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Automakers optimistic about China tariff reduction; analysts skeptical

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Automakers optimistic about China tariff reduction; analysts skeptical

China's decision to temporarily suspend additional tariffs on American automobile exports is seen as a win by U.S. and European auto producers, although some analysts say the 90-day period will not be enough time to help stifled exporters return to pre-trade-war export levels.

China's Ministry of Finance announced Dec. 14 that Beijing would reduce tariffs for three months on imports of American vehicles and parts that were applied in July as a retaliatory measure against Washington in an ongoing trade war between the two nations.

The Asian nation plans to suspend an additional 25% tariff on 144 vehicle exports and 5% tariff on 67 auto parts exports between Jan. 1 and March 31, 2019, while the two countries negotiate a deal. The 25% auto tariff was implemented in July on top of the existing 15% tariff Beijing imposes on vehicle imports, bringing the total tariff rate for American vehicle exports to 40% for the past five months. In that time, exports of American cars to China have fallen steeply.

Automaker reaction

Joe Hinrichs, executive vice president and president of Global Operations for Ford Motor Co., said in a statement the Dearborn, Mich.-based automaker exported nearly 50,000 American-made cars to China in 2017, which he called a "growing auto market."

"As a leading exporter of vehicles from the U.S., we are very encouraged by China's announcement today to reduce tariffs on U.S. produced vehicles to 15%," Hinrichs said. "We applaud both governments for working together constructively to reduce trade barriers and open markets."

In an emailed statement to S&P Global Market Intelligence, General Motors Co. said it supports a "positive trade relationship" between the two countries.

"We continue to believe that both countries value a vibrant auto industry and understand the interdependence between the world's two largest automotive markets," the company said.

The Detroit-based carmaker, which announced in November that it plans to end production at five plants in the U.S. and Canada, said it operates under a "build where you sell" philosophy.

"There are a few small exceptions, but that is the predominant approach in the biggest markets — North America, China and South America — where we have large local manufacturing presences and use mostly local suppliers," GM said.

German car producer Bayerische Motoren Werke AG also lauded the announcement, primarily due to the fact that it operates an automobile production plant in Spartanburg, S.C.

"The BMW Group welcomes the temporary reduction of tariffs on vehicles imported to China from the USA and hopes that a permanent resolution to the tariff dispute between the U.S. and China will soon be reached," BMW said in an emailed statement.

According to Panjiva Inc., a division of S&P Global Inc., American automotive exports to China totaled just 10,000 units in October, which, according to the firm, marks the lowest single month of exports since July 2012. It also marks a 14,000-car year-over-year decline from October 2017.

Analysts see limited benefits

Despite the optimism from two of the so-called Big Three American automakers, the top exporter of vehicles to China from the U.S. in 2017 was BMW, which held 29.2% of total car shipments. Daimler AG followed with 24.8% of the export share, Ford with 12.1% and Tesla Inc. with 10.4%.

Chris Rogers, research director for Panjiva, indicated that the benefits of the tariff reduction could be limited.

"The ability of automakers to benefit from China's temporary tariff reduction is hugely curtailed by the practicalities of logistics," Rogers said in an interview.

Shipping normally takes anywhere from four to seven weeks, Rogers said. Further complicating matters is the Chinese Lunar New Year in February, which he said could limit off-loading capabilities as the vehicles arrive at Chinese ports.

"It's quite possible that the larger car markers may not significantly change their plans," Rogers noted, specifically pointing to BMW, Daimler and Ford.

Tesla, however, may be more ambitious as it looks to build a market presence ahead of a new factory opening in Shanghai targeted for late 2019 or early 2020, Rogers added.

Rebecca Lindland, executive analyst for Kelley Blue Book, was skeptical about the benefits gained from a short three-month tariff suspension.

"Anytime you can reduce tariffs it's a good thing," Lindland said. "But three months is not a very long time in the auto industry because oftentimes we just don't move that quickly."

"I hope that we can reap the benefits of that 90-day timeline but it's very short term," Lindland added. "Hopefully this is something that can become more permanent soon."

Lindland did say that so-called U.S. "sole-sourced cars," or those produced only in one location, including BMW's X5 and X6 models and Tesla cars, would stand to benefit, though American auto exports to China are already relatively low.

Easing tensions between economic powerhouses

The 25% Chinese tariff hike on American autos, which went into effect July 6, impacted roughly $9.99 billion in annual American auto imports at the time, according to Panjiva.

The temporary tariff reduction now puts exports of American-made cars on a par with exports of autos to China from other countries, which are subject to a 15% tariff rate.

National Economic Council Director Larry Kudlow told reporters earlier in December that the White House expects tariffs on U.S. auto exports to China to drop to zero. The White House did not return a request for comment on that possibility.

However, in a Dec. 14 tweet referencing China's decision to reduce auto tariffs, President Donald Trump tweeted that "China wants to make a big and very comprehensive deal," adding that it could happen "rather soon."

Although much of 2018 has been marked by rising trade tensions and tariffs on billions of dollars of one another's goods, Trump and Chinese President Xi Jinping over dinner on the sidelines of the G-20 Summit in Buenos Aires, Argentina, agreed to a temporary detente.

As part of the truce, the Trump administration agreed to postpone a tariff increase on $200 billion of Chinese imports from 10% to 25% that had been scheduled for Jan. 1, 2019, but noted that the U.S. will still increase the tariffs to 25% should a deal not be reached by the end of the negotiating period.