Why Chinese automakers may not benefit from any US trade deal

January 09, 2019 17:02
Tesla will save considerable amounts in logistics and production costs when it opens its Shanghai factory. Photo: Reuters

The fresh round of vice-ministerial-level trade talks between US and China had a good start this week. Chinese Vice Premier Liu He made a surprise appearance at the meeting, sending a positive signal and helping lift stock markets in Hong Kong, mainland China and US.

That said, even if the two sides reach a deal, it doesn't necessarily mean that all industries will benefit from it. Chinese auto makers, for one, are probably going to get the short end of the stick.

Automotive industry, which plays a critical role in the US economy, is set to be a key battlefield in US-China trade talks.

US car exports to China now face a much higher tariff than the rate US imposes on imported Chinese cars.

Beijing has changed its tariff on US car imports frequently over the past few months.

In July last year, China kept the 25 percent tariff on American-made cars as part of retaliatory measures against the US, while reducing the tariff on auto imports from other nations to 15 percent. It subsequently raised the tariff for US car imports to 40 percent.

After the two nations agreed to a 90-day trade war truce in Buenos Aires on December 1, Beijing agreed to lower the tariff on US car imports to 15 percent.

Soon after, US President Donald Trump tweeted that China will not only lower the tariff, it may remove it completely.

US trade Representative Robert Lighthizer and Peter Navarro, White House trade policy adviser, both noted that the US is confident of reaching a zero car tariff deal with China, given that Washington only levies a 2.5 percent tariff on Chinese car imports.

A lower or zero tariff will no doubt create more competitive pressure for indigenous mainland brands such as Geely and BYD.

Meanwhile, Tesla’s wholly-owned factory in Shanghai witnessed a ground-breaking ceremony on Monday. It is the first project allowing 100 percent foreign ownership.

Being able to produce locally will save Tesla considerable amounts in logistics and production costs, and give the US electric car maker an edge in competing for market share.

Over the years, Beijing has been requiring foreign automakers to form joint ventures with local partners, and their ownership is capped at 50 percent.

Global auto firms including Benz, BMW, Ford, Toyota and Honda have all set up joint ventures in China, in which they own half the stake in order to tap the huge market, now worth about 3 trillion yuan a year.

Such moves to open up the market will expose local auto makers to more intense competition.

This article appeared in the Hong Kong Economic Journal on Jan 9

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist