US carmakers brace for tax hurdle
Donald Trump has not couched his intentions of using it as a weapon
that the auto industry manufacture in the US to sell in the US.
After praising German manufacturing prowess, Trump threatened to impose a 35 per cent tariff — he called it a “tax” — on every car that BMW imported to the US. BMW should build the factory in the US, Trump said, where it would benefit from his plans to slash corporate taxes.
Car exports are the lifeblood of the German economy, and the US is one of the most important markets. New trade barriers would be a serious threat to German growth and could sour relations with one of the US’s most important allies.
“We take his comments seriously,” Matthias Wissmann, president of the German Association of the Auto Industry, said in a statement. “Restrictions in the NAFTA zone would put a real damper on the economy.”
Expectations
In a post on Twitter, Trump laid out his expectations for the auto industry: “Car companies and others, if they want to do business in our country, have to start making things here again. WIN!”
The main question lies in what Trump and his trade advisers ultimately decide to do, auto industry officials and trade experts said. Measures to force manufacturers to shift assembly to US factories and to use more US-made parts could drive up prices for US car buyers and make US vehicles less competitive in world markets.
“The people who lose are the core Trump supporters, who end up buying more expensive products,” said Bill Russo, a former chief executive of Chrysler China who is managing director for the automotive industry at Gao Feng Advisory Co., a Chinese consulting firm.
German carmakers are hoping that they will be able to convince Trump that tariffs on vehicle imports would hurt the US economy and get him to modify his views.
“We should seek a dialogue with Trump,” Clemens Fuest, president of the Ifo Institute, a research organisation in Munich, said in an email. But Fuest also expressed concern that differences over trade could escalate.
“There is a danger that his policy fails and that he subsequently starts looking for scapegoats,” Fuest said. “One such scapegoat could be the German economy.”
In some respects, Trump has a point. The US has been more open to imports than other large automotive markets, with the result that cars shipped in from abroad represent a considerably larger share of the US market than of markets elsewhere. European governments have effectively limited imports by putting pressure on vehicle manufacturers not to close high-cost factories or to lay off workers. The Chinese government requires foreign automakers to partner with local manufacturers and sometimes requires them to transfer technology to Chinese companies.
Still, tailoring measures against the auto industry to create jobs in the US could be difficult. For example, BMW’s Mexico plant would produce 3 Series sedans, which are currently made in Germany and China, and South Africa, where production is being phased out.
Most likely, the plant in Mexico would take jobs from the factories in Germany and China and create demand for components imported from the US.
The BMW factory site in San Luis Potosí, Mexico, is swarming with construction workers rushing to make a 2019 deadline to begin production. There is little chance BMW will change its plans and move the assembly lines to the US.
Trump’s comments hark back to the 1980s, when the Reagan administration criticised Japan for what it called unfair trade policies in the auto business. That compelled the Japanese government to set annual limits on the number of cars shipped to the US.
Although President George H.W. Bush allowed Japan to drop the limits soon after taking office in 1989, the fights of the 1980s taught the global industry a valuable lesson: Made in America can be a good thing. Japanese and European automakers built assembly plants in the US, taking the edge off political battles while creating tens of thousands of jobs in the country.
Benefits
Building plants in the US helped in other areas as well, such as improving the foreign automakers’ logistics and moderating the effect from turbulence in currency markets.
BMW’s largest factory anywhere in the world is in Spartanburg, South Carolina. It employs nearly 9,000 people and exports 70 per cent of the vehicles it makes, BMW says. Daimler makes Mercedes-Benz SUVs and C-Class cars in Tuscaloosa, Alabama, and it is building a factory in Charleston, South Carolina, to manufacture Sprinter vans, creating more than 1,000 jobs.
Daimler, Freightliner which trucks in also the builds US, has 22 factories or research and development centres that employ 22,000 people.
Even Volkswagen has not given up on the US despite an emissions scandal that has led to $20 billion in civil settlements and criminal penalties. The carmaker, which has long produced cars in Mexico, is expanding a factory in Chattanooga, Tennessee, to manufacture a new full-size SUV.
GM and Ford, meanwhile, saw big opportunities in places like China, where rapid economic development meant more people could afford cars.
A tough stance on autos from Trump may not have the same impact as that of Reagan. Since the 1980s, automakers have made fewer of their own parts, buying them instead from hundreds of parts suppliers based all over the globe. That means a US car assembled in the US could still have large chunks that are manufactured abroad.
Chinese manufacturers dominate the market for replacement parts in the US, often undercutting prices for parts from the automakers by half or more. Tariffs on Chinese parts would end up being paid by Americans who took their cars in for repairs.
“US consumers are paying a good price for their aftermarket parts,” because of Chinese providers, said Yale Zhang, managing director of Automotive Foresight, a Shanghaibased consulting firm.
Global automakers’ assembly plants have been rapidly shifting orders from parts factories in the Midwest to plants in China in the last few years. But that trend could stop or reverse if Trump imposes sizeable tariffs on those imports, Zhang said.
For any move Trump makes, the devil is in the details. Options include tariffs on imported cars and possibly car parts. He could also prompt a rewrite of the US tax code so that imports — but not exports — are taxed, a move known as border adjustment.