China Fines GM to Spite Trump
China is beginning a crackdown on U.S. automakers, possibly in retaliation for President-Elect Trump’s call for stricter controls on imports. Trump has upended current U.S. policy towards China by accepting diplomatic overtures from Taiwan, which China considers its territory. Trump has also threatened to place tariffs of up to 45% on Chinese goods. The new administration hopes that this will correct the current trade imbalance, which now stands at almost $400 billion dollars a year.
GM Faces an Anti-trust Fine
GM is the first American company to face an antitrust fine under the new directives. China is accusing the company of stifling price competition. The Chinese regulators did not release the size of the fine. However, China fined Daimler Mercedes-Benz $56 million in 2015 under similar circumstances. The year before that, China’s National Development and Reform Commission fined Volkswagen and Fiat a combined total of $200 milllion.
GM stock fell after the fine announcement. Share prices sank to to $35.95, a nearly four percent drop. However, the announcement also hurt trading on the Chinese car manufacturer SAIC which partners with GM. SAIC stock price saw a four percent reduction as well. GM has refused to comment on the action, aside from stressing that the company is careful to follow the laws of every country in which they operate.
Why GM Needs the Chinese Market
China is the largest buyer of automobiles in the world. GM currently sells more cars in the Chinese market than in the United States. While GM is the second largest exporter into the region, ranking just behind Volkswagen. As most other countries are experiencing a decline in the demand for new cars, numerous manufacturers are searching for consumers in Asia. For example, Ford, although far behind GM’s level of market penetration, has seen sales rise by 17 percent since 2015.
Potential Victims of Chinese Protectionism
Other industries are also facing Chinese reprisals. China’s state run paper, The Global Times, lobbied for national airlines to switch orders for Boeing planes to its competitor Airbus. Additionally, if China takes a more protectionist approach, iPhones sales may limited significantly. China has already shown its power over internal commerce by blocking many U.S. companies from doing business within its borders. It is unlikely that GM, Boeing, or Apple wish to join Google and Facebook in the trade penalty box.
The Problem of Taiwan
In addition to trying to stop tariffs on their exports, the Chinese government is also using the fines to call attention to their position on Taiwan. Under previous U.S. administrations, there was a strict “one China” policy. So Taiwan, although independent in terms of commerce, is not accorded separate diplomatic status. President-Elect Trump challenged this policy on December 2, 2016, when he engaged in a short phone call with the President of Taiwan, Tsai Ing-wen. Although the call was merely a short statement of congratulations, it broke with traditional protocol. Trump subsequently stated that he didn’t know “why we have to be bound by a ‘one China’ policy unless we make a deal with China having to do with other things, including trade.”
How Will Wilbur Ross Handle China?
Trump will undoubtedly be discussing the issue of Chinese trade in detail with his nominee for Commerce Secretary, Wilbur Ross. Ross has publicly stated that many of America’s trade deals, such as NAFTA, have resulted in large economic losses. In a CNBC Op-ed, he singled out U.S. support for China to join the World Trade Organization. He pointed out that while China has enjoyed the benefits of preferential trading with WTO partners, they consistently engage in unfair business practices. While many of these cases are tried through the WTO adjudication process, this can take years. In the interim, Chinese companies run those who play by the rules out of the market. Given his adversarial position towards Chinese trade, it remains to be seen how likely Ross is to compromise on tariffs in order to protect American companies operating overseas.
How Does the GM Ruling Affect Trading?
GM stock prices may stall until the amount of the fine is disclosed. If China succeeds in limiting sales, the company may lower production levels, which could drop commodity prices on steel. Other companies will be looking towards the Trump administration’s import policy, to determine if reciprocal sanctions are likely. Apple is currently in line to be the biggest loser if the U.S. and China begin a trade war. The dollar is likely to remain strong, as the new financial policy shutting out China makes sense in light of a potential alliance between the U.S. and Russia.