on July 1, but things are very fluid at the moment as The Mouth That Roared stomps around the White House in a state of high dudgeon.

Donald Trump’s ill-considered trade war against China will have the same effects all wars have — collateral damage. And standing in the crosshairs of the conflict are Tesla and General Motors, both of which are anxious to expand their presence in the Chinese automotive market. Tesla is in the midst of negotiations to build a new factory in the Shanghai Free Trade Zone. GM has been doing business in China for 21 years and is looking to cash in on the electric car revolution the Chinese government is demanding.

So far, the conflict has been mostly a war of words, with The Donald doing what he usually does — bullying, blustering, and browbeating opponents real or imagined. No one seems to notice that if his threats don’t work, he tends to slink away with his tail between his legs, declaring victory to any who will listen. The Chinese, however, are not neophytes when it comes to high stakes games. Their response so far has been carefully calibrated to cause the most economic pain for Trump supporters.

Trade War Will Hurt GM in China

Trump doesn’t care about anyone but Trump. He hasn’t got time to study and understand a situation. Details bore him. He refuses to read the briefing papers his staff prepares for him. He is too busy preening and tweeting to govern. So he is unaware that Chinese people actually prefer to buy Chinese products. Golly, what a shocker, huh?

As Bloomberg points out, Hyundai got jammed up with the Chinese government recently because Korea allowed a US-made antimissile defense system to be installed on its borders. Suddenly, China said electric cars with batteries made in Korea could not be sold there. Hyundai was forced to switch its battery supply from Korean companies to Chinese battery makers.

The damage was done. Chinese shoppers avoided Hyundai showrooms like the plague and sales went into a steep decline. Similarly, when China and Japan got into a flap over who should control the South China Sea in 2012, Toyota, Nissan, and Honda saw their sales fall off a cliff. Some Chinese citizens got so angry they burned down a Honda showroom in the port city of Qingdao.

Even without tariffs, governments can make it hard for foreign companies to do business domestically. Some may remember the days when Japan was the most powerful economy in the world. (Hard to believe today but true nonetheless.) As flotillas of Japanese cars swarmed across the Pacific toward America, US manufacturers complained bitterly that Japan put so many bureaucratic obstacles in their path that selling their cars was in Japan was nearly impossible.

Cars languished at Japanese ports waiting for customs inspectors who never showed up. Japan declared that all American-made cars had crappy exhaust systems. Manufacturers were forced to rip off the factory exhaust systems and replace them with aluminized components. Eventually, the manufacturers just bit the bullet and made aluminized exhaust systems standard equipment on every car manufactured. The change actually benefited American consumers. When was the last time you replaced a muffler? A nation that wants to put the kibosh on imports has a thick playbook of bureaucratic hurdles that can be set in place with a phone call from the right government minister.

“China could retaliate against U.S. President Donald Trump’s tariffs on Chinese goods with a full-blown boycott of American automobiles in the nation,” says Steve Man, a senior auto analyst for Bloomberg Intelligence in Hong Kong. He warns Trump’s tariffs “could derail automakers’ plans to open new manufacturing and export bases in China.” The risk is that after the dust settles and China and the United States kiss and make up — which will happen eventually — Chinese shoppers may simply turn their backs on all US goods. Whether American manufacturers will ever be able to recover from Trump’s intemperate assault on trade relations is an open question.

Additional import duties could hobble Tesla’s push to open a factory in China. Some people will still pay 50% over sticker price for Tesla, of course, but they will be few and far between. One phone call from Beijing could delay an agreement for a factory in Shanghai for years. Investors in automotive stocks recognize the dangers ahead. Tesla was down 6.6% in trading on June 19 and GM stock suffered a 4% decline.

No one denies there is a trade imbalance between China and the US. It make no sense that American companies have had to pay a 25% tariff to sell cars in China while Chinese companies could ship cars to the US and pay little to no import duty. It makes no sense that American companies have been required to enter into a joint venture with a Chinese company in order to build factories in China while a Chinese company is under no such obligation if it wants to operate a factory in the US. Those are issues that need to be addressed. But whether using the economic equivalent of a tactical nuclear device to address those inequities is wise is a question on the minds of many people.