Economic historians will cite July 9, 2018 as the date on which the US lost the trade war with China – before the war began. That was when Germany’s top manufacturing companies – Volkswagen, BMW, Daimler, BASF and Siemens – announced tens of billions of dollars of new investments in China as Chinese Premier Li Keqiang posed for a photo op with German Chancellor Merkel in Berlin.
BMW will expand its joint venture with Brilliance Auto to produce 519,000 vehicles a year. It also set up a joint venture to produce an electric version of the Mini together with Great Wall Auto. And it agreed to buy US$4.7 billion worth of batteries from Chinese producer CATL, which just announced a new plant in southern Germany. Volkswagen earlier this year announced that it would invest US$18 billion in China by 2022 and construct six plants to build electric vehicles. BMW will move some of its SUV production out of its South Carolina plant in response to auto tariffs.
Since then the prices of US automakers have tanked, and German auto stocks have rallied. The future of the auto industry lies in electric vehicles, for which China will be the world’s largest market by far. China also has the world’s most advanced battery technology as well as the most robust supply chain for battery production.
China’s response to American tariffs has been to offer German and Japanese industrial companies a privileged position in joint ventures with Chinese manufacturers. China also is reportedly planning to reduce import tariffs for America’s competitors. Toyota and Honda also announced plans to expand Chinese production in July.
The US administration often cites the relative performance of equity prices as a gauge of its success in the present trade confrontation with China. At the sector level, though, equity prices tell a different story.
President Trump apparently believes that tariffs will bring auto production back to the United States, as he suggested on Twitter in early September:
Ford’s North American production manager Mike Levine tweeted in reply, “It would not be profitable to build the Focus Active in the U.S. given an expected annual sales volume of fewer than 50,000 units and its competitive segment.”
The fate of the Ford Focus, though, is the least of the problems of the American auto industry. China has prepared a supply chain for electric vehicles in depth, and it is extremely difficult for automakers who are not entrenched in the Chinese market to compete.
China also holds the keys to the future of self-driving cars. Rather than attempt to design autonomous vehicles to negotiate the poor infrastructure of American cities, China is designing cities around the concept of autonomous vehicles, with roads fenced off from pedestrians and 5th-generation mobile broadband.
China is not only the largest auto market in the world, and likely to grow as a percentage of the world auto market, but it is the center of auto industry innovation.
Wall Street analysts are busy calculating the prospective advantages to European and Japanese exporters. As I wrote in August (Europe, Japan, China and Russia line up against the US), America’s trade war on China portends a global shift in trading relationships away from the US.
Alicia Garcia Herrero, an economist at the French bank Natixis, summarized the potential shift on September 14:
“For the first batch of import tariffs ($50 billion from each side), the key beneficiaries in Europe from substituting Chinese exports into the US would be general purpose machinery. As for China’s market, European car manufacturers, followed by aircraft and aerospace, would be the key winners from potentially replacing the US exporters…For the second batch of import tariffs (on $200 billion from US side and $60 billion from China’s side), Europe’s potential gains in the US are extended to many more sectors, including office, accounting & computing machinery as well as furniture […] European gains in China will also be more widespread, covering sectors such as medical & precision products, basic chemicals and general purpose machinery.”