US-China Tariff War: Where Do We Stand?

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Tariffs have a direct impact on production costs.

Expect higher prices and a slower economy as it drags on. 

As Canadians, we’ve long known that what happens to the south has an effect on our economy. But it has been a lot more volatile than usual under the current administration, and America’s tariff war with China is playing havoc with the global economy. It began in 2018 when Donald Trump announced tariffs as high as 25% on $50 billion (all figures U.S.) worth of goods imported from China, and the Chinese government retaliated with tariffs on items imported from the United States.

This gradually increased, although additional tariffs of $250 billion on Chinese imports intended to take effect last October were cancelled by the U.S. administration. Among the items under tariff are goods such as clothing, electronic equipment, toys, and cellphones—and when prices for those go up, consumers have less money to spend on vehicles.

At press time, the tariff war was still up in the air, with China reporting that the two countries had agreed to gradually cancel the tariff increases, while the U.S. denied it had agreed to such a measure. Many experts expect the situation will continue without resolution throughout the 2020 U.S. election, and taking a tough stand against China will be a major part of Trump’s campaign.

Taking a hit in the auto sector
According to the World Trade Organization, the trade war directly affects 3% of global trade, while the automotive industry accounts for 8% of everything that’s globally traded. It’s a huge hit for the sector to take.

These trade policies are having an effect worldwide, and while they’re far from the only factor, global auto sales have continued to drop as manufacturing across numerous sectors cuts back, and economies weaken in response. While governments have tried to stem the tide, it’s likely going to continue well into next year.

China only ships about 50,000 complete vehicles to the U.S. every year, but according to the Center for Automotive Research, it provided 12% of America’s imported parts in 2017 and is second only to Mexico as its supplier. And if a Mexican parts supplier to the U.S. uses enough Chinese components to assemble its products, the finished parts would be subject to the tariff as well.

As a result, automakers that build vehicles in the U.S. are paying more to do so. They haven’t indicated how they’ll deal with the extra cost, but if history is any example, at least some of it, if not more, will be passed along to the consumer.

High-volume vehicles rise in price
While Canada exports about five million of the vehicles it builds each year to the U.S., about 65% of the total automotive sector imports into Canada— some $74.1 billion in 2018—comes from the United States. This includes high-volume bestsellers like pickup trucks and SUVs.

Increasing parts production in North America would avoid tariffs, but it’s not a simple process. Estimates are as long as ten years to set up a robust supply chain and assembly processes to substitute for the overseas manufacturers. Throw in tariffs on raw materials, and it could potentially cost more to avoid the levies than it would be to pay them on imported goods. Even if the tariffs rise beyond that point, overseas suppliers are far more likely to relocate production to other foreign facilities than to start from scratch in America, leaving them vulnerable to levies if the U.S. government decides to target those countries of origin as well.

Higher costs for service and repair
According to a 2018 study cited by the U.S. National Automobile Dealers Association (NADA), a 25% tariff on imported parts from China would raise the price of a vehicle assembled in the U.S. by $2,270, and by $6,875 for a typical imported vehicle, and a cost rise of $4,400 more for an average vehicle overall. Monthly new-vehicle payments, which averaged $533 per month at the time of the study, would rise to $611 per month. The tariffs would also result in a drop of two million new vehicles sold; a loss of 117,500 of the 1.1 million jobs in American new-car dealerships; an increase in the cost of used vehicles, and in vehicle service costs; and higher insurance costs.

In both the U.S. and China, the effect isn’t being felt just by companies that directly ship their products across the ocean. The tariffs work their way down the supply chain: as larger manufacturers see their exports drop due to the higher levies, they buy less from the smaller companies that supply them. Although it has been one of the world’s fastest-growing new-vehicle markets since the 1990s, China has now seen more than a year of decline in vehicle sales, as buyers react to an economy that has been weakened by the trade war with America.

So where does that leave Canada? We can expect vehicle and parts prices to rise, for global automakers to feel the pinch, and for the global economy slowdown to affect us. We may not be personally involved in the trade war, but we’re definitely going to be collateral damage. Jil McIntosh

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