Weekly Brief: US-China Trade War Means Expensive American Cars

The escalating trade war between the United States and China put automakers on edge last week and posed a threat to some key technologies that are fueling the connected car revolution.

It all started Friday morning when China announced that it would resume a 25% tariff on US cars starting December 15 of this year and would slap an additional 10% tax on top of that for some US vehicles. Keep in mind those tariffs are in addition to whatever general duties that are already placed on foreign vehicles entering China. As a result, some US vehicles could end up 50% more expensive come 2020. China also announced a 5% tariff on crude-oil and soybean imports from the US. Add it all up and you get about $75Bn in new tariffs on US goods.

How did President Trump respond? On Twitter, naturally, where he announced that he was placing yet another increase on Chinese imports. As of October 1, 2019, about half (or $250Bn) of Chinese imports to the US will be taxed at 30%, up from the 25% Trump had previously announced. The other $300Bn in Chinese imports will now be taxed at 15%, up from 10%.

The escalating trade war is beginning to feel like a game of chicken between the world’s two largest economies and neither China nor America is willing to swerve. Just how bad the wreckage will be upon impact remains to be seen but automakers are worried, especially BMW, Mercedes, Ford and Tesla, the highest exporters of US-produced cars to China. The last time China placed a 25% tariff on US-produced cars, in 2017, it led to a 50% drop in exports of US cars to China. Those automakers that have local production facilities in China can sidestep some of the tariffs. General Motors falls into this category and Tesla broke ground on a new “Gigafactory 3” in Shanghai as of January 2019 that it expects to be open by the end of this year. Still, the financial impact on US automakers, and by extension on their workers, could be significant.

It also could affect the rollout and cost of some connected technologies, from infotainment screens to advanced driver assistance systems. For instance, Tesla’s Autopilot feature, which it calls “the brain of the vehicle,” is manufactured in Shanghai by a Taiwanese company called Quanta Computer. For better or worse, Autopilot is the most visible and publicized self-driving feature of any in the world. It has pushed the envelope for what an advanced driver assistance system can be, admittedly sometimes too far, but it also has introduced many drivers to the notion that their cars really could be self-driving in the near future. Tesla applied for an exemption from China’s tariffs for Autopilot but the Trump administration denied it. China has a strategic plan called “Made in China 2025” that aims to ramp up expertise in artificial intelligence, robotics and electric vehicles. Tesla, the White House believes, is helping China accomplish its goal, at the US’s expense.

Uber also filed for an exemption from the tariffs. In its case, it was concerned about its JUMP electric scooters for its scooter-sharing program, which are also manufactured in China. Again the White House denied its exemption.

To be clear, Tesla doesn’t plan to omit Autopilot from its vehicles because of the tariffs, just as Uber doesn’t plan to shutter its scooter-sharing program. However, the tariffs may hurt Tesla’s bottom line as the company has argued and many investors believe. Tesla stocks dropped nearly 5% on Friday. As a result, Tesla may have to raise the price on its electric vehicles and, on the Autopilot software package in particular, which currently costs $6,000. Similarly, other American automakers may have to increase the final sticker price of their vehicles to offset the cost of more expensive parts across the supply chain.

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