President Trump’s Tariffs Could Be Great For The Car Industry… In China

I have successfully avoided talking in-depth about the tariffs here at The Morning Dump for a couple of weeks, largely because it wasn’t clear what might actually happen (or not happen). As I sip my smoothie and start this post the 25% tariffs against Canada and Mexico are in effect. This might change by the time I’m done with my smoothie, but they’re in place at this very second. Let’s talk about the world we’re entering into and what it means for consumers. More importantly, I don’t want to get to bum everyone out, so I also want to talk about the positive side of these tariffs. It’s going to be great for Chinese companies in the automotive industry. At least I think it will.

I’ve mentioned this before, but I’ve spent the past few weeks and months reading more about government intervention into the economy. Specifically, I’ve been reading about FDR’s Depression-era programs and U.S. trade policy for the last 150 years. The reality is that no one knows for sure what will happen, and that policymakers are historically very bad at judging all the political and economic outcomes of their decisions.

Will I also be bad at judging the future? Probably! Reader, I am no futurist. I’m my only critic.

Today’s TMD will start with the doom-and-gloom from people who claim to know what’s going to happen. Then we’ll look at some positive outcomes. This could be good for Chinese automakers, give European governments a reason to give a break to European automakers and, hmm… maybe bad for Tesla?

And, finally, whenever we have these hard chats I like to end with a little treat. Usually that treat is a Škoda, and today is no different. If you just want to shut off the rest of the world you can skip to the bottom and Czech that out instead.

Ok, donning protective goggles. Let’s do this!

Expect To Pay $2,700 More Per Car, Or Maybe $12,000, Or Maybe Nothing

Ah, the goggles do nothing!

Sorry, I’m feeling a little extra this morning. This is The Autopian, not Bloomberg, so you’ll have to endure the odd reference to The Simpsons or insertion of a completely superfluous Pavement lyric from time-to-time. I have to assume that’s what some of you want, otherwise you’d just read Bloomberg instead of having me read Bloomberg to you.

Let’s start with Bloomberg, then, and my old buddy Keith Naughton on the potential impact of President Trump’s tariff on Canada and Mexico:

Impending tariffs on Canada and Mexico risk driving up US car prices by as much as $12,000, further squeezing consumers and wreaking havoc across the intricate web of automotive supply lines spanning the continent.

The cost to build a crossover utility vehicle will rise by at least $4,000, while the increase would be three times that for an electric vehicle examined in a new study from Anderson Economic Group, an automotive consultant in East Lansing, Michigan. And those costs would likely be passed on to consumers, the study found.

“That kind of cost increase will lead directly — and I expect almost immediately — to a decline in sales of the models that have the biggest trade impacts,” Patrick Anderson, chief executive officer of Anderson Economic Group, said in an interview.

That $12,000 price increase is interesting as it assumes that EV costs will increase more, I assume because EV cars are more expensive to build and the supply chain stretches more into Canada and Mexico, as well as China (which has an additional 10% tariff).

That seems bad! Hey, I said you should buy a car before the next trade war happens way back in November. I took my own advice and bought a car. I think you’ve got roughly a week or two before we see an impact on car prices, so this could be a great weekend to buy a car.

Just how bad this gets, though, is really anyone’s guess. Analysts at Bernstein assume an average cost increase of about $2,700 across the industry, mostly because even cars built in the United States need parts from Canada and Mexico. It’s obviously worse for cars built in those countries. Even more challenging, carmakers may eventually build more cars here, which is one goal, but it’s not like automakers can make that happen overnight as one Business professor pointed out to the Detroit Free Press:

“An auto company launching a new vehicle isn’t like a cereal company adding more marshmallows to a box of cornflakes,” said Erik Gordon, University of Michigan Ross School of Business professor. “It takes three to six years to develop a new car, and it takes the design, testing and integration of assemblies from many companies. If government policy changes in the middle of the process, years of work and tens of millions of dollars can go out the window.”

Gordon said a change in regulation that forces a change in just a couple of parts can cascade into changes in design of a lot of other parts from a lot of suppliers. When the rules keep changing, it makes intelligent long-term planning impossible.

