China’s Auto Tariff Reversal Looks Like a Lemon

(Bloomberg Opinion) -- China has capitulated on cars. Or so it may seem to trade-war watchers.

A premature President Donald Trump tweet, a phone call between trade negotiators and then days later, China may be backing down on a key bone of contention: An elimination of retaliatory tariffs on U.S. automobiles has been submitted to the State Council, people familiar with the matter told Bloomberg News.

The optics weaken China’s hand. But the economics don’t. To begin with, earlier this year China lowered import tariffs to 15 percent on autos and components, from 25 percent for passenger cars and 20 percent on trucks. It then added a punitive 25 percent for American autos in retaliation against Trump’s trade actions. The U.S. has an equivalent 25 percent China-specific levy on top of its general 2.5 percent tariff on car imports, and 25 percent on trucks – longstanding measures that protect a domestic truck industry dominated by Detroit’s big three.

China’s Auto Tariff Reversal Looks Like a Lemon

Painful as it sounds, imports from the U.S. barely account for 5 percent of China’s car market, the largest in the world. As we wrote last week, most automakers make in China, for China.

In addition, the ones that would get a slight bump would mostly be the Europeans, since German carmakers account for an estimated $7 billion of the $11 billion value of U.S. car exports to China. Of U.S. companies, Tesla Inc. would get the biggest benefit – but Elon Musk has already cut himself a great deal with Beijing and is building a factory alongside the government to produce cars in China. 

China’s Auto Tariff Reversal Looks Like a Lemon

As sales in most segments of China’s car market drop, the small benefit from lower levies must be offset against the far greater headwinds from the weakening economic outlook. At this point, automakers need China: Margins are still juicy in global terms, and even if pricing pressures rise, where else will Cadillac have record sales? Sales of electric cars continue to grow rapidly, and China is probably happy to bring in new technology that the U.S. is increasingly averse to supporting.

The long game here is the only one that matters, despite the backdrop of a deepening high-tech war with the arrest of Huawei Technologies Co.’s chief financial officer in Canada at Washington’s behest. To quell Trump’s public hankering, Beijing has given him a win to tweet about, but withheld an economic victory. In doing so, it’s hoping to be seen as taking the high road in trade negotiations. That’s the art of the deal, the Chinese way.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia. She previously worked for the Wall Street Journal.

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