Europe isolates China trade cheat

Recall that China has tried to play Europe for the chump, via Reuters:

China is putting pressure on the European Union to issue a strong joint statement against President Donald Trump’s trade policies at a summit later this month but is facing resistance, European officials said.

In meetings in Brussels, Berlin and Beijing, senior Chinese officials, including Vice Premier Liu He and the Chinese government’s top diplomat, State Councillor Wang Yi, have proposed an alliance between the two economic powers and offered to open more of the Chinese market in a gesture of goodwill.

One proposal has been for China and the European Union to launch joint action against the United States at the World Trade Organization.

But the European Union, the world’s largest trading bloc, has rejected the idea of allying with Beijing against Washington, five EU officials and diplomats told Reuters, ahead of a Sino-European summit in Beijing on July 16-17.

Instead, the summit is expected to produce a modest communique, which affirms the commitment of both sides to the multilateral trading system and promises to set up a working group on modernizing the WTO, EU officials said.

“China wants the European Union to stand with Beijing against Washington, to take sides,” said one European diplomat. “We won’t do it and we have told them that.”

Despite Trump’s tariffs on European metals exports and threats to hit the EU’s automobile industry, Brussels shares Washington’s concern about China’s closed markets and what Western governments say is Beijing’s manipulation of trade to dominate global markets.

“We agree with almost all the complaints the U.S. has against China, it’s just we don’t agree with how the United States is handling it,” another diplomat said.

But it’s China that looking more isolated today, via Quartz:

The US may have been accused by China of “opening fire on the world” with its punitive trade tariffs, but it looks like officials may be making more progress in Europe’s largest economy Germany.

Richard Grenell, the US ambassador to Germany, has caused quite a stir since he arrived in Berlin in May, lecturing German companies to stop trading with Iran, and saying he planned to “empower” anti-establishment conservatives in Europe. However, with the threat of punitive US tariffs on its cars looming, Grenell certainly has the attention of Germany’s powerful car bosses.

German business daily Handelsblatt reports (link in German) that Grenell met Daimler CEO Dieter Zetsche, BMW CEO Harald Krüger, and VW CEO Herbert Diess on Wednesday evening to discuss both sides abolishing all tariffs on each others car imports. Right now, the European Union adds a 10% tax on imported US cars, and the US puts 2.5% on EU car imports, and is threatening to ramp that up to 25%. As part of the deal, president Donald Trump would reportedly want German carmakers to invest more in the US.

Last night’s meeting was not the first time the carmakers and Grenell have talked about abolishing two-way tariffs. The Wall Street Journal (paywall) reported on June 20 that the ambassador had been meeting with all Germany’s most important car companies, and that they were already behind the idea.

Chancellor Angela Merkel is worried about the damage a car trade war could do to one of Germany’s core industries. “We now have tariffs on aluminum and steel and we have a discussion that is far more serious,” she told parliament, referring to auto tariffs. “It’s worth every effort to try to defuse this conflict so it doesn’t turn into a war.”

More from Yahoo:

German Chancellor Angela Merkel said Thursday she would back opening talks with trading partners on lowering automobile tariffs, in what appeared to be an olive branch to US President Donald Trump as the EU battles to dissuade him from imposing hefty levies on European cars.

But Merkel said that any negotiations on lowering tariffs in one area could only be conducted with “all the countries with which we have trade in cars,” rather than just with the United States.

A deal with the US alone “would not conform with WTO” rules, she said.

“We can either have negotiations about a wide range of tariffs, for 90 percent of goods,” Merkel said in a reference to the stalled talks for a transatlantic free-trade deal known as TTIP.

“Or we can talk about one type of goods, but then we must accord the same treatment to all trading partners of the world. That’s an option I could imagine,” she added.

Interestingly, Nomura sees it all as deflationary:

US pursuit of beggar thy neighbor policies: is it leading to a whole new world for global automakers?