Damn, maybe a smoothie was the wrong choice. Now I really want cornflakes with marshmallows.

Jessica Caldwell from Edmunds makes the same point this morning:

In the short term, automakers will need to pull every available lever to minimize disruptions and soften the immediate impact, but there’s no escaping the fact that higher costs will ultimately be passed on to consumers. With vehicle prices already elevated and interest rates remaining high, American car buyers could face an even more challenging road ahead.

Her point is fair, that automakers can probably hold the line on costs for at least a little while. But not forever.

It’s important to try and understand why this is happening. Also, I don’t really understand why this is happening.

There’s a certain attachment to blue collar auto worker jobs that both parties engage in but, as we discussed in my post on the Theory of Competitive Advantage, it’s not like everyone wants to be an auto worker. Is it worth risking the economy over a few thousand of these jobs? 20,000 jobs? 100,000 jobs? President Trump has made it clear that he only wants car plants in the United States and wants to specifically take them away from Canada and Mexico. It would be wildly inefficient if every country made everything only for itself, which is why we have global trade in the first place.

And, to be fair, President Biden’s administration also tried to do some of this, though it was focused mostly on trying to kickstart the development of EV infrastructure here to better compete with China. The Trump administration seems disinterested in supporting electric car development, if not downright hostile towards it in spite of the role Elon Musk has in The White House.

More specifically to the present, though, an attempt to increase jobs is not precisely why the President says this is happening. His reasoning, according to The White House?

President Donald J. Trump is proceeding with implementing tariffs on Canada and Mexico under the International Emergency Economic Powers Act (IEEPA) to combat the extraordinary threat to U.S. national security, including our public health posed by unchecked drug trafficking.

Drugs are bad… fentanyl is bad! A fact sheet from the Drug Enforcement Agency shows that most fentanyl is largely coming from China, though both Mexico and India are also big sources. Canada doesn’t get mentioned in that report, though Canadian law enforcement as recently as a few days ago put on a show of stopping the flow of illegal drugs via arrests.

It doesn’t feel legitimate to me to say that this is about drug trafficking or, at least, if that’s what this is about it feels like setting your house on fire to make s’mores. Damn, I really can’t stop thinking about marshmallows.

This Is Going To Be Potentially Great For China

Let’s not be doomers this morning, if only because in like 30 minutes President Trump could just say “psych” and none of this could mean anything. It might be bad news for American companies, investors, and consumers, but it’s potentially great news if you’re a Chinese supplier. All of this could change, but at the moment it might be cheaper to import parts from China to the United States than from Canada, even though China is apparently a larger source of fentanyl. Sure, cars are way more expensive to import to the United States because of tariffs that go back to the Biden administration, but Chinese automakers don’t sell cars here so that’s not a big deal.

Even better, if you’re a Chinese supplier, what you’re probably doing is making a bunch of parts for carmakers in Japan and South Korea. For… reasons, President Trump isn’t currently doing big tariffs against Japan or South Korea (though those might come). This makes importing cars from Japan or South Korea or anywhere else in Asia (that isn’t China) potentially cheaper than importing cars from Canada or Mexico.

This is also good for Chinese automakers. Not only is the United States proving to be a fickle trade partner, a trade war always involves reciprocity. Hell, the premier of Ontario is already threatening to stop selling nickel to America. If you’ve never been to Sudbury to see the Big Nickel (go Blueberry Bulldogs!) then you might not be aware that America basically solely relies on Canada for this essential material.

If you’re a government anywhere else in the world and you want cars, China might suddenly be a better option. If you’re an auto supplier and you’re looking to sell your supplies, China might suddenly be a better place to do it. If you’re a Chinese company and you want materials or goods, you might now be able to get them at a better rate from countries that don’t want to trade with the United States.

Clearly, I’m not the only one who had this thought.

