China, American Automobile Sales and Trade Wars

On the People's Daily Facebook page (the official news outlet of the Chinese Communist Party), this posting appeared:

Please note that, on a year-over-year basis, June sales of Ford dropped by 26 percent with June sales dropping by 38 percent, General Motors June sales dropped by 8 percent and overall U.S. car sales dropped by 22.9 percentage on a year-over-year basis.  In contrast, sales of both Japanese and German cars increased over the same year-over-year period.

Just in case you were curious, here is a graphic showing automobile sales in China from May 2017 to May 2018 (in thousands):

Here is a graphic showing total vehicle sales in China since 2008:

To help you put that number into context, here is a graphic showing total vehicle sales in the United States since 2008:

While China's auto sales are far lower than that of the United States, over the long-term, the growth in China's middle class will be a major consumer of automobiles.

So, who is there to step in where Americans step out?  Apparently, BMW is expected to be the first foreign car maker in China to take a majority share in a joint venture with Brilliance Auto Group.  China currently requires that foreign automakers partner with local companies with their ownership stake capped at 50 percent.  According to BMW, the company will take a stake of a least 75 percent in the BMW Brilliance Auto venture which produced and sold 380,000 BMWs in China during 2017.

Given that China's trade surplus with the United States has jumped 14 percent on a year-over-year basis for the first six months of 2018, hitting $217.7 billion, the American trade war with China is unlikely to end anytime soon, no matter how painful it may become to American consumers and Corporate America.

So, are trade wars still easy to win?  Apparently, not necessarily.  This is a fine example of yet another unintended consequence.

Trade Bullying and the Boomerang Effect of the Trump Tariffs

One of the preferred ways that governments have to impact bilateral trade is to impose tariffs, those nasty taxes that generally result in higher prices for goods and services.  Governments impose tariffs for several reasons:

1.) to protect domestic industries from international competitors by raising the price of international goods

2.) to raise revenue

3.) for reasons of national defense

4.) for environmental reasons

5.) to protect nascent (i.e. new) businesses

The Trump Administration is proving itself to be a bit of a bully when it comes to international trade, provoking even its largest trade partners to respond to the imposition of tariffs by the United States, most particularly on steel and aluminum.  While Donald Trump has stated that trade wars are easy to win, in actuality, the battle is not always won by the party that started the war.  A recent Policy Brief by Trade Partnership Worldwide takes a close look a the impact of the 10 percent tariff on aluminum and the 25 percent tariff on steel, both of which were recently imposed on Canadian, European and Mexican products as their exemptions expired.

First, let's look at the retaliatory response of some of the nations to the imposition of tariffs on their steel and aluminum:

It is these retaliatory measures that are going to have significant and unintended consequences for the United States and its workforce.

The lead author of the Policy Brief, Dr. Joseph Francois, has concluded that the economic impact of the tariffs are as follows:

Change in GDP: -$36 billion

Percent Change in GDP: -0.2 percent

Change in Steel Imports: -44.4 percent

Change in Aluminum Imports: -12.7 percent

Change in All Imports: -1.9 percent

Change in All Exports: -1.0 percent

Net number of United States Jobs Impacted:

Primary Agriculture: -6,782

Primary Energy: +974

Manufacturing: -19,931

Services: -376,706

Total Job Losses: 402,445

The biggest job gains will be made in the steel and iron sector (+23,424), however, these are far outweighed by job losses in trade and distribution (-98,088), construction (-63,930), personal and recreational services (-35,033) and business and professional services (-26,590).  Other services will also see a decline of 128,102 jobs.  Service sectors are the hardest hit because, as consumers reduce spending when they are hit with higher costs (i.e. more expensive appliances, vehicles), they reduce spending on services such as entertainment and healthcare.  It is interesting to note that job losses in steel-consuming sectors, many of which provide jobs to workers living in the Rust Belt and southern regions of the U.S. will see annual employment declines of 97,614 jobs in the first one to three years that the tariffs and their accompanying retaliation measures are in place.

Let's look at the states which will experience the greatest job losses, noting that states which have an important steel and aluminum sector like Indiana, Illinois, Pennsylvania, Ohio, Michigan and Wisconsin:

California - 49,092 job losses

Texas - 36,372 job losses

New York - 26,284 job losses

Florida - 24,897 job losses

Pennsylvania - 16,823 job losses

Ohio - 15,889 job losses

Illinois - 15,389 job losses

Georgia - 12,575 job losses

Michigan - 11,365 job losses

Virginia - 11,172 job losses

New Jersey - 11, 152 job losses

Illinois - 15,389 job losses

As you can see from this analysis, trade bullying does not always produce the desired results, in fact, sometimes the boomerang effect produces a very negative and unanticipated impact.  In this case, the Trump Administration's imposition of tariffs would appear to lead to a significant number of job losses in states already hard-hit by America's long-term de-industrialization.