Automakers have set up an intricate web of suppliers and assembly plants globally to leverage the benefits of trade agreements, while keeping FX risks at acceptable levels. The pursuit of beggar thy neighbour policies by a large, connected, and heretofore open Now 3 mths 12 mths US Europe Japan Korea Brazil Russia India China Thailand Indonesia Nomura | Global Autos Outlook 4 June 2018 4 economy such as the US threatens to upend this structure.

In this edition of the Global Autos Outlook, we therefore look at trade-related challenges (and opportunities) facing global automakers, possible strategies they could adopt to cope, and potential winners and losers over the near-to-medium term. Risk of “No NAFTA” has risen, although our base case remains NAFTA 2.0 Trump’s openly protectionist policies have increased the risk of a “No NAFTA” outcome, although our base case still remains that NAFTA will be renegotiated.

Nearly 25 years of NAFTA have integrated the North American auto industry very tightly. If NAFTA is dissolved, it will impact all automakers operating in North America. In particular, we think GM and FCA could be hit the hardest (higher import tariffs cut 40% of GM’s FY2018E EBIT, 23% of that for FCA). In our opinion, it increasingly appears that the US President’s decision-making is centered on autoworkers, even if that is to the detriment of the automakers. Thus, US automakers getting hurt might not hold back Trump from making such a move.

Auto industry staring at global excess capacity, no matter what the outcome of the Section 232 drama

The US Department of Commerce has started a Section 232 investigation into US imports of autos and auto parts. Under the worst case scenario, this may result in broadbased import tariffs slapped on US automotive imports after the investigation concludes and reports back to the President in several months. US imports of new passenger vehicles and auto parts totaled $333bn in 2017. Import duties on such a large volume of goods would be highly disruptive and impact all the major car exporting countries/regions such as Mexico, Canada, Japan, the EU, and South Korea.

While we think that the threat of tariffs is largely Trump’s negotiation tactic to get a better NAFTA deal, we caution investors to pay attention, as the tail risk (of import tariffs materializing) is not negligible. Furthermore, no matter whether new auto tariffs are imposed or not, global carmakers, irrespective of nationality, are feeling pressured to build plants and increase employment in the US. This is likely to lead to increased capacity in the US, where car demand is no longer growing.

On the other hand, non-US carmakers are unlikely to cut capacity at home or elsewhere, leading to excess capacity globally. This will impact most markets except for relatively closed ones such as China, India, and Southeast Asia, due to their existing high import tariffs. For global automakers, we therefore see a binary outcome from a growing list of protectionist measures being deployed by the US. Neither outcome is good news, with automakers staring at excess global capacity in either case:

 If Section 232 tariffs are imposed, it (largely) cuts off imports into the domestic US market. However, that would mean that there is excess capacity outside the US, as existing foreign plants supplying to the US (7.88mn/$192bn new PVs, 8.2% of global volume, and $141bn auto parts in 2017) have to find markets elsewhere.

 If new tariffs are not imposed, we still have additional capacity coming up in the US as automakers are goaded into doing so to avoid political pressure. This also leads to a global supply-demand imbalance in the auto industry.

Silver linings: China’s import tariff cut, forthcoming JEEPA

Although US protectionism is a real threat, we see a couple of silver linings. China announced an import tariff cut for autos, from 25% currently to 15% beginning 1st July 2018. The Japan-EU Economic Partnership Agreement (JEEPA) was agreed upon last December and is likely to become effective in spring 2019, benefiting Japanese car exporters. One of the biggest beneficiaries from both China and the EU’s tariff cuts would be Toyota Motor.

Full report here.

Comments

  1. German auto makers also very concerned about a no deal Brexit, Britain is their biggest export market

    • ResearchtimeMEMBER

      Ms May has waved the white flag on that one… potentially could bring down her whole party!