If you think you’re going to be able to expand then, in the modern era, you borrow money to do that. The biggest maker of electric cars this year will probably be China’s BYD, and BYD just raised a bunch of money by selling a crap ton of shares. Specifically, it sold a bunch of shares to foreign firms like the UAE’s Al-Futtaim Family Office. Why? Usually, so you can spend that money. If you’re a car company, it’s to spend money making cars.

From Reuters:

The deal reflects increasingly positive sentiment in Hong Kong and China, especially in the tech sector following a high level summit of tech executives led by Chinese President Xi Jinping. China policymakers have also signalled a higher level of support for the country’s business private sector.

Again, trade wars are unpredictable, and the United States declaring economic war on everyone else will have consequences that no one will be able to likely predict with 100% accuracy. Chinese firms and outside investors seem to be betting that it’ll be good for China in the long run.

Europe To Pause Emissions, Which Is Also Bad For Tesla

It’s possible that President Trump puts big pressure on European car firms by creating higher tariffs on inbound European cars. This high level of uncertainty is bad for European automakers, which is why the European Union, at least, seems to be willing to give them a break.

Specifically, much tighter emissions rules are supposed to go into place this year and the European Commission President Ursula von der Leyen is giving companies three years to comply with CO2 targets, as opposed to just one year.

From France 24:

The announcement is part of the bloc’s push to protect the auto industry, which employs 13 million people and accounts for about seven percent of Europe’s GDP.

“There’s a clear demand for more flexibility on CO2 targets,” the European Commission president told reporters in Brussels. “Instead of the annual compliance, companies will get three years.”

Von der Leyen added companies would still have to “fulfil” the same targets.

“But it means more breathing space for industry. It means also more clarity,” she said after talks on Monday with industry representatives including from BMW, Renault, Volkswagen and Stellantis, which owns several brands including Jeep, Fiat and Peugeot.

This could also be bad for Tesla. If the company sells fewer electric cars in Europe, which is what’s happening, then it has fewer credits to sell. If companies like Stellantis and Volkswagen have more time to meet goals, they don’t have to pay Tesla immediately (or ever) for the credits they have to sell.

The timing of this is interesting, as Bank of America just dropped its price objective for Tesla’s stock from about $490 to $380, though today the price is at… $264 and falling currently. Coincidentally, Tesla’s Board Chair Robyn Denholm has been selling a bunch of her shares, though perhaps that’s just to cover the $919 million settlement she and other directors agreed to pay to resolve allegations that the board overpaid itself.

It’s fine, the Chinese market will bail out Tesla. Right? I’m sorry, I’ve just been informed that Tesla shipments in China dropped by nearly half in February.

Here’s A Škoda For Your Troubles

That was like 2,000 words on a trade war that, for all I know, will be cancelled by the time I get out of the shower. Or maybe it’ll be expanded! As a journalist, it’s all very interesting. As an investor, I’m worried that my 401k is about to turn into a 4.01k.

It was 50 years ago that Czech (then Czechoslovakian) automaker Škoda debuted the 130RS, one of the carmaker’s most iconic models and the winner of numerous races:

It won trophies both within the Eastern Bloc and on the international stage, where it faced tough competition from leading Western brands.

Among its triumphs, the Škoda 130 RS secured a class victory at the legendary Monte Carlo Rally in 1977, finishing 12th overall. Other standout performances include eighth place in the overall rankings at the Acropolis Rally in 1979. In 1981, it repeated this remarkable success, once again demonstrating its ability to outperform significantly more powerful rivals.

The Škoda 130 RS also made its mark on the circuit racing scene, claiming the overall title in the 1981 European Touring Car Championship – its greatest success on the track – after consistently finishing among the top three in previous seasons.

And it looks great. Don’t forget that.

What I’m Listening To Today While Writing TMD

I could use the official video for “Burning Down The House” from Talking Heads, but I’m a damn professional. I’m using the version from all-time concert film “Stop Making Sense.”

Hold tight
Wait ’til the party’s over
Hold tight
We’re in for nasty weather
There has got to be a way
Burning down the house

Apt!

The Big Question

Is this a big deal? Maybe it’s not a big deal?