The sparing of auto parts shows the US-China trade war remains far from an all-out conflict, illustrating how the optics of Trump’s tariffs(3) are more alarming than the reality. There are high stakes in threatening disruption to the broader auto industry, as shown by the president’s decision this week to delay imposing tariffs on US imports of parts and cars from the European Union and Japan.
China has been opportunistic in building up the industry. It reduced import tariffs on these goods last year, presumably as a show of goodwill but also because the value of US auto parts exported to China is small. Chinese tariffs on imported parts went to 6 per cent, from as much as 25 per cent on body frames and 15 per cent on axles.
That’s helped to support manufacturers as auto sales drop and price competition intensifies. US peers, meanwhile, are struggling with rising costs for raw materials (a result of Trump’s tariffs on products such as steel) and large-scale restructurings. In its latest round of tariffs targeted at the US, China excluded most auto parts barring a few items such as vehicle seats that are subject to the lowest level of duties at 5 per cent.
Sales to US and other overseas car companies are a growing revenue stream for Chinese component suppliers such as Shanghai-based Huayu Automotive Systems Co. and Minth Group Ltd., which is based in the port city of Ningbo. Others, like Hong Kong-listed, Michigan-headquartered Nexteer Automotive Group Ltd., have operations in the US and supply the likes of General Motors Co.
If Trump decides to target China’s auto parts industry, he won’t be the first. The sector is no stranger to trade crossfire, having been among the top targets for complaints at the World Trade Organization in the 2000s. The US, Canada and the European Union all filed cases at the WTO more than a decade ago. At one time, China’s tariffs on imported auto parts(1) were so high that they could cost as much as a finished car if a manufacturer didn’t meet local content requirements. Other countries contended that this violated China’s WTO accession agreement.
China ultimately lost that dispute, its first such defeat at the WTO. However, it had already succeeded in changing the auto-parts supply chain, as carmakers switched to local component manufacturers and more foreign ventures set up in China. Those relationships weren’t reversed after the WTO ruling, with the country rising to become one of the world’s largest exporters of parts. More than a quarter of what it produces is shipped overseas.
In 2012, China faced another WTO complaint focused on export subsidies. The industry has managed to weather such challenges and keep growing, in contrast to the US, which has let its own auto-parts sector flail, as we explained here.
So far, the costs of President Trump’s tariffs on low-margin Chinese goods have been borne almost entirely by US consumers, householders and importers, initial results from academic studies show. One paper estimated additional costs of $12.3 billion and a $6.9 billion decrease in real income in the first 11 months of last year. Domestic prices have risen and foreign exporters have absorbed almost none of the increase.
If Trump wants to attack an industry that actually matters to China, auto parts is an obvious target. The question is whether he’s willing to take the pain that this will mean for American carmakers and consumers.
(1) None of the tariffs go into effect immediately. From the US side, there is a grace period of sorts based on a technicality (goods that left China and enter the US before June 1 won’t be subject to the tariffs).
China’s don't come into effect until June 1 and the commerce ministry has put in place a way to apply for exemptions. Essentially, despite the threats being lobbed between the US and China, both sides have given each other time.
(2) Completely knocked down and semi-knocked down parts kits.
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Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia. She previously worked for the Wall Street Journal.