A June 6 Bloomberg article discussed how corporate CEOs are having to prepare for what might come next during the chaos created by demands on U. S. trading partners. Its opening pointed out that the Toyota Motor Company, which went into crisis management a year ago, when Washington imposed huge tariffs on imported steel and aluminum, today has a “war room” of 150 employees “mapping out the impact of various U. S. trade policy scenarios.”
But Toyota would not be the only company doing this, because the average new vehicle may have 1,800 major parts — 30,000, if one includes screws, bolts, and minor trim — and every one of those parts is covered by a contract for delivery between the automaker and the parts supplier. Maybe the parts are made here in America, maybe China or Mexico, and some may be from Canada; but, because most automobile manufacturers operate on razor-thin margins, additional tariffs have the ability to uncouple their complicated supply systems and wipe out their profits.
Now, before you think this is just a U.S. – China issue, on June 12 President Trump threatened Germany and Angela Merkel with potential new sanctions over a natural gas pipeline out of Russia — not just sanctions, but a pullback of U. S. troops for NATO. Additionally, recently there were threats of new tariffs if Mexico didn’t do more to slow or stop the migrant caravans headed for our southern border.
Other threats of tariffs if new trade agreements aren’t put into play involve goods out of the EU and Japan. At this point it might be appropriate to mention that NAFTA 2.0 still hasn’t been ratified and signed by all three parties. Oh, and right in the middle of all this, India put retaliatory tariffs on 28 U. S. goods, including a 70 percent tariff on apples, almonds, and walnuts. Our trade relationship with India started going south last year, when we added the tariffs on imported steel and aluminum.
So, the short list: We don’t have NAFTA 2.0 done, we’re in an actual trade war with China, and we are currently threatening Japan, the European Union, and Germany.
I’m not sure I remember a time when we had this much turmoil in the system because we wanted to rewrite all of our trade agreements at one time. But the one certainty is that when the dust settles, the cost of all these issues will be borne by the American consumer. A quick reminder: In the early Sixties, in retaliation for some European countries’ tariffing American chicken, LBJ put a 25 percent import tariff on imported trucks. This tariff was mostly to target Volkswagen’s Kombi truck, although its sales volumes here were not much — but that tariff is still in place on imported trucks and cargo vans. It affects Ford’s Turkey built Transit cargo vans and every last imported pickup truck sold here over the past 55 years.
More recently Bill Clinton, playing tough with the Japanese in 1995, raised the prices of imported Japanese cars 20 – 25 percent virtually overnight as we manipulated the exchange rate in an attempt to get Japan to cry uncle.
Broke the Genie’s Bottle
Now, many American companies have filed for tariff relief — GM on many parts out of China and its exceptional Buick Envision midsized SUV. Tesla, which gets some of its screens and computer modules from China, has also asked for an exception. Uber wanted relief on its electric push scooters, Chrysler had two dozen requests in, and Nissan had a similar number; so far out of 13,000 relief requests, 7,000 have already been denied.
The point is that many of those critical parts or products either are not built anywhere else, or moving production elsewhere would take time and cost more. The inherent problem in automobile production is something one of Honda’s executives said years ago: If one is missing just one part for a car, that car can’t be built.
Of course, there’s another side to improving trade agreements. The world has changed, as have many ways that we do commerce; since the original NAFTA agreement in 1993, the Internet has created many online buying and selling opportunities. So it seems appropriate to reopen NAFTA and find ways to benefit all parties in the new online mercantile arena. Likewise, President Trump is right to call out China’s demands on outside corporations to come into their country: Take 50 percent partnerships with Chinese firms, transfer technology to those firms, we show them how to do modern manufacturing and, in the case of the automakers, train future generations of Chinese students in engineering and design.
China wants to be the world leader in all things high tech, but we let that genie out of the bottle decades ago when international corporations flooded into China and agreed to all of that nation’s outrageous demands. The hope was that their profits from the huge Chinese retail market would somehow balance out what they had given away. This problem is one our corporate leaders willingly created decades ago.
Like it or not, China is going to be another major competitor to the best of what we offer in this country. But that doesn’t mean America loses, at least not over innovation and design. After all, the reporting on our relationship with China today is nearly identical to the faux anger over U.S. – Japan trade in the Eighties. If one doubts that, you can still buy Shintaro Ishihara’s semi-delusional 1991 book, The Japan That Can Say No: Why Japan Will be First Among Equals. That book mirrored the statements of Sony’s famed CEO, Akio Morita; but less than 15 years later Apple’s iPod and other consumer devices firmly took away Sony’s hold on that market.
Needless to say, stand back from the heated rhetoric of that era and you will find that we still buy Japanese cars and other goods in record numbers. And as good trade neighbors, one can count all the Japanese automobile factories either built here in America or expanded greatly in the past 30 years. However, the Japanese were already planning and building factories here before our national outrage.
Come to think of it, Toyota even partnered with General Motors to build vehicles together, while teaching GM the Toyota system for production — in 1984. Toyota pushed to use GM’s closed Fremont, Calif., factory for this program, as it was considered one of the worst for vehicle quality. So Toyota taught GM and GM taught the Chinese.
But there is pressure in international trade and this time it may not end well for us. BMW’s largest factory anywhere sits in South Carolina. In fact, the BMW X3 and X5 SUVS were built there and shipped to their Chinese customers. But last year, when the trade war started, at first China put a 40 percent tariff on imported cars (since reduced to 15 percent); so BMW made the decision to move X3 production for China out of the U. S. Last week the Bavarian automaker bragged to Bloomberg about how well that decision has worked out; in a down car market, sales of Chinese-made BMW X3 are up 33 percent. Likewise, GoPro cameras has announced that it’s moving production out of China, but it’s not coming here. It’s going to a new plant in Mexico.
Meanwhile, Foreign Policy magazine published a story on June 14, pointing out that Europe strongly desires to get away from using the U. S. dollar as its primary reserve currency. Because if you can do international trade without having to first buy U.S. dollars, then our threats of sanctions every time we don’t like something become almost meaningless. As that article stated, “that poses a long-term danger to U. S. power.”
Of course, there’s a blocking move for that, too. We’ve already threatened the EU with a 25 percent import tariff on imported cars.
In the world of negotiations, to be successful both parties need to have a healthy respect for each other’s positions; and when the negotiations are completed, both sides need to feel they’ve improved their positions and the contract was fair to both parties. That is the same human mechanism you will use to purchase your next new vehicle and it’s the same as international trade. The latter is just a great deal more complicated.
We’ve already lost BMW production in South Carolina to China. GoPro is leaving China and not for our Rust Belt, but for Mexico. CEOs are flipping out because they have no idea what their (or their suppliers’) expenses will be in the future, or even if they will lose export markets as a result of this turmoil. And other countries are quietly seething over the constant threats to their economic well being.
Again, stand back from the fray and ask yourself, if all of our former trade agreements were so unfair, how it is that America is the wealthiest country in the world?
Maybe this is much ado about nothing. But as someone who’s been through this before, although never to this extent, if you’re thinking about getting a new vehicle, now might be the time before the next round of tariffs hit.