Why a trade war with China would hurt the U.S. auto industry
If the United States is at war with China on trade, we should know the stakes.
U.S. politicians, and some businesses, are imbued with anger by China's rise to economic power, and they have accused China of pursuing protectionist policies and currency manipulation.
"We are in a trade war. We have been for decades," U.S. Commerce Secretary Wilbur Ross said Friday on CNBC's "Squawk Box." "The only difference is that our troops are finally coming to the rampart. We didn't end up with a trade deficit accidentally."
The U.S. has a $347 billion (2.4 trillion yuan) deficit with China -- meaning Americans buy a lot more Chinese products than vice versa. Michigan, for its part, had a $6.7 billion trade deficit with China in 2016.
During President Donald Trump's election campaign, he called for a 45 percent tariff on Chinese-made goods. So Ross' comments have brought U.S.-China relations to a boiling point only days before China President Xi Jinping visits Trump in Florida.
An all-out trade war would bruise both economies ¡ª likely China's more. But it also holds major pitfalls for the U.S. auto industry, which has worked tirelessly for a generation to participate in China's economic boom.
Trade chicken
Ross is right, to a degree, that the U.S. and China have been at odds since China's entry into the World Trade Organization in 2001.
Prior to that, China accounted for only a quarter of the United States' annual trade deficit. Now it's nearly two-thirds. That deficit has helped fuel China's unprecedented economic rise, thanks to U.S. consumers' desires for cheap products from clothing to electronics.
The Obama Administration filed 16 WTO complaints against China. And Ford CEO Mark Fields has publicly contended that China manipulates its currency to boost exports.
But that doesn't entirely jibe. Over the past decade, the yuan has appreciated nearly 40 percent compared to the weighted average of major currencies. In fact, at the rate China's middle class is growing, the U.S. trade deficit very well may equalize on its own, according to The Economist.
Trump and Xi should focus on trade imperfections such as China¡¯s 25 percent tariff on light-vehicle imports -- but not at the cost of a trade war.
Supplier risks
Not only would U.S. consumers face higher prices for everyday products, but a trade war could upend U.S. suppliers such as Lear Corp., Delphi Automotive and Adient, which rely heavily on the Chinese market.
Sure, companies like Apple, Intel and Qualcomm would face larger hurdles in a trade war, but the automotive sector is just as vulnerable.
China accounted for about 25 percent, or $4.3 billion, of Delphi's 2016 revenues of $16.7 billion and nearly 12 percent of Lear's $18.6 billion sales.
If China retaliates against new U.S. tariffs, American automakers and suppliers would have a very difficult time in China.
Nearly every international supplier has factories in China. The factories largely support the Chinese market, although they do ship some parts to North America.
These companies have spent nearly two decades establishing themselves in China. A trade war would be devastating to their bottom lines.
While the auto industry lately has focused on the fate of the North American Free Trade Agreement, manufacturers face a potentially steeper challenge if the White House pits the United States against China.
Sources tell me many suppliers have put China investments on hold. Delayed investments are not good for China, the United States or workers in both nations.
The economic relationship between the U.S. and China is bound to rupture under a trade war, so Ross and the White House should tread lightly.
"We are in a trade war. We have been for decades," U.S. Commerce Secretary Wilbur Ross said Friday on CNBC's "Squawk Box." "The only difference is that our troops are finally coming to the rampart. We didn't end up with a trade deficit accidentally."
The U.S. has a $347 billion (2.4 trillion yuan) deficit with China -- meaning Americans buy a lot more Chinese products than vice versa. Michigan, for its part, had a $6.7 billion trade deficit with China in 2016.
During President Donald Trump's election campaign, he called for a 45 percent tariff on Chinese-made goods. So Ross' comments have brought U.S.-China relations to a boiling point only days before China President Xi Jinping visits Trump in Florida.
An all-out trade war would bruise both economies ¡ª likely China's more. But it also holds major pitfalls for the U.S. auto industry, which has worked tirelessly for a generation to participate in China's economic boom.
Trade chicken
Ross is right, to a degree, that the U.S. and China have been at odds since China's entry into the World Trade Organization in 2001.
Prior to that, China accounted for only a quarter of the United States' annual trade deficit. Now it's nearly two-thirds. That deficit has helped fuel China's unprecedented economic rise, thanks to U.S. consumers' desires for cheap products from clothing to electronics.
The Obama Administration filed 16 WTO complaints against China. And Ford CEO Mark Fields has publicly contended that China manipulates its currency to boost exports.
But that doesn't entirely jibe. Over the past decade, the yuan has appreciated nearly 40 percent compared to the weighted average of major currencies. In fact, at the rate China's middle class is growing, the U.S. trade deficit very well may equalize on its own, according to The Economist.
Trump and Xi should focus on trade imperfections such as China¡¯s 25 percent tariff on light-vehicle imports -- but not at the cost of a trade war.
Supplier risks
Not only would U.S. consumers face higher prices for everyday products, but a trade war could upend U.S. suppliers such as Lear Corp., Delphi Automotive and Adient, which rely heavily on the Chinese market.
Sure, companies like Apple, Intel and Qualcomm would face larger hurdles in a trade war, but the automotive sector is just as vulnerable.
China accounted for about 25 percent, or $4.3 billion, of Delphi's 2016 revenues of $16.7 billion and nearly 12 percent of Lear's $18.6 billion sales.
If China retaliates against new U.S. tariffs, American automakers and suppliers would have a very difficult time in China.
Nearly every international supplier has factories in China. The factories largely support the Chinese market, although they do ship some parts to North America.
These companies have spent nearly two decades establishing themselves in China. A trade war would be devastating to their bottom lines.
While the auto industry lately has focused on the fate of the North American Free Trade Agreement, manufacturers face a potentially steeper challenge if the White House pits the United States against China.
Sources tell me many suppliers have put China investments on hold. Delayed investments are not good for China, the United States or workers in both nations.
The economic relationship between the U.S. and China is bound to rupture under a trade war, so Ross and the White House should tread lightly.