      A Thatcher, she is not…

      • ResearchtimeMEMBER

        It is a complicated story though, because the biggest cost inputs are VAT, etc. For instance, the Subaru XV starts from US$22,500 – but it starts from GBP25,000 ($31,050) in the UK – thats a massive 38% difference. A drop of 7.5% in tariff numbers won’t make Subaru’s or any other American car more customer competitive in Europe. There are a lot of other cost inputs…

        Not least, fuel. Heaps of Europeans drive tiny cars, often with engine displacements of 1 to 1.6 litres. Very clever designs, can fit seven people into small packages. You have to in a world where you average petrol/diesel price is above AUD$2.50 per litre, not matter where you go in Europe. Clarkson made the excellent point that driving a Ford F150 in rural England, it couldn’t fit down lanes, and blocked traffic; even through it costs a mere $27,500 in the US, no one in Europe could afford to run it.

        Th only European cars the US buys – are heaps of the big German ones, and the odd Jag, Bentley and RR.

        And lets be very clear about this, only Audi imports into the US. Merc and BMW have massive assembly plants in the US, so with the exception of a couple exclusive models, and Audi, which imports everything – most German cars sold in the US face no tariffs what soever. VW has too much competition from Subaru, sell only a small amount and getting smaller, their cars not quite up to standard.

        This is the quandary, and the reason why German will not join China. Most of German cars sold in the US do not pay tariffs, and never will. They know that US cars will never be sold in any great numbers in Europe, because they are un-suitable, despite their incredible prices.

        The German car-makers are very worried about Japan and increasingly Korea. Their size and drivetrains are a direct competition, given the population density of their home markets, their niches similar to much of Europe (dense cities, open green-belts) Dropping their tariffs could seriously damage PSA, Seat, VW, Vauxhall, Skoda among others in the long-term.

      • Not in relation to Brexit, but thankfully she is not Thatcher- the person who said there is no such thing as community, and worked as hard as she could to destroy every community thing she could,right down to selling off the school grounds. I was in London when she died- thousands of people out on the streets all celebrating- ding dong the witch is dead. And she died a lonely,friendless person..

      • ResearchtimeMEMBER

        I know I am hogging here a little – cannot edit, so forgive my grammar, I never won any awards in English Lit. at school…

        The point I am trying to make, is that this trade dispute has very little about cars. Europeans are not going to import US cars, and European cars built outside of the US have very little interest to the US consumer. European cars in the US will get no tariff impost – The Germans know this, so from their perspective, why poke a bear with a stick, and side up with China???

        The Germans are running a massive trade surplus, 8% GDP, much of which against their European neighbours. It now appears that the surplus, is actually far higher, and the German Government has been actively hiding it, some estimates as high as 12-15%…

        Germany (aka Europe) know they have to do a deal with the US, in some capacity, because Trump, quite rightly, will use NATO as a bargaining chip as well (a collective 3% defence budget, with the majority of materials from US sources could do the trick and a match in tariff rates, although a problem that tariff rate would extend to Japan and Korean car makers as well). The cost to Europe is too high for a US trade, especially with immigration and current demographic crisis, both are inter-twinned, both are in their early stages, and both will only get worse with time.

        The US position with China however, is entirely immutable. A battle with rivals. A trade war will erupt. Rome vs Carthage. Only one can win – Ceterum autem censeo Carthaginem esse delendam

      • ResearchtimeMEMBER

        JS – I was working 100 metres from St Pauls at the time (the bell ringing and tune v. different), the millennials, many who weren’t even born when she governed were shouting abuse and spitting. Despicable behaviour from the Neo Marxist Left

        Thatcher was a great leader, by any measure, a person of her time – better than the pedophile (it now appears, protected by the police and the upper levels of the Torries) Heath and Co. anyhow.

      • “Ms May has waved the white flag on that one… potentially could bring down her whole party!

