China’s retaliatory trade tariffs have targeted U.S. automakers but Chinese consumer responded by purchasing more cars imported from the U.S., a recent economics study found.
When the U.S. began raising tariffs on Chinese-made goods in 2018, China responded by raising tariffs on cars and parts imported from the U.S. The results, however, were not what was expected.
Using automobile sales data in China, Yanlai Chu of the University of China’s Renmin Business School and Junhong Chu of National University of Singapore’s business school found that the tariffs actually increased the sales of cars imported from the U.S.
The economists write in their paper:
We find that the retaliatory tariffs did not deter the sales of U.S. imports. Instead, sales of U.S. imports increased by 9 percent relative to non-U.S. imports during the retaliatory period, which counters the intended effect of the retaliatory tariffs and implies the failure of the retaliatory tariffs,” the economists write in their paper. The Unintended Consequences of Tariff Retaliation: Evidence from the Chinese Automobile Market.
Sales of U.S. brands regardless of country of production–meaning, including cars produced in Mexico and elsewhere–increased by 16 percent over non-U.S. brands in the import segment.
Perhaps surprisingly, it was sales of U.S. brands produced inside of China through joint ventures that suffered. These fell by three percent compared with Chinese brands and four percent compared with other joint-venture brands.
On the other hand, sales of joint venture U.S. brands in the domestic segment decreased by 3% over Chinese brands and by 4% over other joint venture brands.
Since the joint venture market in China is much larger the imported market, overall sales by U.S. automakers fell despite the rise of imports. But since the import market is much more profitable, profits from selling into China by U.S. automakers rose, according to the paper.
How did this happen? The paper argues that the tariffs provided free advertising for U.S. brands:
Using the Baidu Index as a proxy for consumers’ interest in U.S. brands, we find that consumers searched more for imported U.S. automobile brands after the start of the trade war,” the paper reports. (The Baidu Index is the Chinese equivalent of Google Trends). The increase in sales of non-U.S.-made U.S. brands relative to non-U.S.-made non-U.S. brands, which are free from the retaliatory tariff, provides further support for the advertising effect.
The paper finds that decrease in sales of U.S. brands produced by China-U.S. joint ventures was likely due to consumer boycotts of U.S. brands in the domestic segment. Sales fell only in cities considered the most antagonistic to the U.S., the paper reports.
“The retaliatory tariff imposed on U.S. imports by the Chinese government did not suppress demand for U.S. imports, but instead increased sales of imported U.S. brands through an advertising effect among consumers who can afford imported automobiles and reduced demand for joint-venture U.S. brands made in China through triggering boycotts in another group of consumers,” the paper concludes.