The U.S. tax hike on imported cars has exacerbated the turmoil in the global auto industry

【Mingdi】

Author: Wan Zhe (Researcher, Belt and Road College, Beijing Normal University, Special Researcher, National High-end Think Tank, Beijing Normal University)

On March 26, local time, U.S. President Trump signed an executive order at the White House, announcing a 25% tariff on all imported cars. On April 2, Trump declared a national emergency and signed an executive order on so-called "reciprocal tariffs," announcing that the United States would impose a 10% "minimum benchmark tariff" on its trading partners and higher tariffs on some trading partners. The 25 percent tariff on imported cars went into effect on April 3 and extends to all computers exported to the United States.

The U.S. move has sparked strong opposition from major auto exporters such as Germany, Japan, Canada, and Mexico, with many countries arguing that the U.S. move violates WTO rules. At present, economic globalization is encountering headwinds, unilateralism and protectionism are on the rise, and the global industrial chain is undergoing structural adjustment. The U.S. tariffs on imported cars will only exacerbate the shock of the global auto industry.

triggering a new round of trade wars

According to White House documents, Trump invoked Section 232 of the U.S. Trade Expansion Act of 1962 to impose tariffs of 25 percent on imported cars and some auto parts. The 25% tariff will apply to imported passenger cars (cars, sport utility vehicles, etc.) and light trucks, as well as key automotive components (engines, transmissions, etc.), and will be extended to other parts if necessary. Under the USMCA framework, auto importers will have the opportunity to certify their U.S.-made parts, and the mechanism will ensure that the 25% tariff applies only to non-U.S.-made parts. According to the USMCA, 75% of the vehicle is required to meet the proportion of North American parts, and 40% to 45% of the core components must be manufactured in North America. This rule has a direct impact on automakers that rely on global supply chains, such as General Motors, which sources 37% of its production capacity in Mexico and Canada, and Stellantis, which relies on overseas production for 45% of vehicles sold in the United States.

Canadian Prime Minister Mark Carney said the U.S. auto tariffs were a "direct attack" on Canada and Canadian workers, offering to produce more auto parts in Canada. The Canadian government will also set up a C$2 billion fund to support local supply chains, with a focus on increasing local parts production capacity to cope with the impact of U.S. tariffs. At the same time, Canada threatens to impose tariffs on U.S. agricultural products. Guillermo Rosales, executive chairman of the Mexican Automobile Dealers Association, pointed out that the U.S. auto tariffs are a serious violation of the U.S.-Mexico-Canada Agreement and impact regional economic integration, which will not only not bring economic benefits to the United States in the long run, but will also affect the lives of the American people. As the main exporters of high-end automobiles, German automakers such as Volkswagen and BMW account for 73% of the EU's total exports, while Japanese automakers account for 28% of their total exports to the United States. European Commission President Ursula von der Leyen said she "deeply regretted" the US decision to impose tariffs on cars imported from Europe, which were bad for businesses and even worse for consumers. The EU insists on resolving differences through negotiation while ensuring that its economic interests are safeguarded. The European Union has announced retaliatory tariffs on 26 billion euros worth of American goods, including whiskey, motorcycles, etc., and plans to expand them to beef, home appliances and other fields in mid-April. In his reply to the House of Councillors, Japanese Prime Minister Shigeru Ishiba said that it was inappropriate for the United States to impose tariffs on automobiles on all countries, and that Japan had made great contributions to the US economy in terms of investment and employment.

Caught in the cycle of "compliance is loss".

Under the USMCA rules of origin, core components are manufactured by workers who wage at least $16 an hour. This rule directly hits the cost structure of North American car companies, bringing about a "rigid imbalance", and compliance costs may eat into profit margins. The "regional shackles" of labor costs constrain the global competitiveness of North American manufacturing – the average hourly wage of $28 is four times that of Mexico.

