Be your own pundit. Explaining Auto tariffs and our trade imbalance

Will a 25% tariff on imported vehicles and assorted vital components cost American consumers 45 Billion a year, 5,800 per vehicle?
“This would largely cancel out the benefits of the tax cuts”– Alliance of Automobile Manufacturers
Maybe they are lying and it’s #FakeNews
Let’s peel that onion
(Car dealers make their money from auto financing and insurance, also some big chunk from used cars. I’m leaving them out as it has variables outside of these forensics)
The purpose of tariffs is not to make products more expensive for consumers, it is to change the economics of  companies offshoring and to resolve unfair practices overseas and tariffs.
The supply chains of the auto industry go all over the globe in search of cheap labor, lax environmental laws, and all the other dastardly ways to improve profits. Almost all of the US component industry has migrated to Mexico and China.
As the cost of the passing on the new tariffs will not find an eager US. consumer, auto and component makers will have to shift some production back to the US as a lower-cost option. The model of this in action, and working in the US. favor, is Honda (detailed later on),
In terms of assembled vehicles, the largest targets are the EU (particularly Germany), Japan, South Korea, Mexico, and Canada
Component parts cross thru many borders in various stages of completion, and would/could incur tariffs at each stop.
What if, (work me with here as I flesh out my conspiracy theory) automakers and the component industry restructure their supply chains and manufacturing to bring production back to the US?
World Trade Organization (WTO), The European Commission and EU monetary policy
The US. should withdraw from the WTO klatch. EU countries have few shared competencies and any WTO dispute settlement is unlikely to stir retaliation that would escalate conflicts internally within the EU.
Intervention on the level of the dollar (manipulation against our currency). There are big European divergences on monetary policy. Germany does not follow the EU Commission’s recommendations on reduction of their current cash surplus, and this gives us the authority to impose anti-dumping duties against German products and end our subsidies for their energy production.
Let’s start the reverse engineering with the easy analysis, the countries that are the one-offs…
Korea’s Hyundai imports just under 50% of the vehicles it sells in the US. It already has plans to increase production in the US, and tariffs will likely be an encouragement to enlarge and speed up those plans.
Kia Motors, an affiliate of Hyundai, manufactures its Optima and its Sorento in West Point, GA, and imports the rest. Like Hyundai, it also has plans to increase production in the US. Tariffs would boost those plans.
India’s Jaguar Land Rover (owned by Tata Motors) and Volvo cars (owned by Geely) would get hit hard by tariffs, along with other automakers that have no manufacturing plants in the. In expectation of Trump tariffs Volvo just opened a plant in South Carolina to manufacture the new S60, and will start SUV manufacturing there in 2021.
Now let’s go big (or go home)
The EU imposes a 10% tariff on all cars, SUVs, compact SUVs, vans, and pickups imported from the US.
The US imposes a 2.5% tariff on imported passenger cars, SUVs, compact SUVs, and vans from the EU and a 25% tariff on imported pickups (this tariff has worked as intended as foreign car companies with pickups make them in the US
Volkswagen, BMW, and Daimler have manufacturing plants in the US. and export part of their production to other countries. They will need to bring their production into the US.
BMW assembles its moneymaker, the SUVs (X3 and X5) in South Carolina
Japan controls what comes into the country via administrative hurdles. US automakers have found that the costs of getting low-margin small cars over these hurdles are so onerous that the economics doesn’t work out, which is precisely the purpose of those hurdles.
Toyota imports 22%of the vehicles it sells in the US. It’s Lexus line is +/- half its profits in the US, but only a bit more than 1 in 8 sales
Nissan imports 31%of the vehicles it sells in the US.
Honda is the prom king and queen. It would be among the least impacted automakers.
Honda has 12 plants in the US that make Hondas and Acuras plus engines, transmissions, and other components
Honda has 4 cars ranked in the top 10 in terms of US domestic content
Honda ‘The Odyssey’ is built in Lincoln, Alabama and has 75% domestic content
China (read this brilliant post Be your own pundit. Explaining the Chinese Dual Currency system and our trade imbalance)
We have to start forensics on China by understanding their dual currency system.
