Real Money's editors tasked me with delineating the impacts of the proposed cut in China's import tariff on U.S.-made autos from the current rate of 40% to 15%. President Trump tweeted last week that such a reduction was a done deal and published reports out of China overnight noted that China's Cabinet was now considering such a move.
A brief history of China's auto import tariffs is necessary here since so many reports are conflating the amount by which tariffs would be reduced (25%) with the amount of the tariff itself. China was admitted to the World Trade Organization in December, 2001 and in 2006 set a tariff of 25% on imported autos. That rate held for more than a decade until China's government announced on May 22 of this year that the tariff rate would drop to 15% on July 1st. Owing to the brewing trade war between the U.S. and China, the tariff on U.S.-made vehicles was instead raised to 40%, while those made in Europe and Japan are currently facing only the 15% tariff rate.
Whew! That's confusing, and harmonizing tariffs on all cars imported from everywhere would certainly make the lives of auto analysts -- and presumably China's customs inspections -- easier as well.
According to the China Automobile Dealers Association, imports accounted for 1.22 million unit sales in China last year, representing only 4.2% of overall sales. Locally produced passenger cars are much cheaper than imports, so the imported models have a bias toward luxury marques and SUVs.
Among the makers, BMW (BMWYY) and Mercedes (DDAIF) both represented about 15% of the vehicles imported into China in 2017, with BMW holding a slight edge. Lexus (TM) , Land Rover (TTM) and Porsche (POAHY) combined to represent another 25% of the market, and so it is clear that the products imported into China are selling at a much higher price point than the average Chinese passenger car.
Remember that even in Shanghai and Beijing disposable incomes are much lower in China than they are here in the States. Recent figures from China's National Bureau of Statistics pegged annual disposable income for China's two richest cities at $8,000-$8,200 per year -- with the national average less than half that amount -- versus a U.S average annualized real disposable income of $43,871 in November, according to BEA data.
It really is a small segment of the Chinese population that is buying imported vehicles, and competition will remain fierce among Western automakers to serve them. So, this morning's exuberance among European and American automaker shares may be short-lived, but as an old auto analyst it's good to see car stocks other than Tesla (TSLA) in the green for a change.
The biggest winners from lowered tariffs would be workers at U.S plants that export to China, specifically BMW's plant near Spartanburg (Greer, SC) and Daimler's Mercedes factory near Tuscaloosa (Vance, AL.) Also, as the Chinese Passenger Car Association indicated that Tesla only sold 211 vehicles in China in November (Tesla's PR department vehemently denied this), lower tariffs would help workers at Tesla's Fremont, CA plant, as well. None of those three facilities is unionized, and it has been decades since the UAW won anything for its members. You can Google "Lordstown" to find out just how the UAW's rank-and-file feels about its leadership in the wake of GM's announced plant closings.
The biggest loser from lowered tariffs on vehicles exported from the U.S. to China would be homegrown Chinese EV maker NIO (NIO) , a company that IPO'd on the NYSE in September. NIO's battery-only luxury SUV, the ES8, is priced at less than half Tesla's Model X on a tariff-adjusted basis in China. In addition, NIO's smaller SUV, the ES6, will come to the Chinese market next year at a ridiculously low price of 180,000-210,000 RMB or an average price of about $27,500. NIO shares are hovering near $7 today, and while all data -- reliable or not -- shows NIO's ES8 is destroying Tesla's Model X in the Chinese marketplace, William Li still has a long way to go until he gets the Elon Musk premium accorded to Tesla shares.
