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Business trends

Trump trade policy provides boost for China's auto industry

'America first' agenda threatens to push US innovation into second place

China leads the world in "e-range," the aggregate electrified vehicle range sold in the country.

TOKYO -- With the prospect of a full-fledged trade war between the U.S. and China looming, President Donald Trump's "America first" policy threatens to remove the competitive advantage built up by the U.S. auto industry through decades of innovation.

When Trump decided to impose tariffs on $50 billion worth of Chinese goods in early April, a measure designed to combat alleged theft of intellectual property, Beijing responded by announcing retaliatory measures.

In reprisal for "unfair retaliation," Trump then instructed the U.S. Trade Representative to consider $100 billion worth of additional tariffs on imports and Beijing has responded accordingly.

With products such as industrial robots and soybeans featuring prominently in the escalating rhetoric, automobiles might not appear a particular bone of contention, despite being on the lists of goods that are subject to tariffs.

Trade friction in the 1980s and 1990s between the U.S. and Japan, then the world's second-largest economy, was heavily focused on the auto industry. 

In the mid-1980s, Japan exported over 3 million vehicles annually to the U.S., controlling 20% of the market, while American cars failed to gain much traction in Japan. With Washington set to impose sanctions in 1995, Japanese carmakers announced plans to expand production in the U.S., leading to an eleventh-hour bilateral trade deal.

This time, however, the economic data is very different. In 2017, the U.S. exported 280,000 vehicles to China, which accounted for 1% of overall vehicle sales in the country. Just 55,000 units were shipped in the other direction, making up a 0.3% share of the U.S. market.

Chinese automakers have yet to establish a significant presence in the U.S., while American manufacturers produce most of the cars they sell in China locally. Last year, General Motors and Ford Motor manufactured 2.8 million cars in China at plants they operate jointly with local partners. 

More importantly, in 2009, China overtook the U.S. as the world's largest car market. In 2017, a total of 28.87 million vehicles were sold in the country, compared with 17.23 million in the U.S. 

The figures put the U.S. in a vulnerable position, but the Trump administration has maintained its hard-line stance, claiming Chinese companies force their American partners to transfer technologies in areas such as electric vehicles.

Washington's rhetoric appears based on a conviction that the U.S. has technological superiority over China. But experts argue that China's growing market could reverse the balance in the not-too-distant future.

By replicating existing technology, Chinese automakers have all but caught up with global peers in terms of engine development, said Noriyuki Matsushima, an auto analyst at Mitsubishi UFJ Morgan Stanley Securities.

"They are now only one or two steps short of reaching a stage where they no longer need help from foreign companies." 

The gap is even smaller with regard to electric vehicles, which use 40% fewer components than gasoline models.

"If you scored Japanese and U.S. electric vehicles at 95 on a 100-point scale, Chinese products would get 85," said Kenichiro Wada, head of Japan Electrification Research Institute.

Cumulative global sales of electric vehicles and plug-in hybrid cars stood at 2 million units at the end of 2016, according to the International Energy Agency. China accounted for the largest portion with 650,000, followed by the U.S., where 560,000 units had been sold.

But China may already have a greater competitive advantage in the development of electric vehicle technology than these figures indicate. U.S. consulting firm AlixPartners argues that the total distance covered by all electric vehicles in a country is a more important indicator than unit sales.

"The deeply-researched index we've compiled at AlixPartners shows that China is already leading the world in one very important technology measure: 'e-range,' or the aggregate electrified vehicle range sold in any given country," said Alexandre Marian, a director at the company.

As of the third quarter of 2017, China ranked No. 1 in e-range, at 27.6 million kilometers, while the figure for the U.S. was 12.1 million.

More distance covered translates into a larger amount of data that can be used for the development of new technology and China's lead in this respect is likely to extend as the government makes a concerted effort to promote electric vehicles.

From 2019, carmakers will have to ensure that electric cars and plug-in hybrids account for 10% of overall production. The target will be raised to 20% in 2025.

Air pollution poses a significant health hazard in China and the country is also the world's largest crude oil importer. In 2016, China ratified the Paris climate accord and Beijing has put electric vehicles at the forefront of its strategy to tackle these issues.

The U.S. is moving in the opposite direction. The Trump administration has withdrawn from the Paris accord and is easing regulations on oil exploitation and fuel efficiency. Sales of low-efficiency large vehicles have rebounded and made up a record 63% of overall new car sales in the U.S. in 2017.

The trend is likely to be harmful in the long term for the U.S. car industry, where stringent environmental regulations have driven decades of innovation.

As the competitive advantage shifts from the U.S. to China, so too will the attention of leading global automakers.

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