Some people like things shiny and new. Others prefer the proven and time-worn. As far as automobiles go, I’m deeply rooted in cars from the 1950s and 1960s. Cars from that era were purely focused on speed and style, with the best offering both. Designers and engineers gave barely a nod to safety, economy or emissions.
That era is long gone. In the U.S., things began to change with the Motor Vehicle Air Pollution Control Act of 1965 and the Highway Safety Act of 1966. Corporate Average Fuel Economy (CAFE) standards were legislated in 1975. As the industry began to globalize in the 1970s, automobiles were a key element in all subsequent trade negotiations and treaties, and of course they were central to NAFTA. Few remember that the original impetus for NAFTA was a Ronald Reagan campaign pledge in 1979. President Bill Clinton signed it into law 14 years later.
Today, the global auto industry is heavily regulated and works in close cooperation with government and labor representatives as both a large employer and the provider of an important consumer good. The web of safety and fuel-efficiency standards, protections, subsidies and labor regulations that cover it have evolved incrementally over six decades, from the careful negotiations of automakers, lobbyists, governments, unions and customers. It is a delicate and complex balance.
At the same time, the industry’s supply chains have regionalized and globalized—again, incrementally and pressed by economic imperatives. Fiat Chrysler is an Italian-American company headquartered in London that sells Dodge pickups in the U.S. and Jeeps in China. Interestingly, it sources some 80% of its parts for its U.S. manufacturing operations from within North America. Contrast that with the 70% sourced in North America by an “all-American” firm such as Ford.
Another fact that is not as well-known as it should be is that foreign vehicle manufacturers are now making more cars and trucks in the U.S. than General Motors, Ford and all the other U.S. companies.
In short, there is no real “U.S. auto industry.” Trying to protect it with tariffs is like using a sledgehammer to fix a delicate piece of machinery that isn’t even broken—and a vitally important bit of machinery in the global economy, at that.
Removing the Threat
Readers of our Asset Allocation Committee Quarterly and CIO Weekly Perspectives will know we have been cautiously constructive on the threat of a global trade war. When Joe Amato, Ashok Bhatia and I were writing just over a month ago, we even floated “the possibility that we end up with lower global tariffs once the dust settles.” Markets have been with us, for the most part. If it has looked a little complacent against the news flow of the past few weeks, however, I could understand it.
For us, tough talk with a single trading partner such as China that is aimed at kicking off negotiations for a fairer set of trade terms need not be overly disruptive. Even global tariff increases on steel and aluminum are an economic annoyance rather than a catastrophe.
But our outlook would be considerably darker if we saw this trade war shift to automobiles. No other industry is so globally dispersed and integrated, with supply chains so complex and an ecosystem so delicately balanced after decades of incremental evolution. Disrupting that would disrupt the entire global economy.
That is why the agreement between the EU and the U.S. last week to put all new tariffs on hold during a new series of trade negotiations—including the 25% tariff on $200 billion of auto imports threatened by the U.S.—was such an important step back from the global trade war that so many fear.
Last week Daimler reported falling profits and General Motors cut its full-year earnings forecasts, and both cited rising costs from metals tariffs. But those headwinds would seem insignificant next to a 25% tariff on vehicles imported into the U.S. My colleague Linus Claesson, who covers the global auto industry from our London office, estimates that such a tariff would yield 8% total sector cost inflation, with the effect being quite uneven across manufacturers.
Were even half of those costs passed onto customers, we would see cars feeding into inflation statistics for the first time in a decade or more. It would also represent a growth shock, reducing demand for autos in general and putting an abrupt end to the recent trend for trading up to higher-value models. And with an industry as globalized as this one, that loss of demand would reverberate worldwide. Retaliation or a global trade war in autos could knock half a percentage point off global GDP and prove to be the tipping point that brings this long growth cycle to a premature end.
Markets had good reason to be relieved at last Wednesday’s news then. President Trump’s meeting with the European Commission President Jean-Claude Juncker was light on details, but represents a meaningful de-escalation of trade tensions, at least for the time being.
I opened up this week’s Perspectives reminiscing about the way cars were back in the more carefree days of the ‘50s, ‘60s and ‘70s. But safety instruction wasn’t completely neglected. High school driver’s education for me in the ‘70s included videos of real-life highway carnage and crash test dummies on acceleration sleds slamming into fixed objects at high rates of speed. We don’t need to test the effect of a global trade war in autos on crash test dummies because we already know what the outcome would be. The dummies die.
