Car shoppers in China got an unpleasant surprise this morning: the Chinese government announced plans to impose tariffs of up to 22% on all vehicles made in the U.S., starting today. U.S. auto manufacturers aren't especially happy about the news either -- not only because it makes their vehicles more expensive for Chinese consumers, but also because it's further proof that China's hot-to-trot auto market may be cooling.
The official announcement came from China's Commerce Ministry on Wednesday. The taxes come in two forms: anti-dumping tariffs and anti-subsidy tariffs (armchair economists can find an explanation of the two here). It's not entirely clear from news reports, but it appears that these tariffs are over and above the 25% tax China already levies on imported passenger vehicles. The new taxes apply to all vehicles with an engine capacity of more than 2.5 liters, and they'll be in place for at least the next two years.
The frustrating part of all this -- particularly for automakers -- is that China doesn't to be applying the tariffs in a consistent manner. Vehicles from General Motors, for example, will be hit with a 21.8% tax (8.9% in anti-dumping fees, 12.9% in anti-subsidy fees), and Chrysler will see a 15% tariff (8.8% anti-dumping, 6.2% anti-subsidy). However, BMW and Mercedes-Benz -- both of whom export American-made vehicles to China -- will face tariffs of just 2% and 2.7%, respectively. Perhaps that's based on the volume of vehicles each company brings into China, but there's no denying that it squarely targets U.S.-based automakers.
WHAT'S CHINA'S RATIONALE?
Some see this as retaliation for the 35% anti-dumping tariff that the U.S. levied on Chinese-made tires in 2009. According to China.org, that policy will reduce Chinese tire exports to the U.S. by some 50% over the three years of the tariff, and it may result in 100,000 job losses in China's tire industry.
Others might argue that this is another example of China regulating trade to give its homegrown companies an advantage. For some time, Chins has been accused of devaluing the yuan, keeping the cost of Chinese-made goods artificially low. This new tariff ensures that those goods remain attractive to Chinese consumers.
But the real reason behind this move may be that China's auto market is stalling. In 2010, the auto industry saw jaw-dropping 30% growth, but as most folks knew, that kind of expansion was unsustainable, and 2011 is looking to wrap up with far more modest gains closer to 5%.
That kind of volatility is enough to make China very, very nervous. (It's also one more reason why regulators may 86 a pending deal to bring another automaker -- Saab -- to China.) By Beijing's logic, the new tariffs put China's domestic auto industry -- which holds only about 30% of the country's auto market -- on equal footing with their foreign rivals.
THE LARGER EFFECT
Most analysts don't see the new tariffs having much of an effect on U.S.-based manufacturers. General Motors, for example, is one of the biggest foreign companies doing business in China, but even during the 2010 boom, GM sold less than 32,000 vehicles in the country -- about 1% of the 2.4 million units the company sold in total.
The bigger effect that the tariffs are likely to have will be increased tensions between China and the U.S. America lobbied hard for China to become a member of the World Trade Organization in 2000. Now, slightly more than a decade later, China doesn't seem to be playing by WTO rules. We'll see if that pattern continues as China's economy becomes increasingly enmeshed with those throughout the rest of the world.