Car tariffs can backfire

Pronounced “boo-eek-ka” in China, the General Motors Buick has been one of China’s most popular cars in recent decades. Having sold over 3 million Buicks in China by 2011, those sales are still important to the U.S. General Motors industry. In 2022, 167,000 Buicks were sold in the U.S., but 517,000 were sold in China. And, on average, 80% of all Buicks are sold in China.

Buick began making cars in China after a joint GM arrangement with Shanghai Automotive Industry. If GM only relied on U.S. sales, mainly to older Americans, Buick would have ceased production back when GM ended Pontiac production. Buick builds and sells far more models in China than in the U.S. Only the Buick Envision is shipped back to the U.S., and made in China, this would likely be subject to U.S. tariffs.

China’s middle class is more than twice the size of America’s, making China by far the largest car market in the world. Other Western car brands are also are produced and sold in China, again often providing these Western companies with their major market. And Chinese are very loyal to their local factories. If you take a taxi in Shanghai, it will nearly always be the Volkswagen manufactured in Shanghai. And in Wuhan, a former French concession, the taxis will be Citroën, a French auto brand made in Wuhan.

On May 14, President Biden announced plans to impose major new tariffs on Chinese electric vehicles and other goods.

Many Americans fail to recognize that tariffs on China goods, first imposed by Trump, are not paid by China but by American consumers with the tariff money going into U.S. coffers. But the recent shallow-minded Biden administration announcements of stiff tariffs on Chinese goods are rarely seen as inflationary. U.S. presidents actually have very little control over inflation that is usually and mainly driven by OPEC reducing fuel production in order to increase prices. But increasing the price Americans pay for Chinese-made products is definitely inflationary.

Look at the huge number of “Made in China” products on shelves in the big U.S. box stores. Even a small U.S. tariff on these goods would cause major U.S. inflation. It is difficult for Americans to accept that in nearly all cases, China is producing a better product and cheaper than what the U.S. could produce, even when the cost of shipping is added.

The really big lie being promulgated in the U.S. is that China products are cheaper because the Chinese government is subsidizing their cost. While both the U.S. and China do provide money to start up a few new industries, such as electric vehicles, once the technology is developed, the product must be profitable on its own. That is why Janet Yellen remains truthful in calling the large number of Chinese electric cars “oversupply” rather than subsidized.

The EU has also investigated whether China’s EVs remain subsidized. China’s cars currently face a 10% tariff when they enter the EU. If there was any subsidy found, the  average EU tariff would raise that to 19%.

The U.S. does not import any significant number of EVs from China, and it is obvious that both Trump’s and Biden’s actions are primarily to win support of voters in states with car factories. Oddly, the new U.S. tariffs would not apply to internal combustion engine cars that U.S. companies build in China and we import back.

The world’s biggest EV producer is now BYD (Build Your Dream), a company in part backed by Warren Buffett’s Berkshire Hathaway. BYD has also just released two hybrid EV models, posing a challenge to Toyota’s Prius and accelerating China’s move to far cleaner and cheaper cars.

According to the South China Morning Post, “the China Chamber of Commerce to the EU says China may consider increasing temporary tariff rates on imported cars equipped with large-displacement engines.” And this could result in other Chinese tariffs on U.S. goods sold in China.

There is a simple rule in economics: if you are selling at a loss, you do not make up for it in volume. Chinese businessmen know this well and are not selling the BVD at a loss. American politicians promoting anti-China hatred do not understand economics, and we will suffer.

The danger in playing the U.S. tariff game is that China may have to respond in kind with tariffs on American cars. And that could mean the end of the Buick in America — and more inflation, caused by us.

John Richard Schrock is a Roe R. Cross distinguished professor and biology professor emeritus at Emporia State University.

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