Trump’s 25% tariff hands the car industry keys to China

By David Fickling

If you had a vision of the future where the global car industry wasn’t dominated by China, you can kiss those dreams goodbye.

That’s because President Donald Trump’s promised 25 per cent tariff on auto imports, announced late Wednesday Washington time, takes an ax to the only bits of the emerging electric vehicle supply chain that aren’t already dominated by Beijing.

The biggest losers when the levies take effect next week will be Japan and South Korea. They account for a third of the cars imported into the US, and as much as two-thirds of those imported from outside North America. (Mexico and Canada, while still swept up in the tariffs, will be partially exempt.)

They’re also crucial to the development of electric vehicles, because South Korean and Japanese companies produced more than a quarter of all EV batteries last year, making them the only serious challengers to China’s near-total dominance of the market. US and European businesses barely figure, especially since the bankruptcy earlier this month of the most serious contender, Sweden’s Northvolt AB.

If you’re wanting to bring manufacturing jobs back to the heartlands of America, landing a blow against these two Asian allies is a strange way to go about it. South Korea was the biggest foreign investor in new projects in the US in 2023, signing off on $21.5 billion of greenfield plants. Japan, meanwhile, has spent decades assembling the largest portfolio of foreign direct investments in the US, with $783 billion of assets, about 15 per cent of the total.

Former President Joe Biden’s push to establish a non-China clean energy supply chain had been turbocharging that relationship. South Korea’s LG Energy Solution Ltd., Samsung SDI Co., and SK On Co. have promised $54 billion to set up a constellation of 15 battery factories stretching from Michigan south to Georgia. EV batteries have accounted for more than half of jobs brought back to the US since 2021, according to a report last year by the Reshoring Initiative.

General Motors Co., Ford Motor Co. and Stellantis NV have all tied up with one or other of the three South Korean companies to build their EV batteries, while Tesla Inc. is working with Japan’s Panasonic Holdings Corp. If the US auto industry is to have an electric future, as its top executives insist, it’s going to need these Asian businesses to succeed.

As we saw during the Covid pandemic and its aftermath, however, global supply chains are held together with threads of gossamer. With the latest tariffs, Trump has driven a monster truck straight through this one.

Korean and Japanese battery makers, after all, aren’t just making cathodes and anodes for Detroit. Instead, they’re integrated into domestic auto industries that will struggle to survive without exports. Hyundai Motor Co. and Kia Corp. make more money in the US than in their home market, and their American plants are capable of assembling barely a third of the two million cars they sold in North America last year.

Devastate the profits of Korean and Japanese automakers, and the battery makers who depend on them for revenue will be the next to suffer. Those companies usually have profit margins in the single digits at best. What’s more, they’re already struggling as their larger Chinese competitors such as Contemporary Amperex Technology Co. and BYD Co. extend their lead in LFP, a better-value type of lithium-ion battery that is rapidly taking over the EV industry, and announce breakthrough innovations such as five-minute charging.

Ill-considered trade restrictions have a nasty habit of coming back to bite their instigators. Trump’s March 2018 tariffs on steel and aluminum were costing the US $4.6 billion a month in higher costs and tax losses by the end of the year they were introduced. Former President Barack Obama’s 2012 levies on Chinese solar panel manufacturers sparked a retaliation that killed off US production of solar polysilicon, a crucial raw material that American companies had once dominated. We’re about to see that scenario play out again.

To Trump, smashing up the remnants of one of Biden’s signature clean energy policies is a feature, not a bug of these tariffs. Among his first executive actions were moves to tear up rules pushing carmakers to electrify their fleets, pull funding for EV charging, rescind car fuel-economy standards, and roll back environmental regulations on tailpipe emissions.

Analysts and shareholders in Detroit might even welcome the shift in the short term. Pulling back on the billions of capital spending and research and development still required for electrification will mean more money for investors over the next three years or so. Protectionism is a great way to boost short-term profits.

It’s not a route to win the long-term game, however. Right now, the US and its allies are far behind as the global auto industry goes electric. By smashing up the links holding the delicate non-Chinese supply chain together, Trump is guaranteeing a future where Beijing rules the road.