German Auto Companies Sign Manufacturing Deal With China…

It is more than likely President Trump and Commerce Secretary Wilbur Ross knew this was in the making several months ago.  In hindsight it now appears Germany presented a false proposal to U.S. Ambassador Richard Grenell intentionally to poke him in the eye.

Germany has sealed the fate of their auto-industry with a multi-company agreement to manufacture vehicles in China and share all their intellectual processes therein.

FRANKFURT (Reuters) – German companies signed a series of agreements with Chinese partners at a meeting of Chancellor Angela Merkel and Prime Minister Li Keqiang in Berlin on Monday, according to a document seen by Reuters. Following are details of them:

♦BASF signed a Memorandum of Understanding (MoU) with China’s Guangdong Province to look at building a highly-integrated chemical production site there, BASF said.

♦[…]  BMW and its joint venture partner Brilliance Automotive Group Holdings (1114.HK) have agreed to expand production capacity at BMW Brilliance Automotive’s two sites in China to a total of 520,000 BMW brand vehicles in 2019, BMW said.  In addition, it said the two companies had agreed that the all-electric BMW iX3 would be exported from China to other markets.

♦[…] Bosch and Chinese electric vehicle startup NIO agreed to cooperate on sensor technology, automated driving, electric motor controls and intelligent transport systems.

♦[…] Volkswagen said its Spanish brand SEAT would return to the Chinese market in 2020/21 as part of an agreement with China’s Anhui Jianghuai Automobile Group (JAC) (600418.SS) to develop electric vehicles.  VW, SEAT and JAC will jointly set up a new research and development center in China to develop electric cars as well as technologies for connectivity and autonomous driving, it said.  (read more)

On its face this seems like a poor decision on the part of Germany, however within multinational trade constructs the alignments are a heavy blend of the political and the financial.   Germany is aligning their interests ideologically with China and as a consequence they will likely see ZERO benefit in any trade negotiation with the U.S.

Chancellor Merkel is taking a gamble here, because China is aligning with Iran in the energy sector; and as an extended consequence Merkel’s auto industry will likely face 20% import tariffs from the U.S.

Chinese built BMWs will likely not hold much appeal in the U.S; and the structure of this German-China deal has downstream ramifications making the U.S. exit from NAFTA more urgent; thereby cutting off the workaround the EU -specifically BMW- was counting on from the new Mexican auto plant set to begin production next year.

Immediately following the 2016 election (December), President Trump warned BMW (and others) about opening a manufacturing plant in Mexico; Trump suggested such a decision might backfire.  BMW ignored the warning and contracted with Mexico for an auto plant with intentions to use NAFTA to bring the completed cars to market.

The plant is anticipated to be operational in 2019; however, it is now increasingly likely that NAFTA will be dissolved and President Trump is threatening a 20% auto-tariff to any imported cars.

BMW was planning on using the NAFTA loophole to assemble EU auto parts in Mexico for duty-free transport into the U.S.   However, now there’s a likelihood the BMW sedans planned to be built in Mexico could be subject to U.S. tariffs and they cannot gain benefit from the NAFTA loophole.

BMW builds SUVs in Spartanburg, South Carolina.  The reason they build them there is due to a 25% pre-Trump existing tariff on imported SUV’s.   It looks like BMW made a bad decision to build an car plant in Mexico; although their position as expressed within the Reuters article fails to mention this aspect at all.   Obviously they don’t mention the 2016 warning from President-Elect Trump either.

The alliances will not end well for the EU.  This is a perfect opportunity for President Trump to push a bilateral trade deal with the U.K…. but British political leadership is too stupid to see the opportunity.

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