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China to Cut Tax on US Vehicles to Ease Trade Tensions

Dec. 14, 2018
Tariff imposed on U.S. imports removed for three months.

China will remove the retaliatory duty on automobiles imported from the U.S. for three months in an effort to defuse trade tensions with the world’s biggest economy.

The 25% tariff it imposed in a tit-for-tat measure will be scrapped starting Jan. 1, the finance ministry said Friday. Earlier this week, Bloomberg News reported that China was considering cutting the duties.

The move comes two weeks after President Donald Trump and his Chinese counterpart Xi Jinping agreed to a truce in the trade war at their meeting in Argentina. Trump claimed he won a concession during trade talks with Xi and said China, the world’s biggest automobile market, would reduce and remove tariffs, a claim that Beijing didn’t immediately confirm.

The White House is also looking to officially delay the tariffs that had been due on Jan. 1, with an announcement expected on Friday.

Since the leaders met, China has started buying soybeans again, is now cutting car tariffs and may restart corn purchases, as the first steps in a larger deal. But there’s doubt in Washington and Beijing whether China is willing to water down its plans to match and exceed U.S. industrial strength, which are one of the root causes of the current fight.

China’s top leaders are expected to meet next week to decide next year’s economic policies. Their focus will be on how they propose to sustain stable growth when faced with both uncertainty from the trade war and from the slowing domestic economy.

The temporary tax reduction for U.S. car imports comes as China heads for its very first annual vehicle sales decline in 28 years amid the trade war and an economic slowdown that’s undermining consumption momentum.

Car sales in China have fallen for six straight months after decades of almost uninterrupted growth. While there were other factors, the tit-for-tat jabs between the world’s biggest economies have played a role. The move by China would reduce tariffs on cars made in the U.S. to 15% from the current 40%, in line with what other countries pay.

China’s decision may provide a respite for American carmakers such as Tesla Inc. German carmakers such as BMW AG and Daimler AG would also benefit as they bring to China U.S.-made cars.

German carmakers BMW and Daimler have been hardest hit by the additional levies, shipping large numbers of sport utility vehicles from plants in the U.S. to China. Six of the top ten vehicles exported from the U.S. to the world’s biggest car market are from the two German brands, according to forecaster LMC Automotive.

BMW said the punitive levies caused a hit of 300 million euros (US$339 million) to its bottom line during the second half of the year. The trade tensions were a key factor in both carmakers cutting profit forecasts for the year.

BMW and Daimler, which import thousands of SUVs into China from plants in the U.S., reversed earlier losses tied to a weak European auto sales report. BMW rose 0.2%, after falling as much as 2.4%. Daimler’s decline narrowed to 0.6% from as much as 2.8% earlier. Volkswagen AG was down 1.2%, after dropping 2.9%.

Foreign carmakers have long pleaded for freer access to China’s auto market, while its own manufacturers are trying to expand abroad. In April, China announced a timetable to permit foreign companies to own more than 50% of local vehicle-making ventures.

Longer-term, China has a lot to gain from free trade in autos as manufacturers such as Guangzhou Automobile Group Co. and Geely Automobile Holdings Ltd. look to move overseas. The U.S. currently charges a 27.5% tax on imported cars from China after adding a 25% additional tariff during the trade row.

By Bloomberg News

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