New York Times - Economy

China’s Taxes on Imported Cars Feed Trade Tensions With U.S.

Hinting at potentially tough talks to come, Lawrence H. Summers, a former Treasury secretary, raised the issue of auto trade in the first question to Li Keqiang, China’s premier, at a closed-door meeting on Monday, participants in the meeting said on the condition of anonymity because the discussions were private.

Mr. Li did not answer the question directly, the people said, instead responding that every country faced trade issues, and that China had its own trade deficits with a few countries, like Australia, from which it imports a lot of raw material.

Mr. Trump has made trade a major issue, saying he wants a level playing field and similar terms on both sides. Partly because of China’s taxes, less than 5 percent of cars in the country are imported, compared with one-quarter in the United States. Major American, European and Japanese carmakers have built huge assembly factories in China with the help of local partners, contributing to China’s rise as the world’s largest automaker.

Mostly because of taxes in China, “an imported car can be double the price when compared with a domestically produced car,” said Bill Russo, the former chief executive of Chrysler China. “This acts as a powerful motivation, especially for mass-market brands, to localize their products in China.”

(The online news organization Axios reported recently on potential political tensions between China and the United States over the auto industry.)

But the industry dynamics are complex. American auto companies, which have come to depend on China as a major source of revenue, have been largely quiet despite Mr. Trump’s statements. Building cars in China keeps them close to a vast Chinese supply chain and saves on transportation costs.

Companies like Fiat Chrysler, the manufacturer of the Wrangler, also set prices in China that allow somewhat higher profit margins.

Pricing can depend on factors like taxes, shipping, certification costs, equipment options, the size of the market and other details, said Ariel Gavilan, a Fiat Chrysler spokesman, in an emailed reply to questions. “We also take a look at the competitive landscape — i.e. what are the prices of the vehicles we compete against — before determining our pricing strategy.”

Industry figures have also long talked about the possibility of exporting big volumes of China-made cars to the United States. In an early test, General Motors started shipping the Buick Envision model from a factory in eastern China’s Shandong Province to the United States last year. That decision irritated the United Automobile Workers union. G.M. officials said that the Envision, a midsize sport utility vehicle, was designed for the Chinese market and is made only at the Shandong factory.

There is only a small chance that Chinese automakers would set up assembly plants in the United States, the way Japanese automakers did in the 1980s to allay trade tensions. China’s highly fragmented industry includes a number of fairly small manufacturers producing low-cost models, making the economics difficult, while Chinese automakers must still deal with quality problems.

Parts are also an issue. In January, the most recent month for which data is available, the United States had $ 817 million in automotive exports to China, including finished cars and auto parts, and $ 1.71 billion in automotive imports.

Still, American negotiators might have better luck in that area, as some Chinese parts makers are already investing in the United States to diversify. Fuyao, one of the world’s largest makers of automotive glass, has built a large factory in Ohio to supply car-assembly plants in the state. Officials with Fuyao have been criticized on social media in China, however, for investing offshore instead of keeping jobs within China.

Fuyao declined to comment on its plans in the United States.

Yale Zhang, the managing director of Automotive Foresight, a Shanghai consulting firm, said Fuyao’s Ohio factory could be the start of a larger trend that might help soothe trade frictions.

“Those large local suppliers are willing to invest in the U.S.,” he said. “It won’t be a major issue for those large, local suppliers. They are willing to do that.”

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