WHAT DOES A TRUMP PRESIDENCY MEAN FOR AUSSIE DEALERS?

New US President Donald Trump’s protectionist trade policy could set off a global trade war that would weaken the US dollar, according to financial experts.

In January the Australian dollar topped US76 cents for the first time in more than two months, as the US dollar fell below 100 on the US dollar spot index (which measures it against a raft of other currencies) for the first time since early December.

One of Mr Trump’s first acts as President was to withdraw the US from the Trans-Pacific Partnership (TPP), leading some – including Australian Opposition Leader, Bill Shorten – to declare the TPP dead and turn their attention to a China-led trade agreement instead.

However the Turnbull Government has restated its commitment to both the TPP and the goal of free trade.
Australia should not be too affected if the TPP does fall through. We already have individual trade agreements with all the signatories to the TPP, including the US. Australian Prime Minister, Malcolm Turnbull, expressed disappointment in the US withdrawal, while hoping for a change of heart. In the meantime, China could potentially take the US’ place in the TPP.

Is protectionism back?

Mr Trump has vowed to make American manufacturing “great again”, saying he will impose tariffs on imports from countries that currently impose them on American goods.

On top of withdrawing from the TPP, Mr Trump has also cast aspersions in the direction of NAFTA, the North American Free Trade Agreement the US has with Canada and Mexico, describing it as “the worst trade deal in history”.

Mr Trump would need the assistance of congressional Republicans to ratify any US withdrawal from or renegotiation of NAFTA, something the mainly free-trade-supporting members are unlikely to grant him.

Trump on the auto industry

The new president has targeted German car makers, asking why so many Americans drive BMWs and Mercedes-Benzs and so few Germans drive Chevrolets. He criticised BMW for its plans to build its new plant in Mexico and threatened to impose a 35 per cent ‘tax’ on every car BMW imported to the US
Mr Trump has also criticised General Motors, Ford, Hyundai and Toyota.

Automotive manufacturing in Mexico has enjoyed staggering growth in the past two decades. Low wages and other costs make it an attractive base for OEMs, with Audi recently moving its global manufacturing hub for the Q5 SUV to Mexico. Toyota and BMW are committed to opening similar facilities but Ford has cancelled plans to open a new plant in Mexico. It will, however, go ahead with plans to build the next-generation Focus south of the border.

Mexico has benefited greatly since NAFTA took effect in 1994. Its trade with the US has grown from US$82 billion (A$110 billion) to US$483 billion (A$646 billion) in that time. American investment in Mexico has increased by a factor of six.

Mr Trump has promised to impose a 35 per cent tariff on all Mexican goods.

China

Mr Trump has indicated his willingness to engage China in a trade war. The problem for the American auto industry is that China is one of its largest customers. According to 2016 figures, GM sold more cars (3.87 million) in China than it did in the US (3.04 million).

The other issue is that even cars assembled in the US will have parts manufactured in other parts of the world. It is the way the auto manufacturing industry has worked for three decades now: auto makers sourcing parts from hundreds of different suppliers all over the world.

Chinese manufacturers dominate the US replacement parts market, with prices often half those made by the OEMs.

BK Asset Management Director of Foreign Exchange Strategy, Kathy Lien, said “all signs are pointing to a global trade war.

“Investors are worried that other countries will retaliate and any headlines related to that would be negative for the US dollar.”

Germany

Matthias Wissmann, President of the German Association of the Auto Industry, said in a statement that the German auto industry is taking Mr Trump’s comments seriously. Exporting cars is a massive part of the German economy and one of its biggest markets is the US. Barriers to trade would have a significant impact on German economic growth.

“Restrictions in the NAFTA zone would put a real damper on the economy,” said Mr Wissmann.

What does it mean for Australian Dealers?

A lower US dollar is theoretically great for Australian importers of US-owned brands, giving them greater buying power and resulting in lower prices for Australian consumers. However, if Mr Trump followed through on his threat to force manufacturers to move their factories to the US, higher wages and costs would likely drive prices up.

If German car makers find it harder to sell their products into the US, the overflow could result in cheaper imports here.

Mr Turnbull’s reiteration of Australia’s commitment to free trade presents us with another angle to argue for the removal of the Luxury Car Tax (LCT). The Government cannot say it is against tariffs while imposing what is a tariff in all but name.

If we can get rid of the LCT, the likes of Mercedes-Benz and BMW could start selling a lot more cars in Australia.
The one thing we know for sure about a Trump presidency is that times, they are a’changin’.

Leave a Reply

Your email address will not be published.