Auto industry caught in the trade war crosshairs

Key Points
  • Responding to the latest tariffs levied by the Trump administration, China announced 25 percent tariffs on $16 billion in U.S.-made goods.
  • That included the roughly $10 billion in automobiles that Chinese motorists were expected to purchase this year.
  • The impact could be significant considering that American-made vehicles were previously saddled with 25 percent tariffs upon reaching Chinese ports.
  • All told, about 276,000 U.S.-made vehicles were shipped to China last year.
Police officers are seen in front of a cargo ship with containers at a port in Qingdao, Shandong province, China April 6, 2018.

Customs agents in Shanghai have refused to release a shipment of American-made Mercedes-Benz SUVs because of what they have described as a "safety risk."

Ostensibly, the Mercedes GLE and GLS models have a problem with their rear brakes that authorities want fixed before they are allowed into the country. But the timing of the move, just days after the Trump administration raised the stakes in its trade battle, triggering the Chinese to swat back with new tariffs on products that include American-made autos, has many observers raising eyebrows.

"This, unfortunately, appears to be part of a tit-for-tat in an escalating trade war, and it could reach crazy levels," warned Joe Phillippi, head of AutoTrends Consulting and a long-time Wall Street automotive analyst.

The Trump administration has to hope the dispute with China won't last long, Phillippi said. If it results in a sharp cut in U.S. automotive exports that could take its toll on jobs over the next few months. And that would likely backfire on Trump and the Republicans "because you don't want to hurt the industrial heartland on the run-up to the mid-term elections." For China, the growing dispute could shut down plans for its own auto industry, which has been flirting with the idea of more exports.

Responding to the latest tariffs levied by the Trump administration, China announced 25 percent tariffs on $16 billion in U.S.-made goods. That included the roughly $10 billion in automobiles that Chinese motorists were expected to purchase this year.

The impact could be significant considering that American-made vehicles were previously saddled with 25 percent tariffs upon reaching Chinese ports. On a $35,000 Ford Mustang, for example, duties already added about $8,750 to the base price. By doubling that figure, analysts like Phillippi warn that the Mustang — and a number of other U.S. vehicles — could wind up being priced out of what is now the world's largest automotive market.

"We will continue to export from the U.S. some of our great products," Ford said in a statement provided to CNBC in response to questions about the new tariffs. "However, with limited pricing capabilities, we will be lowering volume on some of our exports."

Unless Ford can find alternative markets for exports like the Mustang, the impact of such a move could be the loss of American jobs.

All told, about 276,000 U.S.-made vehicles were shipped to China last year. Because of the duties that were already in place, manufacturers tended to focus on higher-price models with large profit margins built in, such as the Navigator, built by Ford's luxury division Lincoln.

The Detroit automaker is actually just the third-largest exporter of U.S.-made vehicles to China. At the top of the list is BMW. Like most automotive manufacturers, it has set up a global network of plants, many serving as centers for production of key products, such as the X5, which it exports to worldwide markets. Mercedes-Benz takes a similar approach with its plant in Vance, Alabama. Both focus on utility vehicles since the U.S. is the number one market for SUVs and car-based crossover-utility vehicles.

Full speed ahead — for now

The trade war comes along at a particularly bad time for BMW. The automaker recently authorized a $1 billion expansion for its plant in Spartanburg, South Carolina, its largest manufacturing complex in the world. The move was intended to create about 1,100 new jobs with the addition of the all-new X7 model, BMW's largest and most expensive SUV yet.

"We're proceeding full speed ahead," said Oleg Satanovsky, a BMW spokesman, despite the automaker having previously warned that it might cut back on the project if a global trade war breaks out.

But Satanovsky was quick to add that "We will wait and see" what happens with the dispute in China, as that market was expected to be a critical one for the new X7 flagship, as well as the X5. Last year, Chinese motorists bought 52,407 X5s, making it the single most popular American-made vehicle sold in that country. The BMW X3 wasn't far behind, with sales of 34,609.

