Trade Difficulties Complicate FTZ Manufacturing

Carmakers in foreign-trade zones that employ thousands of workers in the United States may find themselves compelled to shift jobs to, of all places, China.

Carmakers’ early hopes that congressional Republicans who favor free trade could reduce the impact of punitive measures have faded, reported the New York Times. Instead, manufacturers are girding for a protracted period of conflict that will disrupt supply chains and change the companies’ calculations about where to expand and where to cut back.

BMW, the largest exporter of cars from the United States, has already moved some production of its popular X3 sport utility vehicle — once made exclusively in FTZ 38 in Spartanburg, S.C. — to a factory in Shenyang, China. Analysts expect the German automaker to also move some production of its larger X5. Fellow foreign-trade zone users Volvo and Mercedes are similarly impacted.

By shifting production, BMW can avoid China’s retaliatory tariffs on cars imported from the United States. It could also insulate BMW if President Trump follows through on his threat to tax imported vehicles and parts, a move that would further increase the cost of building cars in the United States and selling them abroad.

The Chinese government is encouraging expansion, and thereby shifts away from U.S. manufacturing. It is allowing BMW to increase its stake in a Chinese joint venture to 75 percent from 50 percent, an unprecedented majority share for a foreign carmaker that makes BMW the first company to benefit from a policy meant to give the makers of passenger cars larger stakes in such joint ventures.

Business leaders in South Carolina and other areas that depend on foreign carmakers are registering alarm. At the very least, they wonder if jobs to be created for future models will shift out of the United States.

“It’s a tremendous concern,” said H. David Britt, a member of the Spartanburg County Council who last month appeared before the Senate Finance Committee to warn of the threat the tariffs posed to South Carolina’s economy.

“It’s not just BMW,” Mr. Britt said by telephone from Spartanburg. “It’s every one of the suppliers that produce for BMW.”

BMW’s production in Spartanburg slumped 6 percent in September compared with a year earlier. The company, which has had operations in Spartanburg since 1994 and employs 10,000 there, cited trade tensions in issuing a profit warning last month.

China is a big and profitable market for BMW. But retaliatory tariffs of 40 percent on imported cars have sharply raised the cost of X5s in China. The company was able to skirt some of the tariffs by meeting some of the demand in China with cars partly built in South Carolina and finished in Thailand.

BMW is stepping up its investments in China. It has announced that it would spend $3.4 billion to expand its Shenyang operations and hire 5,000 workers over the next several years. The two factories it operates there could eventually surpass Spartanburg, BMW’s largest factory in the world, in the number of cars produced.

BMW representatives emphasize that the company has not decided to relocate production of the X5, one of its most profitable models, from Spartanburg. But Saskia Essbauer, a spokeswoman, said: “Production always follows the market. Naturally as a company we have an interest to produce where the demand is.”

Others are following BMW’s lead. ZF, a major German auto industry supplier, recently said that it would build a factory in China to produce transmissions used in the X5 and other BMW models.

“Our philosophy is we follow our customers and we serve our customers where they need us,” said Christoph Horn, a ZF spokesman.

Other foreign car companies will have to make similar assessments. Mercedes-Benz employs about 4,000 workers at a large factory in Alabama. The Swedish carmaker Volvo, which belongs to Zhejiang Geely Holdings of China, opened a plant in South Carolina in June. Volvo plans to hire 1,500 people in the state. Daimler, which exports Mercedes cars to China from a factory in Tuscaloosa, Ala., has warned that trade tensions were hurting its sales. In a call with reporters on Thursday, Bodo Uebber, the chief financial officer, said the company was reviewing ways to counter the effect of the tariffs, which have meant higher prices for clients and dealers.

Mr. Uebber said that Daimler was “currently delivering normally into China.” Asked about possible changes in the production line, he said, “We are looking at other alternatives, but it is too early to say anything.”

There are also signs the trade war could crimp investment by Volvo at its new factory in Charleston, S.C. The company may not hire as many people there as planned, Anders Gustafsson, the executive responsible for Volvo in the United States, told the Detroit Bureau website this month.