[Samurai]

Originally Posted by smartcat

It is about setting up automobile factories in US. Automobile brand from any country is fine, as long as the factory is in the United States.

And what is the purpose of that? To make cars that no one can afford? Keep in mind that cars need huge amount of component suppliers from all over the world, and those components are impacted by tariff.

[SmartCat]

Originally Posted by Samurai

And what is the purpose of that? To make cars that no one can afford? Keep in mind that cars need huge amount of component suppliers from all over the world, and those components are impacted by tariff.

Why would cars made in US be unaffordable to customers? 70% of cars sold in USA are made in USA. Automobile production per year is second highest in the world (after China).

Actually, if Europe doesn't budge, cars made in United States will be even more affordable to consumers. And brands that are left out will come running to US to setup factories.

Setting up a component supply chain for each model will be an issue - hence backroom negotiations is likely to be about Europe reducing tariffs for made in USA cars.

[Samurai]

Originally Posted by smartcat

70% of cars sold in USA are made in USA.

If this is the status quo, what is the problem Trump trying to solve?

What is the requirement to get the Made in USA tag? The product must meet the “all or virtually all” standard. The "all" is clear. What is "virtually all". Just 50% would do, according to the FTC. Buy American Act — Requires that a product be manufactured in the U.S. of more than 50 percent U.S. parts to be considered Made in USA for government procurement purposes. This is measured via cost. That means 50% or more cost should be expended in USA.

Given this situation, car companies get all the labour intensive components from abroad where labour is cheap, and do all the automated stuff as well as the R&D work in USA. Now, all the R&D cost can be added as fixed cost to every car via amortization. That way they will satisfy the 50% cost spent in USA, while importing most parts cheap from abroad.

Originally Posted by smartcat

Why would cars made in US be unaffordable to customers? 70% of cars sold in USA are made in USA.

Now that we have established the meaning of Made in USA, imagine what happens if all the car parts that are imported are hit with tariff.

Let's take a crude example of a car that costs $19,000,
1) $10000 cost is R&D/Homologation amortized, local parts and final assembly.
3) $9000 cost is imported parts made cheaply in say mexico. (8780 + 220@2.5% tariff)

The above car will qualify for made in USA tag. If you apply 25% tariff on the parts, $9000 changes to $10975 (8780 + 2195@25% tariff). Now the car doesn't qualify for made in USA tag, and also costs $20975. The cost went up by 10%.

Now the car maker must find domestic suppliers for those parts to re-qualify for made in USA tag. Or forget the made in USA tag, just try to get cheaper local source for those imported parts, who will be cheaper than Mexican cost + 25% tariff.

What do you think are the chances of getting cheaper US sources who can beat Mexican costs, while not compromising on the quality? Just for your reference, for similar skill sets, Mexican worker makes $4/hour while US worker makes $30/hour. They could be working just 5 miles apart across the US-Mexico border. $4 + 25% tariff is still way cheaper than $30.

So the parts will be still imported, but the cars become more expensive for Americans to buy.

[shortbread]

Originally Posted by smartcat

You misunderstand. Trump is not trying to get the Americans to buy Cadillacs. Trump Tariff Tantrums have two objectives:

1) Get Europe to slash tariffs so that Toyota/Ford/GM/ Nissan can export made-in-USA cars to Europe and/or
2) Impose tariffs on made-in-Europe cars (from all brands) so that it incentivizes them to set up an assembly line in the United States.

Exactly, Trump wants to boost US production and exports. This is not necessarily limited to the American Big 3. The issue is unlike Germany rest of the Europen nations might reject Merkel's plans to lower tariffs.

The French and Eastern block nations have a large car industry with little exports to the US. They would prefer to protect their markets and rising US import tariffs have no bearing on them.

[SmartCat]

Originally Posted by Samurai

what is the problem Trump trying to solve?

The core objective is to further increase the number of jobs in automobile sector. With the tariff plan, one of the following will happen -

1) More automobile exports to Europe (if EU slashes import duties) OR
2) More foreign makers will setup new factories in US (if EU doesn't budge)

Both (1) and (2) will increase the number of blue collar manufacturing jobs (one of his core constituencies)

$9000 cost is imported parts made cheaply in say mexico. (8780 + 220@2.5% tariff)

No 2.5% tariff either. There is a free trade agreement between Canada, Mexico and America.

just try to get cheaper local source for those imported parts, who will be cheaper than Mexican cost + 25% tariff. What do you think are the chances of getting cheaper US sources who can beat Mexican costs, while not compromising on the quality? So the parts will be still imported, but the cars become more expensive for Americans to buy.

1) 25% tariff on auto parts is hypothetical. Even India has tariffs of just 30%.

2) But let's play along with that for now. Even if US slaps 25% import tariff on Mexico because they won't pay for the Wall, US can always import parts from other countries. Tariff on commodities like steel & aluminum is usually blanket (all countries). Or else commodity traders from a third country will import & then re-export to USA. But tariff on non-commodities (cars, auto parts) will always be country specific.

3) You are again seriously underestimating American automobile industry (incl. auto parts). US actually exports auto parts worth $3 billion (but most of the production is consumed by companies in America). And auto parts industry employs close to a million people directly.

[Samurai]

Originally Posted by smartcat

You are again seriously underestimating American automobile industry (incl. auto parts). US actually exports auto parts worth $3 billion (but most of the production is consumed by companies in America). And auto parts industry employs close to a million people directly.

Where are you getting your numbers from? They actually exported $85B auto parts in 2017 alone. But they also imported $141B auto parts in 2017. So they imported $56B in net value.