Brad Tank is a Managing Director, Chief Investment Officer, and Global Head of Fixed Income at Neuberger Berman. He is a member of Neuberger Berman's Operating, Investment Risk and Asset Allocation Committees. To learn more, see Mr. Tank’s bio or visit www.nb.com.
In Case You Missed It
- U.S. Existing Home Sales: -0.6% to SAAR of 5.38 million units in June
- Japan Purchasing Managers’ Index: -1.4 to 51.6 in June
- Euro Zone Purchasing Managers’ Index: -0.6 to 54.3 in June
- U.S. New Home Sales: -5.3% to SAAR of 631,000 units in June
- U.S. Durable Goods Orders: +1.0% in June (excluding transportation, durable goods orders increased 0.4%)
- European Central Bank Policy Meeting: The Governing Council made no changes to its policy stance
- U.S. 2Q 2018 GDP (first estimate): +4.1% annualized rate
What to Watch For
- Tuesday, 7/31:
- U.S. Personal Income & Outlays
- Case-Shiller Home Price Index
- Euro Zone 2Q 2018 GDP (first estimate)
- Euro Zone Consumer Price Index
- Bank of Japan Statement on Monetary Policy
- Wednesday, 8/1:
- ISM Manufacturing Index
- FOMC Minutes
- Friday, 8/3:
- U.S. Employment Report
- U.S. ISM Non-Manufacturing Index
Statistics on the Current State of the Market – as of July 27, 2018
|S&P 500 Index||0.6%||3.8%||6.6%|
|Russell 1000 Index||0.4%||3.5%||6.5%|
|Russell 1000 Growth Index||-0.5%||3.7%||11.2%|
|Russell 1000 Value Index||1.3%||3.4%||1.6%|
|Russell 2000 Index||-2.0%||1.3%||9.0%|
|MSCI World Index||0.8%||3.3%||4.1%|
|MSCI EAFE Index||1.3%||2.7%||0.3%|
|MSCI Emerging Markets Index||2.1%||2.7%||-4.0%|
|STOXX Europe 600||1.2%||3.0%||-0.2%|
|FTSE 100 Index||0.3%||0.9%||2.6%|
|CSI 300 Index||0.9%||1.1%||-11.0%|
|Fixed Income & Currency|
|Citigroup 2-Year Treasury Index||-0.1%||-0.1%||0.0%|
|Citigroup 10-Year Treasury Index||-0.5%||-0.7%||-3.4%|
|Bloomberg Barclays Municipal Bond Index||-0.2%||0.2%||0.0%|
|Bloomberg Barclays US Aggregate Bond Index||-0.2%||0.0%||-1.6%|
|Bloomberg Barclays Global Aggregate Index||-0.2%||-0.2%||-1.6%|
|S&P/LSTA U.S. Leveraged Loan 100 Index||0.1%||0.8%||2.6%|
|ICE BofA Merrill Lynch U.S. High Yield Index||0.3%||1.0%||1.0%|
|ICE BofA Merrill Lynch Global High Yield Index||0.4%||1.2%||-0.3%|
|JP Morgan EMBI Global Diversified Index||0.6%||2.6%||-2.7%|
|JP Morgan GBI-EM Global Diversified Index||1.1%||2.0%||-4.6%|
|U.S. Dollar per British Pounds||0.2%||-0.6%||-3.0%|
|U.S. Dollar per Euro||-0.5%||-0.2%||-3.0%|
|U.S. Dollar per Japanese Yen||0.8%||-0.2%||1.5%|
|Real & Alternative Assets|
|Alerian MLP Index||1.5%||4.7%||4.0%|
|FTSE EPRA/NAREIT North America Index||-0.8%||-1.3%||0.3%|
|FTSE EPRA/NAREIT Global Index||0.4%||0.1%||0.1%|
|Bloomberg Commodity Index||1.4%||-2.8%||-2.8%|
|Gold (NYM $/ozt) Continuous Future||-0.7%||-2.5%||-6.6%|
|Crude Oil (NYM $/bbl) Continuous Future||0.6%||-7.4%||13.7%|
Source: FactSet, Neuberger Berman.