Threat of Automobile Tariffs in the US Trade War: Impact on Singapore Car Market?

Threat of Automobile Tariffs in the US Trade War: Impact on Singapore Car Market?

2018 has seen the United States (US) become embroiled in trade disputes with China, the European Union, Canada and other trading partners. In a major move, the Trump administration in March 2018 imposed a 25% tariff on steel and a 10% tariff on aluminium being imported into the US, though there were temporary exemptions to the EU, Canada, Mexico, Brazil, Australia and Argentina after protests and negotiations.

The tariffs have heightened tensions between the US and its trading partners worldwide and led to several challenges before the World Trade Organisation on US tariff policies. For the US, such tariffs are aimed at rejuvenating the US steel and aluminium industries which have seen a low level of activity over several years. Steel and aluminium tariffs would indirectly affect the auto industry since they count as raw materials.

Featured Image Source: FT

Cars and car parts have also become the subject of tariffs as the US seeks to correct a perceived trade imbalance. President Trump even remarked that tariffs on the auto industry were perhaps the biggest hammer in his tool kit. Trump’s administration has framed the proposed car tariffs, along with steel and aluminium tariffs, as a means to protect key domestic industries against unfair foreign competition. With that in mind, the US threatened to impose a 25% tariff on imported cars and auto parts in regions such as Europe.

Why Motor Vehicles?

Automotive TradeImage Source: DW.com

The US has gone as far as to consider its motor vehicle industry a “national security” issue due to its strategic economic importance. According to US Commerce Secretary Wilbur Ross, national security means far more than cyber attacks, terrorism or military attacks. Instead, it is broadly defined to include the economy and the impact on employment. Almost one million jobs in the US are tied directly to auto and parts manufacturing, according to official statistics. Another two million jobs are linked directly to vehicle and parts dealers.

Import and export statistics illustrate this point. Passenger vehicle imports are the country’s leading import and the largest category of motor vehicle parts rank at number six on the import list. Passenger vehicles are also the US’ third largest export, while auto parts exports come in at number four.

As such, the Trump administration has launched a national security investigation to assess whether vehicle and parts imports are threatening the industry’s health and ability to research and develop new technologies. The process for investigating whether tariffs are necessary and implementing them usually takes about six months. This means a decision from the Trump administration on whether to follow through on its car tariff warnings may not occur until 2019.

Global Auto Industry: Casualty of Trade War?  

Given their strategic significance to a country’s economy, cars have long featured as part of trade disputes between countries and regions in the international trading landscape. An imbalance between the US and the European Union (EU) in trade tariffs on auto imports has taken centre stage for years. Auto imports was a hot topic during the trans-Atlantic trade talks during the Obama administration but were left unsettled when Mr Trump took office and stopped the talks. Currently, Europe imposes a 10% duty on American auto imports, relative to US tariffs of 2.5% on European imports.

Image Source: BBCI

With such an imbalance, it is no wonder that President Trump is eyeing a role for the auto industry in his trade disputes. Persistent US trade deficits with Japan have also long been largely blamed on the Japanese auto industry, which plays a major role in Japan’s economic well-being.

Although there is a lot of uncertainty about whether the US will actually go through with its threat to impose tariffs on cars and auto parts, now or in the future, the implications are potentially serious as it could be a threat to the global auto industry. The damage could extend to major European carmakers such as BMW, Daimler and Volkswagen.

Japanese and South Korean car companies would be affected as well. As would Mexico and Canada, which are the biggest suppliers of US car imports, worth a total US$89 billion annually. They would definitely be hit badly if tariffs are enacted.

Impact on Singapore Market: Boon for Car Leasing in Singapore?

If the implications of auto tariffs for Singapore are to be considered, it must first be acknowledged that car ownership in Singapore is expensive. With regards to imports and exports of cars here, excise duties apply, which are a form of tax imposed on specific goods within a country. The Excise Duty on a car in Singapore stands at 20% of its Open Market Value (OMV). Such taxes are imposed as a means to control the car population in land-scarce Singapore.

In the event that auto-market conditions turn bad in the US, affected automobile brands from Europe, Japan, South Korea and elsewhere may instead turn to markets such as Singapore and neighbouring Southeast Asia, a region still experiencing economic growth and a rising base of middle-class consumers. In Singapore, this would make sense since according to official statistics, Honda, BMW, Mercedes, Toyota and Kia were among the top brands of the car population in Singapore in 2017, as they have been in the years before that. And if US car makers are hit by retaliatory tariffs in Europe, American car brands may also turn to Singapore and Southeast Asia.

ASEAN Automotive StatisticImage Source: ulikaiser slideshare

The greater supply of cars, along with marketing and promotional campaigns may drive down the OMV of cars as competition heats up and buyer interest goes up. Singaporeans do like a good bargain after all, especially when it comes to a sizeable purchase like a car. The Singapore market could also see an increase in the range of brands and models available. This applies particularly to American cars, which do not have as large a market share as European or Asian models.

That said, more active market activity from auto-dealers and consumers could also lead to higher COE prices – that unique component of car ownership in Singapore – and higher car prices overall.

As such, the greater supply and variety of cars, and potentially higher COE prices would be a good opportunity to promote the greater adoption of car leasing and other car rental services in Singapore.

Image Source: Gettyimages

For those who never considered driving a car due to the high costs involved, short-term car rentals may be the solution to meet the need for convenience and mobility within a specific time period. Long term car rental or car leasing of passenger cars could meet the needs of companies and individuals who do not want to commit to owning a car but have strong needs for a car for an extended period of time.

Stringent car loan restrictions in Singapore add to the appeal of vehicle leasing as an option as it serves consumers who need a car but cannot afford the hefty 50% downpayment. This could suit families with young children or senior citizens or businesses which need a car. Car leasing is a popular option in other countries such as the US, and there is no reason it should not catch on in Singapore where trends like the sharing and gig economy have taken off. Leasing offers the convenience of covering the cost of road tax, insurance, servicing and maintenance of a car in the monthly rate.

Other segments of the automobile market such as private hire cars, limousine service, chauffeur service and even commercial vehicle rental could also benefit from a larger supply and greater market activity.

 

While no country, company or individual, especially in trade-dependent Singapore, would want trade disputes that disrupt the economy and livelihoods, such an occurrence could well present unexpected opportunities to redefine the car industry and mobility options in Singapore and elsewhere.

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