It started, like so many things, on Twitter. Amidst a national debate over his promised tariffs on foreign steel and aluminum, President Trump tweeted on Wednesday that China has been asked to find ways to cut the trade deficit between the two countries by a billion dollars. (FWIW: The request comes from the US, which Trump didn’t specify, and the correct number is $100 billion.)
“We look forward to seeing what ideas they come back with,” Trump wrote.
On Thursday, @ElonMusk joined the conversation, because this is how trade policy is argued now. “Do you think the US & China should have equal & fair rules for cars?” he asked. “Meaning, same import duties, ownership constraints & other factors.” In a series of follow-up tweets, Musk pointed out an American car going to China pays a 25 percent import duty. And that a Chinese car coming the other way pays just 2.5 percent. And that auto companies that want to operate in China must collaborate with a local company. “It’s like competing in an Olympic race wearing lead shoes,” he wrote.
An Olympic race with a whopping big gold medal. China is the world’s largest car market, one on which nearly every automaker is becoming increasingly reliant. So yes, the world’s automakers are prepared to don those heavy shoes, submit to regulations and restrictions, and sell as many cars as possible to China: In 2017, General Motors sold just over three million vehicles in the US—and four million in China. Although previously meteoric rate of sales growth is slowing, it’s still on the up, particularly luxury brand sedans, like Buicks, and SUVS, which can be very profitable vehicles. Cadillac alone saw a sales jump of 51 percent last year. To do it, GM had to enter into joint ventures with local partners, one of the rules designed to give the country’s young auto industry a chance to rival the established competition in the US, Europe, Japan, and Korea. And Musk doesn't like those rules.
The first question to address is, what exactly is an American, or Chinese, car? “The traditional notion of national car manufacturers isn’t valid any more,” says RA Farrokhnia, business and engineering professor at Columbia Business School.
Auto manufacturer supply chains wrap around the globe like a cocoon—parts might be manufactured in one place and assembled in another, while the people running the process sit in an office somewhere else altogether. In 2016, the Japanese owned Toyota Camry topped the Cars.com list of “The Most American” vehicles. Sounds ironic, but it’s assembled in Kentucky and Indiana. (In 2017 the Jeep Wrangler, built in Ohio, topped the list, but only because cars.com had to change its judging criteria. Previously, to make the list at all, 75 percent of a car’s parts had to be domestically sourced. Globalization of supply chains would have meant only three vehicles would have qualified under those rules, down from 60 a decade ago.)
Meanwhile, Chinese company Geely owns (superficially) Swedish Volvo. It builds the S90 sedan in China, and will make the upcoming Polestar 1 performance hybrid there too, at a new factory in Chengdu—cars it exports to countries all over the world, including the US. Geely, then, is likely one of the competitors Musk is complaining about when he says “there are five 100% China-owned EV auto companies in the US.” The others are Faraday Future, Karma Automotive, NIO, Lucid, Baidu. Byton, another Tesla competitor, is also backed with Chinese money.
Musk’s Tesla is all-American, building cars in California and batteries in Nevada (but even they rely on some components imported from overseas). But electric cars are hot in China, and Tesla wants a slice of that fast-growing EV market. So you can understand Musk’s frustration over lopsided trade restrictions. (It’s a common sentiment in the industry, but Musk is the rare CEO who expresses such thoughts over Twitter, rather than public relations experts and lobbyists.)
There are two ways to level the uneven playing field that Musk sees. One is to persuade China to drop its tariffs and restrictions. The problem is that those Chinese companies he notes are operating in America sell just about zero cars. Volvo moves just 80,000 cars or so in the US every year, and it’s by far the biggest of the crew. That leaves the US with very little negotiating power, because American manufacturers are more dependant on sales in China, than the other way around.
The White House can speak nicely to Chinese officials, and ask them to please reduce their tariffs. They could use other geopolitical leverage, but there’s no obvious mechanism to twist China’s arm. And to take a wider political viewpoint, are car imports the most important thing for the government to be focusing on right now?
“If you had one point of leverage on China, would you use it for cars, or to handle the North Korea situation?” says Farrokhnia.
Trump could impose tariffs on imports of Chinese cars into the US, to level the playing field on paper at least. But, messing with today’s global business ties means risking collateral damage. Limit one import, impact another. Economists are just starting to work out how Trump’s steel and aluminum import tariffs will hit the domestic companies that use steel for everything from cars to construction.
If Musk catches Trump’s ear, and is able to provoke him into asking China for changes, car companies have to contend with plenty of other issues besides tariffs when trying to expand into that new market. They incur the expenses of starting sales in a new country, like having to offer different interior options, updated user interfaces, and for China often a stretched wheelbase with a super comfy back seat for chauffeured execs.
“But on top of that we’re starting to see additional restrictions that will create difficulties for car makers,” says Farrokhnia. For example, in the US, high-end Cadillacs come with the impressive Super Cruise hands-free semi-autonomous driving system. To make it work, Cadillac created lidar laser maps of the freeway system in the US and Canada. In China, such mapping is considered a national security issue, and so must be done by Chinese companies. (Cadillac is still working to bring Super Cruise to China, but with a local partner.) Other companies may be reluctant to start testing their new robo-cars in China, if they have to do it with a local partner, and share their proprietary, artificial intelligence algorithms.
“The Chinese have long term plans, they’re smart, the understand the broader geopolitical issues, and they’re going to leverage any unfair advantage that they can,” says Farrokhnia.
Later on Thursday, Musk retook to Twitter for a bit of backpedalling, saying he thinks a fair outcome for all is quite likely. “China has already shown a willingness to open their markets and I believe they will do the right thing.”
That may be wishful thinking. Unfortunately even for Twitter’s most powerful grandstanders, Donald Trump and Elon Musk, it’s not possible to solve the world’s global automotive trade issues in 280 characters.
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