BMW is caught in a tough spot as trade barriers rise, having no facility currently capable of taking on production of its X models in the short-term, but the spokesman suggested it is studying "a lot of options" it might have to take if the dispute stretches on. And the need to act could become even more dire if the Trump administration follows through with threats to impose new sanctions on European auto imports, a move that would all but certainly bring rapid retaliation.

Mercedes is the second-largest exporter of U.S.-made vehicles to China, the GLE generating 40,304 sales last year, while its GLS and R-Class models are in the top 10 list, as well.

For its part, the Stuttgart, Germany-based automaker is trying to keep a low profile as the trade war heats up. A spokesman for Mercedes' parent Daimler told the Reuters news service that the company is "working with the relevant authorities to resolve the issue," that has sidelined its GLE and GLS models at the Shanghai port, describing the issue as "entirely technical."

The automakers "don't want to get caught in the middle of a polarized situation," said David Cole, the chairman-emeritus of the Center for Automotive Research, in Ann Arbor, Michigan. "They don't want to be seen as being on one side or another."

But there seems to be little they will be able to do to avoid getting caught up in the dispute, Cole and other observers said. And that could create an escalating series of challenges that only begin with higher sanctions. The issue facing Mercedes could be just the first step in delaying or outright blocking the shipment of American-made vehicles into China.

Meanwhile, analyst Phillippi worries that Chinese authorities could turn up the heat on U.S.-based manufacturers, General Motors, Ford, Fiat Chrysler and Tesla, in particular. "You could see a derailment of investment programs for expansion plans that have to be approved by the Chinese government," he said.

GM is the second-largest automotive manufacturer in China, behind Volkswagen, and it is constantly upgrading and expanding its plants. Ford was a relative latecomer to the market and has been struggling to catch up. Its Chinese model line-up is out-of-date and it is getting ready to launch a new wave of products, including the Territory SUV revealed this week. Fiat Chrysler Automobiles was also a latecomer and needs to expand its relatively limited Chinese production base. And Tesla only last month confirmed plans to build its first assembly plant in Shanghai.

With relatively little effort, Chinese authorities could tie up all these programs, even cancel them outright, according to experts familiar with the way the country operates. Considering the vast size of the Chinese automotive market, such setbacks could prove disastrous.

But "both countries' automotive industries could get hurt if the trade war escalates," adds Phillippi.

The Chinese market imports relatively few foreign-made vehicles, the various trade barriers that have infuriated the Trump administration effectively limiting imports to specialty and high-end models. But China doesn't export all that many vehicles, either. Until recently, Chinese plants struggled just to keep up with domestic demand. As the growth of the home market slows, however, that seems likely to change.

China's ambitions at risk

For the moment, China ships relatively few vehicles to the U.S., these include not only the Buick Envision but also several versions of the Volvo S60 sedan. That Swedish-based company is owned by China's Zhejiang Geely and plans to add more Chinese-made products to the list over the next several years. Ford is also planning to join the list of importers over the next several years.

Meanwhile, China's homegrown companies have long talked about export opportunities but, until recently, shipped only a small number of models to markets primarily in Asia, Latin America and Eastern Europe.

Several of the larger manufacturers, such as BYD, have exhibited products at U.S. auto shows though, until now, there was no follow-through. But after displaying several new models at the North American International Auto Show in Detroit last January, Guangzhou-based GAC has been quietly lining up a U.S. distribution network, with plans to open its first showrooms next year. Others set to follow include BYD and Great Wall.

All told, Americans bought about 50,000 Chinese-made vehicles in 2017, but a forecast by the Center for Automotive Research anticipates that will reach 225,000 by 2019 and 500,000 by 2023 – barring new trade restraints, of course. The Trump administration could certainly find ways to short-circuit the ambitions of China's auto industry if the trade war escalates.

With the specter of prior waves of Japanese and Korean cars flooding American shores, there are many folks in the U.S. auto industry who would be happy to see a Great Wall erected to keep out Chinese manufacturers.

"When it comes to automotive trade, we've been everybody's sucker for a long time," said Cole. "The question is whether we will do things in a smart way."