Tesla, Trump, & Tariffs: China Holds The Key

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What any business wants more than anything is stability so it can make long term plans. China is a major part of Tesla’s long term plans. Right now, sales of Tesla automobiles in China — $2 billion last year — account for 10% of the company’s revenue. It has been holding talks with officials in Shanghai for more than a year about building a factory in China, but uncertainty over tariffs have prevented those talks from reaching a conclusion.

At present, all the cars Tesla sells in China are manufactured in Fremont, California, which means they are subject to a 25% import tariff. While the power of the Tesla brand can offset most of that disadvantage in the marketplace for now, Chinese customers are like those in every other country. Price is a major consideration when it comes to making a buying decision.

If Tesla wants to grow from beyond its position as a niche player in China, it will need to solve the dilemma of selling its cars at a 25% premium to all the other choices Chinese customers have. Not only are new Chinese car manufacturers cropping up at a record pace, the quality of the cars they build is getting better all the time. Given a choice, many Chinese would prefer to buy a car built in China rather than one imported from another country.

Donald Trump Rears His Ugly Head

Elon Musk has complained recently that paying the 25% import duty is like competing in the Olympics while wearing track shoes made of lead. Originally, Tesla thought/hoped that building a factory in the Shanghai free trade zone would get its cars out from under the 25% tariff. But Chinese officials have nixed that idea. The only way to beat the tax is to partner with a Chinese company, something Tesla is not anxious to do. In actual fact, “partner” is a bit misleading, as under Chinese rules, the local company must own 51% of the enterprise, leaving the foreign manufacturer without a controlling interest in the operation.

The partnership also means most if not all the intellectual property involved in the products manufactured gets transferred to the local Chinese partner. China simply has a different perspective on intellectual property rights than most western countries, especially the United States. Donald Trump — the first world leader to govern via tweets — has railed against China’s refusal to protect intellectual property rights the way he and most American companies think they should be protected.

It all comes down to your point of view. In some countries, eating horse meat or dog meat is perfectly OK, even a delicacy. In the US, people who do such things are considered barbarians. The Chinese don’t understand the American obsession with intellectual property rights and don’t know what all the fuss is about.

Trump has been beating his breast lately about whacking Chinese imports with stiff new tariffs in order to punish them for not playing fair. Even Elon Musk has tweeted his displeasure at how the game is played. The Chinese in return have come up with new tariff proposals of their own. Where Trump uses a broad brush approach, the Chinese have carefully calibrated their response to target items that come from red states — the very people conservatives reactionaries consider their base.

China has also said it may add another 25% import tariff on US-made cars, which would convert those lead track shoes Musk complains about into concrete blocks. Chinese customers may be willing to pay a premium for the cachet of driving a Tesla, but would they be willing to pay half again as much as similar Chinese made vehicle? Some would, no doubt, but Tesla is really not about being a boutique manufacturer. It wants to sell millions of cars. That extra level of tariff — if it ever came to pass — would be deal a body blow to Tesla’s plans.

The Boao Forum

Asian economic leaders are meeting this week on the island of Hainan in southern China at the Boao Forum, a four day conference known as the Davos of Asia. The theme of the this year’s event is “An Open and Innovative Asia for a World of Greater Prosperity.” China’s leader for life, Xi Jinping, took the occasion to make a major address in which he said, “We have a genuine desire to increase imports and achieve greater balance of international payments under the current account.” He went on to promise a that China wants to lower import duties on imported cars “significantly.” Elon Musk greeted the news with enthusiasm.

This is a very important action by China. Avoiding a trade war will benefit all countries.

— Elon Musk (@elonmusk) April 10, 2018

A person could be forgiven for suffering a bit of cognitive dissonance here. Is China going to impose new tariffs on imported cars or lower them? The answer may be that Xi’s comment signals a new openness toward car companies based in Japan, South Korea, and Europe, while dropping the hammer on US companies like Tesla. A popular expression in Asia goes like this: “When the elephants fight, the grass gets trampled.” The question now is whether Donald Trump is an elephant or the grass. Nothing in the world of global events should be taken out of context. For instance, consider this other recent tweet by People’s Daily China.

Chinese PLA Navy will conduct a live-fire drill in the waters of the #TaiwanStrait on April 18, Fujian maritime administration announced on Thursday; Military training off Sanya, south China's Hainan Province, concluded on Thur, according to Sanya maritime administration pic.twitter.com/7OBzBvg0Ao

— People's Daily, China (@PDChina) April 12, 2018

Images of Chinese warships firing heavy guns in the general direction of Taipei have to cause consternation in some world capitols. Since it was on Twitter, even America’s tweeter in chief should be aware it, although whether he has the intellectual capacity to appreciate its implications could be a matter of some debate as he plays “Mine’s bigger than yours,” with world leaders.

Will China really open its markets to foreign products, beef up its protections for intellectual property, and loosen the requirements that force foreign manufacturers to partner with Chinese companies in order to build factories in China? No one knows. All we can be sure of is that whatever happens, Donald Trump will take credit for it.