In addition, there are "compliance traps" in the Mexican automotive supply chain. Only 63% of Mexico's auto parts exports to the U.S. meet USMCA standards, while the compliance rate for finished vehicles is as high as 92.1%. To maintain existing production capacity, automakers will need to shift their parts supply chain from Asia to North America, but this means that costs will rise further. While Mexico has become a North American supply chain hub with the USMCA, its manufacturing costs are close to those of the southern states of the United States. The price of electricity at the Monterrey plant is twice that of China, and the logistics cost is 30% higher than in China. This "nominal low cost" may lead to car companies falling into a cycle of "compliance is loss".

There are also "sunk costs" associated with supply chain switching. North American automakers rely on Asian suppliers for 70% of their traditional fuel vehicle supply chains, and the transition to electrification requires new supply chains such as batteries and electric drive systems. China's CATL battery cells account for 40% of the battery modules at Tesla's Berlin plant, and forced localization will lead to production capacity disruptions. S&P Global estimates that if North American automakers switch 30% of their Asian supply chains to North America, the cost per unit will increase by 15% to 20%, and the hidden costs of equipment relocation and worker training could double the total investment. Although Canada will set up a $2 billion fund to support local supply chains, the funding will take up to 18 to 24 months, and the tariffs will take effect immediately. As a result, car companies may fall into a cash flow dilemma of "high input and low output" in the early stage of transformation. It is estimated that GM would need to invest an additional $2.3 billion in a battery plant if it redirects 30% of its Chinese supply chain components to the United States, but the window period before production could cost the company 150,000 vehicles.

Weakening the global competitiveness of the U.S. auto industry

From a global perspective, the Trump administration's tariffs on imported cars will lead to supply chain restructuring and economic slowdown, exacerbating the fragmentation of the global trading system. The U.S. imposes tariffs on major trading partners, and the global industrial chain will also be forced to de-Americanize, which will weaken the global competitiveness of the U.S. auto industry in the long run.

Tariffs may push up the price of imported cars, which may encourage U.S. consumers to switch to local brands, but demand for cars from the price-sensitive low- and middle-income consumer group may also shrink further. The Peterson Institute for International Economics predicts that the tariffs will lead to a $3,500 increase in the average price of new cars in the United States, and that car buying demand in low- and middle-income groups could fall by 25%. This will force automakers to make a difficult choice between the premium market and the mass market, for example, Ford may abandon low-cost models and focus on the high-end pickup market.

Although Tesla's vehicles sold in the U.S. are produced in local factories, it still relies on imports for key components, such as batteries. Tesla CEO Elon Musk said the impact of the tariffs on Tesla is also significant. One-third of the capacity of its Shanghai Gigafactory is for exports, mainly for the European and Asia-Pacific markets, and has not directly impacted the US market. However, if it plans to sell back to the United States through Chinese factories in the future, it will face 25% tariffs, which may force Tesla to adjust its global production capacity layout. Tesla's planned factory in Mexico could become a new hub for its North American supply chain, but the company's factory expansion in Texas and Berlin is both a strategy to deal with tariffs and create cost pressures. Like Tesla, many companies are trying to respond to the Trump administration's tariff hikes.

Overall, the regional layout has weakened the global competitiveness of North American automakers. Emerging markets such as Southeast Asia and Latin America are accelerating their regionalization, with Indonesia requiring a localization rate of 40% for foreign automakers and Malaysia imposing a 300% tariff on imported cars. Failure to establish supply chains in these regions will result in missing out on emerging markets with 12% annual growth, while Chinese automakers have established 15 production bases in the region through the Belt and Road Initiative.

Inhibiting technological innovation in the global automotive industry

Multinational companies are re-evaluating and adjusting their supply chain and production strategies globally in response to changes in trade policies in different countries and regions. On the one hand, in response to tariff pressures in the U.S. market, they may shift some of their production to the U.S. or adjust their supply chains to reduce the impact of tariffs. On the other hand, they also need to consider the layout of the global market and cost control, so as to avoid a significant increase in costs due to over-local production.