        A Thatcher, she is not…”…………………………..to be fair to Ms May (who is renowned for having no small talk and can leave awkward silences at meetings with other leaders) its a bit difficult to give Thatcher good marks on the question of Europe. Thatcher enthusiastically joined the Single Market in 1986 because it promised to liberalise trade and services. She liked that. However it also presaged closer political union. Thatcher accepted this part of the Single Market deal because she misjudged its feasability. She thought she could get away with paying lip service to it because it was never going to happen. I agree with her scepticism of Europe but she misjudged how determined the other countries were to make it happen on a political level. Her failure to anticipate this was what led the Eurosceptics of her party to stop trusting her or indeed anybody on Europe and that led to a long period of discontent in the party which led to UKIP and the referendum. While I am here, cant resist posting this famous moment

        https://www.youtube.com/watch?v=tVt_1ByddUQ

      • “Thatcher was a great leader by any measure” – by any measure she had the North Sea oil bounty and a divided opposition Labour Party. When she left office unemployment and inflation was back to levels present when she won power in 1979 due to leaving interest rates too low in 1987/88, her poll numbers were in the 20s and widespread riots from her disastrous poll tax previewed the riot from her own party. No great leader by any measure is deposed by their own party

      • ResearchtimeMEMBER

        Context is everything, this was a country with three or four days of energy a week, and it was going bankrupt with crazy unions at the helm of key industries.

        No one gets it right all of the time – i despised her views on Eire, but again that reflected the UK’s dominant view at the time. Not claiming Thatcher did everything, and make her out to be some-sort of demigod… but she did a lot and tried her best. Got the economy on a semi-sustainable footing.

        And don’t think I am Labour bashing either. A large part of Thatchers actions were against the establishment, thats why they hate her so much even today. Primarily because of the class system, the upper classes tried to be benefactors to the working classes, not making the hard economical rational decisions, because of perceived near-term deleterious impacts (e.g. Heath, arguably one of the worst UK PM’s ever). But thereby making the whole social system unstable. The reality is “they” (upper class) were preserving their own position, not allowing general social mobility.

        Thatcher broke that forever – and “began” a merit based system. And it remains broke today, and millions owe their rise in fortunes in life, whether thy realise or not.

  2. adelaide_economistMEMBER

    It feels like China learnt diplomacy by playing Civilization on the computer. In the real world you don’t get to sh!t in the nest of a another country then follow up by asking them to join you in a declaration against their long term ally. I can’t believe how hamfisted the celestial middle kingdom is.

  3. Wedging the EU into a bloc VS China.

    How long before NATO collectively puts in a massive order for jets and tanks?

  4. Consumerism is about to get more expensive. Hello Amazon purchasing powerr. Or AliBaba and the 40 teves

  5. Anyway you cut it up China is fxxxxed
    They’ve been caught out
    Trump said on Fox the other night – I said to all the leaders “hey I’m free trade” let’s just remove all barriers and he said they all jumped and hit under the table

    • reusachtigeMEMBER

      Yep, gotta love Trump! The US implemented free trade while everyone else did it selectively and to their own benefit. Trump is just saying “Fck you” as he does so well. The US has nothing to lose but all the scammers that have done fake free trade with them do. Hilarious stuff, the guy is a ledgend!

  6. “Grenell met Daimler CEO Dieter Zetsche, BMW CEO Harald Krüger, and VW CEO Herbert Diess on Wednesday evening to discuss both sides abolishing all tariffs on each others car imports”

    It’s the same the world over. In Australia Harry Fkn Triguboff sets immigration policy and Gerry Fkn Harvey dictates GST rules.

    In Germany, the car company CEOs seemingly set EU car import tariffs.

    Love it.

  7. Love this…

    “State Councillor Wang Yi, have proposed an alliance between the two economic powers and offered to open more of the Chinese market in a gesture of goodwill.”

    That is, of course, unless your national airline doesn’t refer to Taiwan as China, or you upset them in some other minor way and they leave all of your produce to rot on the dock!
    Oh sorry, just Customs issues. Can you resend that 50million worth of beef again? We think we have the issue sorted…..

    I hope Trump smashes them to be honest.

  8. Ajaydee73MEMBER

    If China did a deal with the EU, they would find sneaky ways of getting out of their obligations while taking everything the EU gave up.