The Trade War between China and The US, and its Implications on the Auto Industry

In his recent interview on CNBC’s “Squawk Box”, the US Commerce Secretary Wilbur Ross was quoted as saying “We are in a trade war. We have been for decades.” This statement by one of the core members of the trump cabinet indicated the ongoing trade tussle between China and the US.

Before discussing the crux of the matter, it is important to briefly comprehend the trade relationship between the two nations. Over the past couple of decades, China has witnessed an exponential growth of several of its industrial spheres. It is fair to say that the country has successfully established itself as a manufacturing powerhouse. Meanwhile, the US’s manufacturing sector has been a victim of the neo business policies endorsed by many of its indigenous enterprises. Currently, China is winning the war, investors are relishing the lucrative business opportunities offered by the country. A business-friendly environment with massive cost benefits has lured companies from all over the world to set up manufacturing facilities in China. This surely is not going well with the promoters of the US economy, as China’s growing economic stature has been a constant threat to the US.

The matter becomes even graver in the context of the automotive industry. Not only in Asia but the Chinese automotive industry has earned acknowledgements across the globe. The high cost of labour and low preference for manufacturing jobs by Americans have compelled the Auto industry in the US to outsource its manufacturing requirements to other countries such China and Mexico. This has been a major reason behind the recent economic slowdown in the country. Nonetheless, unemployment was a major agenda in Donald Trump’s election campaign, and the newly-elected president looks keen on bringing back jobs in the nation by implementing new protectionist trade policies.

Threatening to impose an additional export levy on foreign manufactured vehicles simply explains the new government’s approach to stopping US automaker’s from exploring into other countries. While the protectionist policies will create more job opportunities, they might also have some negative repercussions.  For instance, prices for consumer goods may shoot up and companies that heavily rely on offshore units will be more vulnerable to upends. Certainly, upsetting China will not be a preferred solution for the US as a lot of American Companies operate through China on the global level. Most auto companies that have a decent international presence operates manufacturing plants in China. Even though these factories primarily support the auto market in China, a portion of the production is frequently shipped in regions such as North America, Europe and South America. Several of these companies have strived for years to establish themselves firmly in the Chinese market. Which is why any Chines retaliation is likely to have a devastating impact on their business in the country as well as in the international market. Incidentally, investors have been wary of the situation, as industrial activities in both the countries have been moderate of late. China, on the other hand, has been successful in keeping the trade momentum steady despite Trump’s precarious approach to revive the US economy. But, in the long-run, it is essential for the two superpowers to sort to a middle-way without risking a global crisis.

By Nikhil Kaitwade

With over 8 years of experience in market research and consulting industry, Nikhil has worked on more than 250 research assignments pertaining to chemicals, materials and energy sector. He has worked directly with about 35 reputed companies as lead consultant for plant expansion, product positioning, capacity factor analysis, new market/segment exploration, export market opportunity evaluation and sourcing strategies.

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