The Trade Numerologist: Trade Tariffs Steering Auto Parts
This column is based on data from Global Trade Atlas.
Supply chains are feeling the winds of trade wars.
While brand-name products like bourbon, motorcycles and cars, and commodities like steel and aluminum get the attention, there are signs of change in how the ingredients used to make all those famous goods are being traded.
In recent years, the $2 trillion auto industry, which made almost 80 million cars last year, has aggressively globalized. Companies have diversified sources to make sure they always have a part available at the right time. That end result is a supply chain where shipping bumpers, wipers, wheels, mirrors, belts and cables across borders has become routine, boosting the global parts industry, worth around $400 billion a year.
Then came the Trump administration, elected on a protectionist platform. Earlier this year, it imposed import tariffs of 25% on steel and 10% on aluminum. That's a big deal for carmakers: Both materials are crucial.
The US hasn't yet imposed sweeping new tariffs on cars or cars parts, although it has held out the possibility. So, for now, it makes even more sense for car companies to ship in metal-made parts, instead of importing raw materials, with tariffs, and making those parts domestically.
Top importers of car parts, first quarter, 2018
US $17.1 billion (+5.5%)
Germany $12 billion (+18.7%)
China $7 billion (+9%)
Mexico $6.8 billion (+17.1%)
Canada $5.1 billion (flat)
However, there are signs that automakers are starting to buy more easily available non-metal low-cost parts they need closer to home. Among the ten biggest importers of windshield wipers, only the US decreased imports during the first quarter of 2018 compared to the year before.
Top importers, windshield wipers (% change) first quarter, 2018
US $42.6 million (-0.3%)
Germany $21.1 million (+8.2%)
UK $19.2 million (+16.5%)
Belgium $19.1 million (+16.4%)
France $14.6 million (+4.2%)
China $14 million (+33.1%)
Canada $12.7 million (+12%)
Spain $12.5 million (+1.9%)
Netherlands $12.2 million (+18%)
Mexico $12.2 million (5.2%)
Luckily, times are still good. The global economy is expected to expand at a rate of 3.1% in 2018, according to the World Bank. That strong growth means that, for now, there's still demand to suck up what factories around the world are producing, even if tariffs are popping up between plants and consumers.
Instead of shrinking trade, the duties are tweaking where and how it's being shipped.
The steel and aluminum tariffs are almost sure to shake up supply chains in North America, which trade has been mostly tariff-free thanks to the North American Free Trade Agreement.
There are signs that a Canada-Mexico supply chain nexus could be developing, circumventing the US and its high tariffs. In the first six months of 2018, Canadian car part exports to Mexico were up over 25%.
Canadian car parts exports, first 6 months (% change), 2018
- US $5.1 billion (+7.1%)
- Mexico $441.8 million (+25.9%)
- China $42 million (+3.9%)
- UK $24.8 million (-9.8%)
- Australia $15.9 million (+44.3%)
Mexico, the biggest supplier of car parts to the US, could get hit in a particularly bad way. The country exported 82% of the 3.8 million cars and trucks it produced in 2017, and almost 3% of Mexico's gross domestic product comes from the automotive industry.
At the same time, countries with abundant raw materials are exporting more finished parts, which are harder to tax, and fewer commodity-type raw materials. The best example is China, which is now the world's fourth biggest exporter of car parts, behind Germany, the US and Japan.
Top exporters of car parts, first quarter, 2018
- Germany $18 billion
- US $11.4 billion
- Japan $8.8 billion
- China $7.9 billion
- Mexico $6.9 billion
- South Korea $4.6 billion
- France $4.4 billion
- Czech Republic $4.2 billion
- Italy $4.1 billion
- Poland $3.9 billion
In recent years, the US and other countries have campaigned for China to reduce its gargantuan steel exports. The country makes half the world's steel, and has been dumping excess production, diluting prices around the world. The recent tariffs are part of that campaign.
As China develops a more sophisticated manufacturing system, it is exporting more high-tech parts, and fewer raw materials like steel.
Chinese car parts exports, first quarter
- 2010: $3.4 billion
- 2011: $4.3 billion
- 2012: $5 billion
- 2013: $5.6 billion
- 2014: $6.3 billion
- 2015: $6.7 billion
- 2016: $6.5 billion
- 2017: $6.8 billion
- 2018: $7.9 billion
Compare that rise to what's happened during the same time period to steel exports from China, which have been shrinking, because of higher tariffs in the US and Europe, and because of changes to Chinese industrial policy.
Chinese steel exports, first quarter, 2010-2018
- 2010: $8.8 billion
- 2011: $8 billion
- 2012: $8.6 billion
- 2013: $9.1 billion
- 2014: $11.2 billion
- 2015: $13.3 billion
- 2016: $9.5 billion
- 2017: $10.8 billion
- 2018: $10.4 billion
In a more protectionist world, making and exporting finished parts is a smart strategy. The margins are higher, and it's harder for customs agencies to tax specific parts than bulk commodities.
It's especially smart if you have access to cheap steel. The hard truth for Western automakers is that, in a world of higher tariffs on raw materials, China might have an even bigger advantage in making itself indispensable to supply chains.
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.
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