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Protectionism is rarely the right way to meet a competitive threat. But it’s easy to understand why it seems better than letting one’s domestic industry get crushed. The profitability of US carmakers, which roundly beats that of their European rivals, shows why in one industry, at least, the seeming allure of tariffs persists.
The current disparity is stark. General Motors this week reported a 30 per cent jump in operating profit in the second quarter, helped by Americans’ appetite for high-margin pick-up trucks and SUVs. Analysts expect Ford’s operating profit to rise by a third this year. Both enjoy the protective shield of US tariffs, which levy a 100 per cent surcharge on Chinese electric vehicles.
By contrast, European carmakers are losing share not just in China but increasingly at home. In June, major Chinese manufacturers accounted for more than 10 per cent of new car registrations in the EU, according to the European Automobile Manufacturers’ Association. It is no accident that Volkswagen’s operating profit fell by a tenth in the second quarter, after halving last year. By 2030, almost a third of Germany’s carmaking capacity is expected to disappear, according to Citigroup.
The old arguments against tariffs still apply. They make products more expensive for domestic customers and store up problems for the future: protected industries are likely to get complacent and under-invest in new technologies. So when the barriers are lifted — as they presumably must be one day — they find themselves easily outcompeted. Time and capital are wasted that could have been better invested in sectors where the country genuinely has an advantage.
Carmakers in the US have indeed largely taken their foot off the pedal where electric vehicles are concerned. It’s virtually unthinkable that the US could ever now catch up to China on key components such as batteries. That, though, may have saved the US from squandering capital by trying, as some Europeans did. The cells used in Volkswagen’s ID range are still a third more expensive than the cheapest BYD cells, on UBS estimates.
Even in a world where tariffs are lifted, the US carmakers may still be able to compete when it comes to assembling vehicles. Europeans have started to focus on building cars in partnership with Chinese operators, piggybacking on their eastern rivals’ supply chains. Given that components are a huge chunk of the cost of a car, delaying wouldn’t put the US companies far behind.
Even so, manufacturing cars in the US would be more expensive than in China — especially at the start, with limited volumes. But at least US carmakers are making money and can build up a cushion to absorb losses when competition eventually heats up.
There is little likelihood of US automotive groups being exposed to true global competition any time soon. Besides trade tariffs, Chinese “connected vehicles” also face national security import restrictions that predate the Trump administration. Protectionism is rarely cost-free. But in the case of US carmakers versus their European counterparts, it is hard to see much downside.
