Growth is slowing for the auto sector, but there is hope on the horizon
Dec 28, 2018 10:13AM
By Chris Haire
By Chris Haire
This should come as a surprise to no one: Automotive growth is slowing in South Carolina as a result of our nation’s ongoing trade wars. When it comes to the key indicators, one is fairly obvious—the other, not so much.
“We’ve seen growth rates in export volume shipped out of the Charleston Port has been negative in 2018, and we’ve also seen a decline in the growth of the employment services sector, which largely reflects the state’s contingent workforce; that is, workers who are employed by staffing firms,” says Joey Von Nessen, research economist at the University of South Carolina’s Darla Moore School of Business.
“The reason this is important is contingent labor helps automotive companies, in particular, deal with more efficiently some of the disruptions due to tariffs,” he adds.
And it’s not just the automotive sector, either; the entire manufacturing sector utilizes these workers. However, the economist says manufacturing as a whole seems to be retaining direct employees, a sign that companies are adjusting to the new business climate.
Although growth this year was about half that of 2017, Von Nessen says the overall manufacturing outlook is positive for the Palmetto State.
“Manufacturing in the United States is moving south, and South Carolina has been able to capture a lot of the gain from that momentum from the U.S. level,” he says. “The uncertainty for 2019 is simply surrounding the automotive tariffs and the degree to which we see those reduce in the new year.”
Although exports are down—Von Nessen says it’s the first time since at least 2012 that growth has been negative—BMW North America President and CEO Bernhard Kuhn said that demand for BMWs had not dropped in China since the tariffs have been introduced, according to a Nov. 28 CNBC report. In fact, the report notes that sales rose “12 percent in October over the same month last year and 6 percent year to date.”
Still, the German automotive giant saw four consecutive months of declining exports as of October.
BMW has also begun talking about building another plant in the U.S., one that would manufacture parts that are currently being imported and therefore affected by Trump’s tariffs.
And while Volvo’s new Berkeley County-produced S60 sedan is one of the finalists in the North American Car of the Year Award, the Lowcountry automaker has cancelled plans to ship the vehicle to China and is easing workforce expansion plans.
“It’s important to contextualize the importance of the automotive sector in South Carolina because any disruption to the automotive sector does have a disproportionate effect on South Carolina,” Von Nessen says. According to the economist, the auto industry has a multiplier effect of 3.7, which means for every 10 jobs that are either created or sustained by the automotive cluster, another 27 jobs are created elsewhere in the state.
Laissez-Faire No More
Currently, China imposes a 40 percent increase on imported cars made in the U.S.; however, the People’s Republic has indicated they might be willing to drop the tariff to 25 percent.
“We’ve always been a state that has benefited from international trade,” says Doug Woodward, director of research at the Moore School. “It’s an important part of our economy.”
He adds, “So when we have trade restriction and protectionism like this, it’s something that is going to affect us in South Carolina and already has.”
As it stands today, the president’s tough trade policy reveals a truth about China’s dependence on the American market.
“They are getting hurt more than we are,” Woodward says.
“The U.S. is the most lucrative market in the world and people want to access that, and we’re finally taking advantage of that,” he adds. “In the past, we haven’t done what China has done. We haven’t said, ‘If you want to access our market, here are the rules that you’ve got to play by.’ We had a more laissez-faire attitude. We don’t have that anymore.”
‘It Seems to Be Working’
China isn’t the only nation negatively impacting American manufacturing. Mexico, with its promise of extremely low wages, gives businesses less incentive to use U.S. factory labor.
The U.S.-Mexico-Canada Agreement could bring more production to America. How so? By requiring Mexican auto manufacturers selling vehicles in the States to pay a sizable number of workers $16 an hour. According to the Wall Street Journal, that figure is “about three times what the typical Mexican autoworker makes.”
While Trump certainly overreaches, Woodward says the tariffs may be a useful negotiating tactic. “Most economists would oppose this,” he says, “but it seems to be working.”
And if the trade war ends, Von Nessen expects an almost immediate effect. “The current negotiations between the U.S. and China are for a 90-day period that would come to a conclusion in early March,” he says, adding that the automotive- and manufacturing-driven South Carolina economy would begin seeing a positive change in the third or fourth quarters.
If that happens, Von Nessen says an additional 6,000 jobs could be created because of the boost the trade war’s end will have on the automotive sector and, in turn, that lovely multiplier effect.