In the value chain of economic globalization, the global collaboration network is broken, and technological innovation may be "shackled" by the region. From the perspective of path dependence of core technologies, the localization of North American car companies in the fields of batteries and chips has been slow. Among the top 10 battery companies in the world in 2023, only one in North America is among them, and its production capacity is concentrated in the low-end market. Ford has partnered with South Korean energy companies to build a battery plant in Georgia, but it still relies on Korean suppliers for technology, resulting in the cost of its electric models being 25 percent higher than that of its Chinese competitors. If they fail to break through the technical bottleneck, North American automakers are likely to fall behind in the global race for electric vehicles.

The global value chain is "interrupted", and R&D efficiency may suffer "regional decay". Technological collaboration on a global scale often accelerates innovation, as in the case of Toyota's partnership with CATL, which has led to the development of solid-state batteries. However, the regional layout has forced U.S. automakers to concentrate their R&D resources in North America, resulting in a slowdown in technology iteration. In order to meet the battery localization requirements of the U.S. Inflation Reduction Act, the BMW iX model needs to build a new production line in North America, with an investment of more than 2 billion US dollars, and the research and development cycle has been extended by 18 months. In addition, the standard system can also form "regional fragmentation". The EU's carbon tariffs and the U.S. Inflation Reduction Act (IRA) have led to the divergence of technical standards, and North American automakers will increase R&D costs by more than 30% if they meet the double standards of both Europe and the United States. Tesla's ability to meet the EU's battery carbon footprint standards would require an additional €500 million investment in upgrading its production processes at its Berlin plant, while its U.S. plant would need to meet the Inflation Reduction Act's mineral source requirements.

What's more, the trade war is likely to continue to escalate. As the scope of tariffs expands, global trade barriers will be further raised. The scale of international trade is likely to shrink significantly, threatening the stability of global industrial and supply chains. This will lead to more countries struggling economically and global technological innovation to a standstill.

Pushing up production and consumption costs

The U.S. tariff policy is like a "stress test", forcing multinational automakers to find a new balance between local production and cost control. They use regionalized supply chains to reduce tariff risks, technological innovation to hedge cost pressures, and policy insights to capture market opportunities, trying to quickly adapt to rule changes and build more resilient supply chains.

The restructuring of the supply chain of North American automakers is essentially a disruption. The old system of economic globalization is disintegrating, and a new regional industrial ecology has not yet taken shape. In the new industrial order under the trade war, regionalization and fragmentation will coexist, and the global automotive industry chain may form three major sectors of "North America-Europe-Asia". The game of technical standards and policy barriers will reshape the rules of the industry, car companies need to meet multiple compliance requirements in terms of technology research and development, supply chain transparency, etc., and the rebalancing of consumer and environmental costs will put forward higher requirements for enterprises, which will increase the cost and consumer price of the global automotive industry.

The restructuring of the supply chain will also lead to the explicit consumption costs. Under the frequent tariffs of the Trump administration, consumers and businesses in the United States are actually under pressure, as inflation and consumer cost pass-through will become inevitable. The U.S. retail industry has issued an early warning of rising commodity prices. After the United States imposed tariffs on Chinese goods in 2018, the prices of household appliances such as washing machines rose by 12% year-on-year. Among low-income groups, the consumption of such household appliances accounts for a relatively high proportion of their total consumption expenditure, so the rise in the price of these goods will lead to a significant increase in the cost of living, which will further intensify social conflicts.

In addition, the lagged impact of policy on economic data will be reflected in many aspects such as GDP growth and employment data. Moody's, an international credit rating agency, predicts that if tariffs continue to increase, US GDP could fall by 0.6% and 250,000 jobs will be lost. The Trump administration's tariff policy has increased market uncertainty and investors' concerns about the economic outlook have intensified, leading to recent turmoil in the U.S. stock market. The multilateral trading system has been undermined, countries are forced to strengthen regional cooperation, the global governance system is accelerating the differentiation, and trade frictions have escalated into confrontation between countries. History has proven time and again that economic globalization is the trend of the times, and there is no winner in trade wars and tariff wars.

Guangming Daily (2025-04-04 03 edition)

Source: Guangming Net-Guangming Daily