When you run a business, these things become obvious. One always outsources activities that others can do cheaper than yourself, the quality being cet par. USA makes auto parts that they can do better/cheaper than other countries. Otherwise, nobody would buy it from them. Similarly US imports parts that others make cheaper and may be better than them.

Tariffs are fine if you have cheap labour pool, who can make inexpensive products domestically. But US has the most expensive labour pool, so tariffs are very counterproductive.

If you do force US automakers to source local parts, they will only go more and more into automation. That doesn't create many jobs.

[SmartCat]

Originally Posted by Samurai

They actually exported $85B auto parts in 2017 alone.

$3 billion is ex-NAFTA (Canada/US/Mexico has a highly integrated automobile industry. You can call it one country/region) and ex-tyres (considered as auto parts but is actually not)

One always outsources activities that others can do cheaper than yourself, the quality being cet par. USA makes auto parts that they can do better/cheaper than other countries. Otherwise, nobody would buy it from them. Similarly US imports parts that others make cheaper and may be better than them.

Very simplistic view that is mostly applicable to service industry. Like how software work done in India is equal to software work done in United States. But in certain other industries, things are very different. Eg: Cement of highest quality & lowest cost manufactured in a particular country cannot be exported at all.

There are whole lot of moving parts when it comes to automobile industry ( supply chain, internal market size, competency & availability of sub-contractors, tariffs, transport cost, transport time, currency stability etc etc). Labor cost as a percentage of gross value is actually quite low when compared to other manufacturing industries because of automation.

Shocking example: Maruti's employee costs are around 3% of its sales.

[Samurai]

Originally Posted by smartcat

Very simplistic view that is mostly applicable to service industry. Like how software work done in India is equal to software work done in United States. But in certain other industries, things are very different.

I guess I don't have your extensive experience in product development and related SCM. BTW, although I am in software product development, most part of my career I closely worked with special hardware. Therefore hardware procurement, integration, testing with different vendors, shipping them across countries and dealing with the logistics of it was recurring part of my work. Only in the recent years I have escaped it.

Anyway, since your business experience is telling you something else, I guess we can never agree. I'll stop trying to make you see my POV. Meanwhile, I will continue to concur with all the US experts who are horrified at this tariff.

[volkman10]

Trumps 'threatening' Policy finds Volvo making the first move .

Volvo is becoming the first automaker to react on the new U.S. tariffs on Chinese imports. The Swedish manufacturer will move the production of the XC60 SUV for the American market from the People’s Republic to Europe.

During the first half of the year, Volvo sales in the United States rose by a whole 40 percent compared to the same period of 2017. One of the main contributors to this amazing result is the XC60 with 14,790 deliveries during the first six months of the year, up 64 percent from last year.

With Washington’s 25-percet tariffs on Chinese imports, Volvo is switching the production of the model to its Torslanda plant at home in Sweden

Link

[Ithaca]

General Motors Is Preparing To Lose A Massive $1 Billion Over Trump’s Tariffs

General Motors has lowered its 2018 earnings forecast by around $1 billion, sending its stock down by 6.33% at the time of this article.

Link

Also

Trump and EU officials agree to work toward 'zero tariff' deal

“We agreed today, first of all, to work together toward zero tariffs, zero non-tariff barriers and zero subsidies on non-auto industrial goods,” Trump said .

Link

[volkman10]

Trump Backs Off On Car Tariff Threats After Meeting With European Commission President.

The two leaders said they would hold off on other tariffs while they negotiate a new deal to expand European imports of US natural gas and soybeans, as well as to lower industrial levies

Trump also added that they would try to “resolve” the steel and aluminum tariffs he imposed earlier this year and the counter measures levied by the EU in response. The U.S. and EU will also work together to reform the World Trade Organization and revisit unfair trading practices,

Link

[tsk1979]

Originally Posted by Samurai

If you do force US automakers to source local parts, they will only go more and more into automation. That doesn't create many jobs.

This is something very difficult for people to comprehend. For example coal belt does not realize that even with coal production rising since 1980s, jobs are going away due to automation

[mallumowgli]

Originally Posted by volkman10

Trump Backs Off On Car Tariff Threats After Meeting With European Commission President.

Am a bit confused. Wasn't Trumps tariff threat a retaliatory one? My understanding was that this was aimed at EU for them to reduce the tariff on imports from US. Hence shouldn't the title read as EU buckles to US pressure?

[Jeroen]

Originally Posted by mallumowgli

Hence shouldn't the title read as EU buckles to US pressure?

Actually, here in Europe most people are really sniggering. Juncker really did not make any concessions, but told Trump what in essence has been EU policy all the time. He just put it in a nice wrapper. Trump being Trump (i.e thick as a brick) has no clue as to what EU policies are, and considered it a concession. But it was all in the making already.

So depends a bit on what European news channel you are following, but the general consensus is that Juncker outsmarted Trump. But everybody plays it low key. Let Trump believe he is winning is the best strategy with ego centric types like him.

Did I mention I am not that impressed by Trump as a President, nor as a human being? So I might have a certain bias. 😀

[Hayek]

Originally Posted by Jeroen

So depends a bit on what European news channel you are following, but the general consensus is that Juncker outsmarted Trump. But everybody plays it low key. Let Trump believe he is winning is the best strategy with ego centric types like him.

But for Trump (and his voters), facts don’t matter. What matters is the perception of winning. So Juncker and the EU have given Trump just what he wanted - the ability to claim he Made America Great Again. (And got the EU to buckle under pressure). Just why I am willing to bet that barring an actual nuclear war, Trump is heading for re-election by a huge margin (in the electoral college, which is the only thing that counts)