Trade war

Global trade war

How will the US import tariffs affect global Light Vehicle production and other aspects of global trade?

Pete Kelly, Managing Director

17 July 2018

Impact of US tariffs on global Light Vehicle Production

At LMC Automotive, we have focussed a great deal of attention on the potential impact on the automotive industry of tariffs resulting from President Trump’s approach to international trade. As Jeff Schuster pointed out here, import tariffs will increase prices, only some of which are likely to be absorbed by the car makers. And the effects on NAFTA are also significant – see Bill Rinna’s comment here.

This is, of course, just the impact on the US market and North American industry. Retaliatory activity would likely follow, though as the US exports far fewer cars to Europe or China, the volumes impacted would be smaller. Nonetheless, it is worth noting that in 2017, the US exported 300,000 units to China and 200,000 to the EU/EFTA bloc. On it goes.

But this does not take into account the broader macroeconomic impact of a full-blown trade war involving all kinds of classes of goods. What if, for instance, all Chinese goods imported to the US were subjected to tariffs? In our global scenario analysis, created in partnership with Oxford Economics, it is possible to model the impact of this kind of event, one of which has already started, but has an uncertain end point.

Impact of US tariffs on global light vehicle production

The key finding from this analysis is that the reduction in overall activity would spread via reduced trade, falling business confidence and higher prices across the globe. In a moderate trade war scenario, world real GDP growth could be reduced by around 0.5% in 2019, relative to the base case of 2.9%, producing a near standstill in vehicle markets. It is important to note that global Light Vehicle sales almost always grow and have done so in all but three years in the last two decades – and two of those years coincided with the highly unusual circumstances of the Financial Crisis and resulting Great Recession.

In this scenario, by 2020, the global Light Vehicle market would track around 3 million units below the base case. If we were to assume an average global vehicle price of US$25,000, this would represent a loss of revenue to the industry in the order of US$75 billion in one year. A big number. Furthermore, such a scenario event would not disappear overnight, so such quantities of vanished revenue would be permanent.