Tim Dunne
China’s Ministry of Commerce (in mid-December) announced that it would begin to impose—effective immediately and continuing for two years—a new duty on cars imported from the United States. The duty, which the Chinese government said is to offset unfair government subsidies and a policy of dumping on the Chinese market by US manufacturers, will affect only vehicles with engines larger than 2.5 liters. The duty will range from between 2-21.5%, with the rate increasing as the size of the vehicle’s engine increases.
Given that China’s automotive market is the world’s largest—and that General Motors Company and Ford Motor Co. are both heavily dependent on China for future growth—it might appear at first glance that the new policy could put a significant dent in their China ambitions. But the truth is the new policy is more political posturing and negotiating theater, rather than an actual effort to stem alleged illegal trade practices.
Duty Will Have Little Impact on GM and Ford
First, it is unlikely that GM and Ford vehicles are being dumped in China. Roughly 95% of all GM and Ford vehicles sold in China are made in China, and not exported from the United States. The highest-volume vehicle exports to China are the specialty niche and luxury brand vehicles only—such as large SUVs, sports cars and luxury vehicles—which are sold in relatively small numbers.
Due to China’s pre-existing duty and tax structure (before the recent import duty increase), these types of vehicles carried retail price tags that were already 2-3 times higher than the retail price in the United States. For example, a typical SUV that retails for $27,000 in the United States might retail for $75,000 in China.
As a result, sales volumes of these types of vehicles are relatively small, and are targeted to only a small set of very wealthy buyers. Adding another 2-21% duty on top of the existing price and duty structure is unlikely to have a serious impact on demand for these vehicles.
Second, the Obama administration and U.S. Congress have become more insistent that China open its markets by reducing tariffs and policy barriers, and let its currency float rather than peg its value to the dollar. The U.S. maintains that China’s currency is undervalued by 20-30%, which gives Chinese manufacturers an advantage in export trade, while making imports less price-competitive in China. As a result, some in the U.S. Congress have been clamoring for regulations to impose higher duties on Chinese-made goods imported into the U.S., or an appreciation of the Chinese yuan.
How Will the U.S. Respond to China’s Higher Duty?
It is not clear what the U.S. response to China’s higher duty on U.S.-made vehicles will be. Some U.S. trade representatives are already saying that the new Chinese legislation contravenes World Trade Organization (WTO) rules, and are threatening to file a complaint with the WTO. If they do, any resolution in the dispute could take months or years to hash out. In the meantime, the uneasy tit-for-tat trade relations between the U.S. and China will likely continue.—Tim Dunne, director of global coordination at J.D. Power and Associates
Larger than 2.5L’s. You forgot to mention what percent of Ford, GM production, etc. in China have 2.5L Plus engines, I’m sure it is not a small percentage.
Also, a 2 to 21% bump on luxury vehicles that already have large tariffs is huge. Remember the 10% luxury tax on large boats in the US. It sent dealers in the US quickly into bankruptcy because those “Rich” people could buy anywhere in the world. I’m sure the wealthy in China have lots of options as well as buying other brands that are not hit as hard by the tariffs.
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