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The Trade Numerologist: Global Auto in Thick of Trade War

05 September 2018 John Miller

This column is based on data from Global Trade Atlas.

The world's brewing trade war could have a significant impact on automakers, parts manufacturers, logistics firms, and investors.

The biggest threat: a steep import tariff on the world's top car market.

President Trump has made a duty on cars and car parts, potentially 25%, a centerpiece of his renegotiating of trade treaties with longtime economic partners such as Japan, South Korea and the European Union.

In the US administration's view, the sector, which produces around 80 million vehicles a year globally, is leveled unfairly against the US. And, in fact, the US has lower tariffs on cars than its counterparts, according to the World Trade Organization.

The new US hardline, aimed at exacting better trade conditions overall, has frustrated governments, and their carmakers caught in the middle. A group of 40 countries has protested at the World Trade Organization. But they have no choice but to pay attention: In 2018, the US is still, by far, the world's number one car import market.

Top importers of cars, first 5 months, 2018

· US $71.6 billion (-0.3%)

· Germany $26.1 billion (+10.2%)

· UK $20.8 billion (+11.8%)

· Belgium $20.8 billion (+9.9%)

· China $20.7 billion* (+9.3%)

· France $17.5 billion (+18.5%)

· Italy $16.8 billion (+16.6%)

· Canada $15.5 billion (+16%)

· Spain $10.4 billion (+27.5%)

· Australia $7.2 billion (+9.2%)

*Projected data based on first quarter.

New tariffs, in the US and elsewhere, threaten to upend the trillion-dollar-plus market. China and the US have already imposed extra duties on each other's vehicles, which is likely to stimulate EU exports to Asia. With NAFTA trade becoming more difficult, that's likely to help the bottom lines of seaborne auto carriers.

And car talk has become the central part of almost every important trade discussion.

Last week, the US and Canada broke off talks to renegotiate the North American Free Trade Agreement. That deal was, in large part, focused on knotting together the continent's auto sector and supply chains.

And, indeed, a preliminary deal with Mexico announced last month focused on cars. According to the agreement, which has not been ratified, carmakers could import vehicles with no tariffs if three-quarters of the content is made in North America, up from 62.5% currently. And 45% of parts in the vehicles must be made by workers making over $16 an hour.

Even without Canada, the US still aims to sign a final pact in late November. "I intend to enter into a trade agreement with Mexico-and with Canada if it is willing, in a timely manner," Trump wrote to congressional leaders in a letter.

If the three countries reach a deal, it will reduce trade with the EU and Asia, but if it fails and it gets harder to trade cars within NAFTA, that could help the import of cars from outside free-trade bloc arriving in American ports. The US imports a large number of cars on so-called roll-on roll-off, or RoRo ships.

Top exporters of cars to US by sea, first 6 months, 2018

· Japan $19.6 billion (+5.7%)

· Germany $8.2 billion (-14.7%)

· South Korea $6.6 billion (-23%)

· UK $4.5 billion (+0.2%)

· Mexico $3.8 billion (+16.5%)

· Italy $2.1 billion (+3.7%)

· Sweden $1.3 billion (+51.2%)

· Finland $1 billion (+343.2%)

· Slovakia $916.5 million (+0.5%)

· India $598.7 million (was zero in 2017)

Restrictions on trade can have fast impacts. In July, the US set a 25% tariff on imports of cars and car parts from China, and already that's drying up imports from that country.

Last week, Ford said it would scrap plans to make its Focus, a compact car, in China for exporting into the US. The reason, it said, was the tariffs.

Ford's idea had been to start shipping the new Focus to the US from China in the second half of 2019. Instead, Ford will no longer sell the Focus in the US after current inventory is expired.

Another company, General Motors, makes its Buick Envision SUV in China. The company has said it might stop selling the vehicle in the US if it's granted an exemption from the tariff.

In any case, the tariff is almost sure to put the brakes on Chinese car exports to the US, which have been growing.

Nbr of cars exported to US from China, first 7 months

· 2009: 31,187

· 2010: 54,392

· 2011: 32,788

· 2012: 34,293

· 2013: 47,337

· 2014: 53,420

· 2015: 72,486

· 2016: 78,760

· 2017: 123,540

· 2018: 139,033

The European Union is keen to avoid a similar fate. It's offered to let in US cars for zero tariffs under a new industrial trade treaty, in exchange for Washington dropping its tariff plans. That would make sense: It's a European country, Germany, that is still on top of global auto trade, thanks to companies like Daimler, BMW and Volkswagen, and it needs the US market.

Top car exporters, first 5 months, 2018

  • Germany $73.9 billion (+13.8%)
  • Japan $41 billion (+15.3%)
  • US $23.7 billion (+6.6%)
  • Mexico $20.2 billion (+34.1%)
  • UK $19.2 billion (+11.4%)
  • Canada $18.1 billion (-10.1%)
  • Spain $17 billion (+14.8%)
  • South Korea 15.8 billion (-4.4%)
  • Belgium $15.5 billion (+15.3%)

The EU is also a massive car market that Asian manufacturers are likely to target instead of the US. Although Europeans mostly shop for cars on the continent, they still imported $29.4 billion of cars from the rest of the world. Imports from the US fell during the first six months of 2018, while they rose sharply from Japan, Turkey and South Korea.

Top sources of EU car imports, first 6 months, 2018

· Japan $6.4 billion (+17.8%)

· Turkey $5.6 billion (+7.2%)

· South Korea $4.7 billion (+33.5%)

· Mexico $3.8 billion (+87.8%)

· US $3.6 billion (-4.8%)

· South Africa $1.9 billion (+8.6%)

· Morocco $1.4 billion (+32.1%)

· Serbia $522.3 million (-6.5%)

· Thailand $308.1 million (+8.6%)

· China $306.4 million (+273.5%)

Not surprisingly, most cars coming into the EU are arriving in Rotterdam, Antwerp and other big ports.

Top ways of car transport into EU, first 6 months, 2018

· Sea $25.3 billion

· Inland waterway $2.7 billion

· Road $1.1 billion

· Air $159.9 million

· Rail $144.3 million

But the big prize is still the US. One big priority for US policymakers, and their boss, is to stimulate more buying of parts from shops in Ohio, Michigan and Indiana. The US gets most of its imported parts from its NAFTA neighbors, and China.

US parts imports, first six months, 2018

· Mexico $12.2 billion (+5.4%)

· China $5.4 billion (+14.4%)

· Canada $4.8 billion (+6.6%)

· Japan (+1.1%)

· Germany (+0.6%)

· South Korea (-5.9%)

· Taiwan (+4.3%)

· India (+24.6%)

· Italy (+21.4%)

· Thailand (+3.2%)

Already, China has acted aggressively to protect its market share. This summer, it retaliated against the Trump administration with a 40% tariff on US-build vehicles.

Immediately, EU exports of cars to China spiked: Monthly shipments rose to $2.6 billion in June of 2018, up from $1.9 billion in June of 2017. Over the first six months of 2018, EU car exports to China totaled $14.1 billion, up 19.6% from $11.8 billion during the same time period in 2017.

Posted 05 September 2018 by (John Miller, Guest Blogger)

The Trade Numerologist is IHS Markit's unique weekly look at global trade by award-winning journalist John W. Miller, formerly of the Wall Street Journal, using proprietary numbers from IHS Markit's Global Trade Atlas database, the world's most complete and accurate set of trade numbers.

What topic would you like the Trade Numerologist to cover? Email tradenumerologist@gmail.com with comments and questions.

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