Had enough of theoretical arguments about free trade—of complaints by establishment Republicans and the business community that President Trump is leading us from the glorious era of free trade into a recession induced by his protectionist policies? Well here’s a tangible example that should help you decide what is happening in the real world.
China has announced that it will soon be marketing its cars in the United States. The People’s Republic is the largest manufacturer of cars in the world, selling more vehicles than Japan and the United States combined. And not because they make such great vehicles.
The Chinese have achieved that place in the sun because of their clever policies and our policy failures, a combination that is not the stuff of which free trade is made. You might not have noticed, but China has been selling a small volume of autos here for a while. Volvo is now owned by China’s Geely, and markets its made-in-China S60 Inscription here in the States.
Some Detroit-based brands are also imported here from China, and Ford plans to move production of its Focus from Michigan to China, in order to do its bit to help Xi make China great again. But now the onslaught of Chinese-branded vehicles is about to start in earnest.
The Chinese have learned that we will levy a duty of only 2.5 percent on each vehicle imported for sale and have been keeping our import fee at that level even though they collect an import duty of 25 percent on any American-made car sold in China. Little wonder that President Trump congratulated the Chinese on the superior negotiating ability that produced such a disparity.
There is worse. For one thing, no foreigner can make cars in China unless he finds a Chinese partner—which will probably be a state-owned company—and then turns over all its American technology and intellectual property to that partnership. As you might imagine, this saves a lot of R&D expense for the Chinese.
As the New York Times’ Keith Bradsher puts it, “Those policies forced multinationals to move factories and their latest technologies to China.” Where their growth is fueled by a series of protectionist measures that reserves the home market for them. Which in turn gives them the opportunity to obtain the economies of scale needed to enter the international vehicle market. That combination of exclusive access to a domestic market and the expropriation of superior American technology is hard for any competitor to beat.
China plans to sell both gasoline-powered and electric vehicles in the United States. Their electric vehicles will be eligible for any tax credit made-in-the-USA cars get—currently $7,500 on the first 200,000 such vehicles. Since our companies have just about hit that ceiling, and the Chinese companies have not, China will have a $7,500 per car edge when consumers compare the price of its vehicles with those made here.
China, however, does not believe that turnabout is fair play. The regime has decreed that every electric car sold in China receives a subsidy of $10,000. Well, not every electric car. The subsidy is not available on imported electric cars; only to those manufactured in China. Assume that both an American car maker and its Chinese competitor market a $50,000 electric car in Beijing. The consumer will face a cost of $62,500, tariff included for the U.S. vehicle, and a net cost of only $40,000 for the made-in-China car after he receives his $10,000 rebate from the government. Forget any labor cost differential, or subsidies the state-owned auto manufacturer will receive—this is enough to make our electric cars uncompetitive in China, while theirs will be benefiting from the $7,500 paid to U.S. buyers by our government long after our own companies have used up their access to such credits. Little wonder that Xi Ping favors continuation of the current trading system.
The Chinese attack on our market and our manufacturers will be led by state-owned GAC, offering its—get this—Trumpchi, a brand name that predates the arrival of The Donald at the White House. (The company will announce whether it plans to retain that name when it brings its models, most especially its GS8 mid-size SUV, to the Detroit auto show in January.)
It sounds funny, to be sure. But so did the idea of selling cars with strange names such as Toyota, Hyundai, Kia, and Mitsubishi once upon a time. The latter of course started out here as a well-known brand because of the exploits of its Zero fighter plane during World War II, just as Volkswagen was a familiar brand after years of promotion by Hitler before the war.
The Trumpchi, if that name is retained, will probably have as little trouble overcoming the challenges of name-recognition to its brand as our former enemies did, thanks to the price advantages our policies confer upon it. Unless the rest of Washington figures out that “free trade” is a nice slogan—but not a useful description of America’s current encounter with the global economy.