Why the U.S. auto industry would suffer in a trade war with China

If the U.S. is at war with China on trade, we should know the stakes.

U.S. politicians, and some businesses, are imbued with anger by China's rise to economic power in recent decades -- accusing now the largest world economy of, ironically, protectionist policies and currency manipulation.

"We are in a trade war. We have been for decades," U.S. Commerce Secretary Wilbur Ross said Friday on CNBC's "Squawk Box."

"The only difference is that our troops are finally coming to the rampart. We didn't end up with a trade deficit accidentally."

The U.S. runs a $347 billion deficit with China -- meaning Americans buy a lot more Chinese products than vice versa. Michigan, for its worth, had a $6.7 billion trade deficit with China in 2016.

The White House's combative stance on China -- which during President Donald Trump's campaign called for a 45 percent tariff on Chinese-made goods -- is at a boiling point with Ross' comments only days away from Xi Jinping, China's president, visiting Trump in Florida.

An all-out trade war would bruise both economies, likely China's more, but also holds major pitfalls for the automotive industry, which has worked tirelessly for a generation to penetrate China's economic boom.

Trade chicken

Ross is right, to a degree, that the U.S. and China have been playing trade chicken since China's entry into the World Trade Organization in 2001. Prior to joining the WTO, the U.S. trade deficit with China accounted for only a quarter of the total. Now it's nearly two-thirds, leading to an unprecedented economic rise in China, thanks to U.S. consumers' desires for cheap products from clothing to electronics.

The Obama administration took up this fight as well, filing 16 WTO complaints against China. Ford Motor Co. CEO Mark Fields has contended for years that China manipulates its currency, harming importers, but that doesn't jibe. The Yuan has appreciated nearly 40 percent in the last decade compared to the weighted average of major currencies. In fact, at the rate China's middle class is growing, the U.S. trade deficit very well may equalize on its own, according to a report in The Economist.

Look no further than soybeans. U.S. soybean exports surged to a record 1.9 billion bushels during the 2015-16 marketing year that ended in August -- with China accounting for nearly 60 percent of the buying, according to a report in The Farm Journal.

The meeting between Trump and Xi should focus on the opportunities and balancing the minor trade imperfections, such as the 25 percent tariff on car imports, but not at the cost of a trade war.

Supplier risks

Not only would U.S. consumers face higher prices on everyday products, but a trade war could upend suppliers such as Lear Corp. and Delphi Automotive plc, which rely heavily on the Chinese market. Sure, Apple, Intel and Qualcomm face larger hurdles under a trade war, but the auto sector is just as vulnerable.

China accounted for about 25 percent, or $4.3 billion, of Delphi's $16.7 billion in revenue in 2016 and nearly 12 percent of Lear's $18.6 billion in revenue last year.

If China retaliates to any U.S. tariffs, it could make operating in China very difficult.

Almost every auto supplier with an international presence operates factories in China. These factories largely support the Chinese market and, to a lesser extent, ship parts back to Mexico and the U.S. These companies have spent nearly two decades navigating to establish themselves firmly in China. Any retaliation from China would be devastating to the bottom lines.

While the focus of late has been on the looming renegotiation of the North American Free Trade Agreement, manufacturers face a potentially steeper challenge if the White House pits the U.S. against China.

Sources tell me many suppliers have put China investments on hold. Delayed investments are not good for China, the U.S. or workers in both nations.

The economic relationship between the U.S. and China is bound to rupture under a trade war, so Ross and the White House should tread lightly.