Trump Trade Stance Turns U.S. Automakers Hawkish on China

Recent reports about the Trump administration’s plans to fight China’s protectionism in automotive trade matter in no less than three different respects — with the third being both the most neglected and potentially most important. For it makes startlingly clear how the emerging new Trump-ian trade policy could both remedy specific problems American producers have with specific regions and countries, and reverse the powerful production and job-killing trends set in motion when U.S. trade policy entered its current, offshoring-focused phase.

President Donald Trump’s reported China auto trade policy most obviously represents an early effort to keep a central campaign promise. Candidate Trump repeatedly vowed to make sure that Washington’s overall approach to Chinese commerce benefits domestic employers and their workers first and foremost — not multinational companies that successfully lobbied both major political parties to allow them to supply the high cost U.S. market from that super-low cost country.

The industry is anything but the most obvious place to start fixing America’s lopsided commerce with the People’s Republic.

So with plans announced for a summit sometime in April with Chinese leader Xi Jinping, it’s understandable that the administration would start spreading the news about its determination to end predatory practices that, in particular, artificially depress China’s imports of American-made vehicles.

Second, reports of a U.S. automotive trade offensive have also been useful in undercutting claims that the president was turning soft on China. As critics have noted, Mr. Trump has backed away from his promise to declare China a currency manipulator on his first day in office. Secretary of State Rex Tillerson just finished a visit to Beijing where trade issues took a decided back seat — if they were raised at all. And Trump-haters had begun speculating that this unexpected turn in China policy was linked with Beijing’s decision to approve provisionally the Trump businesses’ applications to register dozens of trademarks.

Still, for all the importance of America’s automotive trade with China and the brazenness of China’s automotive trade barriers, the industry is anything but the most obvious place to start fixing America’s lopsided commerce with the People’s Republic.

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For example, the U.S. trade deficit in automotive products overall with China has skyrocketed since 2001, when it gained admission to the World Trade Organization, and therefore substantial immunity from the American trade law system that seeks to defend domestic industries from mercantilist rivals. But so has the larger U.S. shortfall in goods trade with China. In fact, the automotive trade gap has risen since then only from 1.33 percent of the total to 1.56 percent last year.

Moreover, the deficit has grown much faster in auto parts than in vehicles. From 2001 through 2016, the parts share of the overall U.S.-China trade deficit is up from 1.08 percent to 3.75 percent. That’s largely because the big vehicle-makers reportedly behind the new trade push have been using more and more Chinese content in the final products they make both in the United States and the PRC. It’s true that Beijing forces the companies to use certain amounts of local parts and components in the vehicles they produce in China. But it’s also true that the automakers have always been willing to accept these long-standing regulations as the price of doing business in the hugely promising China market they anticipated.

The companies, though, apparently have complained to the White House that vehicles are in fact their main issue. Specifically, high Chinese tariffs have kept imports at less than 5 percent of its total vehicle market. At the same time, sales of U.S.-made autos to China shot up by nearly 750 percent since the current global economic recovery began. They dipped by a little less than 3 percent last year, but so far this year, they’ve rebounded by about 11 percent. Of course, without the China tariffs, they would surely do better. But the numbers sure don’t scream “Crisis!” — especially given the U.S. automotive boom all these firms have enjoyed since the last recession ended.

What seems to be motivating the auto firms? In a phrase, the North American Free Trade Agreement (NAFTA) — specifically President Trump’s vow to end the bonanza it created for the automakers by encouraging them to keep using Americans as customers for their products, but steadily replace them as workers in their supply chains. And that’s the third dimension of the China auto story that ultimately could prove so decisive. As explained in a Wall Street Journal article, the increased costs the auto companies fear from these NAFTA-related changes, and from a tariff-like border adjustment tax, have prompted a search for new revenue. And what could be more promising than realizing their full potential in an immense, still under-developed China market — where their brands appeal much more than local competitors to quality and prestige-conscious consumers?

Regardless of whether the auto industry is the ideal starting point for a China trade counterattack, the core of the vehicle-makers’ message to the White House could be what really counts in the longer run. For the companies are saying that China’s trade barriers are denying them critical economies of scale they need to remain fully competitive. And although Chinese-brand vehicles don’t threaten their sales in the United States now, and won’t for the time being (mainly due to the time needed to build up retail networks and to the safety standards these products will need to meet), the companies undoubtedly are thinking about the future — especially with Chinese rivals’ success surging in many smallish but fast-growing third world markets. Better access to China’s own market would greatly ease these concerns.

It’s not clear, though, how quickly this playing field can be leveled. Ironically, the auto companies themselves are a part of the problem. All import parts from China, and Buick has started to sell Chinese-made vehicles in the United States. But the emerging Trump NAFTA position suggests a better solution than haggling with the Chinese to produce a market-opening deal that would be excruciatingly difficult to monitor and enforce because of the sheer size of the Chinese automotive complex. It’s using the lure of keeping and increasing shares of the much larger U.S. and North American vehicle market through a renegotiated NAFTA to reduce China’s importance to the vehicle-makers.

The key would be requirements that all vehicles sold in North America consist overwhelmingly of North American-made parts and components, and meaningfully enforcing this mandate with sky-high tariffs on extra-regional products — as Trump administration advisers have suggested for months. As a result, the domestic auto industry would gain a big leg up not only on the Chinese but on other Asian and European rivals as well.

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The auto sector could counter by noting China’s gigantic current auto market and a potential that still dwarfs North America’s. The president could respond by pointing out how much easier it would be for Washington to control access to the United States. He could add that much greater uncertainties hang over China’s economic and political future than over America’s. He could convincingly argue that any further significant China market opening will be impossible without the leverage created by smart new U.S. trade barriers. And given the challenges faced by so many American industries from so many protectionist foreign economies, President Trump could take this approach far beyond China and autos.

In so doing, he would bring much of American trade policy back full circle. Starting in the early 1990s, numerous U.S. multinational manufacturers faced big economy-of-scale threats stemming from their inability to sell in Europe and Japan the way their foreign rivals could access America’s market. After they became convinced that Washington would keep ignoring their pleas for reciprocity, they started offshoring production and jobs to low-income countries like Mexico and China in order to improve their competitiveness through cost-cutting.

Today, at least China has turned the tables on them, and become a threat in its own right. The auto sector’s newfound support for a harder and smarter trade line on China opens the door for the president to use the American market’s lure to start a reshoring dynamic. He can’t walk through it quickly enough.

Alan Tonelson, who writes on economic and security policy at RealityChek, is the author of “The Race to the Bottom” (Westview Press, 2002). Follow him on Twitter: @AlanTonelson