The ‘onshore’ currency is the Renminbi (RMB) or yuan and also called the CNY. It is only used to pay bills on the mainland. There is no real market for the exchange rate, instead the People’s Bank of China (PBOC) comes up with a price every day thru an unknown equation, and then trades around it
The “offshore” currency, also called the yuan or CNH, is used for international clearing and trading. The CNH has a completely separate set of demand and supply conditions from the onshore RMB
The Chinese have it both ways, huge inner stimulation to appease the people. Strong external currency to maintain purchasing power outside.
By controlling the supply of CNH (offshore money) outstanding China can create a CNH shortage. They’d just buy the offshore currency to drive the value/price up
Alternatively they can sell the offshore currency, flooding the market with CNH to drive the value/price down.
How this affects trade. Bear with me, we’ve got to get a little technical
By managing the global supply and therefore the exchange rate of the onshore currency needed by ‘outside’ companies doing business with China, the Chinese Government has been able to generate, in US dollars, trillions of additional compensation for their net exports as well as purchase Western/Offshore assets at a significant discount.
Simultaneously, the Chinese Communist Party (the one party owner of the State) have been selling Mainland (RMB Denominated) Assets to EU/Western/Offshore Businesses and Investors at a grossly inflated price.
Let’s keep making this pizza, it’s that important
When a US company buys goods from China, he/she pays in dollars, then…
The banks exchange the dollars for CNH (offshore money), then…
The banks must convert the CNH to CNY (from offshore money to onshore money), then…
The exporter of goods receives CNY to pay their onshore staff, bills, etc.
The same happens (in reverse), when a Chinese company purchases US goods
The Chinese company pays in CNY (the onshore currency), then…
His/Her bank exchanges the CNY for CNH (the offshore currency), then…
The CNH goes into the the FOREX (foreign exchange markets used to sell international transactions) to complete the transaction.
The Peoples Bank of China (PBOC), because of their gigantic foreign currency reserves (all the world’s money that is used to pay for Chinese goods), can make the value of the CNH virtually any number they like. Like a thinly traded stock, the PBOC can buy up all/most of the outstanding CNH making it difficult/expensive to close transactions. Conversely, they could flood the market with CNH driving the value of the CNH down.
(going off on a tangent here. Not coincidentally there have been thousands of Chinese owned offshore shell companies created to facilitate movement of wealth from the mainland. If you’re lucky and mobbed enough to be one of the China elites, do you want their funny money that can only be spent at home and is a disaster waiting to happen, or do you want to trade it for some of the real stuff?)
Now, back to the China and cars puzzle…
China imposes a 25% tariff on all imported vehicles but has recently offered to cut this to 15% as a goodwill gesture in the trade war. Their peace offering ain’t peaceful enough.
To get around the Chinese tariffs and sell vehicles to the 1.3 billion Chinese consumers, automakers invested billions in China, set up manufacturing facilities in joint ventures with the China Communist Party (or its proxies) and complied with demands for technology transfers (itself a large and enduring tax)
China-made components are in every vehicle sold in the US, yet only two models that are assembled in China are sold in the US. Those components are a target for tariffs.
GM makes and sells more vehicles in China than it does in the US.
Mexico and Canada
The NAFTA countries are fused within supply chains. GM announced in early June, 2018, that it would build its new Blazer in Mexico, where it already employs 15,000 workers.
In terms of auto exports from the US, the challenges are different with each trade partner.
While as tariffs on vehicles imported from Germany, Japan, and South Korea would mostly be a benefit for US. automakers, tariffs on imports from Mexico and Canada would be a bigly problem for US automakers.
GM imports 30% of the vehicles in sells in the US. Most of those imports are made in Mexico and Canada, including a significant portion of its high-margin trucks and SUVs. (GM pays its 15,000 workers in Mexico less than $3 per hour on average)
Ford imports 20%of the vehicles it sells in the US, most of them from Mexico and Canada.
Both companies would need to absorb the costs of shifting some production from Mexico and Canada back to the US. This type of restructuring takes time and is expensive and in the US, their profit margins would be less.
No that you now all this you’re smart enough to put on a bow tie and go on CNN and CNBC and be the pundit.
The End

h/t to NC

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