Geopolitical Risks:Assessing International Trade and Energy Drivers and

Their Potential Impact on the New Vehicle Market

David P. Teolis, Ph.D.

Senior Manager, Economic and Industry Forecasting – International

General Motors Company

Overview

• Key geopolitical risks

• Measuring/monitoring geopolitical risk

• Sources of geopolitical risk in international trade and energy

• How geopolitical risks are transmitted to the vehicle market

• What can help limit the impact of geopolitical events

• Summary

2

Key Geopolitical Risks

United States▪ Trade Tensions• Tariffs on solar panels

and washing machines• NAFTA renegotiation• Steel/Aluminum tariffs• Tariffs targeted against

China ▪ Political tensions with N.

Korea, Russia, and Iran• Russia sanctions

Venezuela▪ Political and economic crisis;

Maduro sanctioned by US

Middle East▪Qatar economic boycott▪Military conflicts: Syria, Yemen, Iraq

Europe▪Brexit; Stability of

EU/Euro Zone▪Migrant crisis▪ Populist movement▪Russia• Tensions with US• Annexation of Crimea

▪ Turkey• Authoritarian rule

China▪ Tensions in South

China Sea▪ Trade conflict with US

South Korea▪ Tensions with North Korea▪ KORUS renegotiation▪ Currency manipulation watch-list 3

Elevated Geopolitical

Risks since 2014

Source: “Measuring Geopolitical Risk” by Dario Caldara and Matteo Iacoviello at https://www2.bc.edu/matteo-iacoviello/gpr.htm.

0

100

200

300

400

500

600

1985 1990 1995 2000 2005 2010 2015

Geopolitical Risk Index

9/11

Iraq War 2

Arab Spring

Iran/NuclearTensions

Iraq Disarmament Crisis

Iraq invades Kuwait

Iraq War 1

USbombs Libya

NorthKoreaTensionsParis

bombing

Russia annexes Crimea

ISIS escalation

Data through March 2018

4

Financial market data – highlighting geo-

economic and geo-financial risks – can

complement the identification of

geopolitical developments

0

5

10

15

20

25

30

35

40

45

1985 1990 1995 2000 2005 2010 2015

Gold/Oil Ratio

RUBCrisis

S&L Crisis

BlackMonday

MXNCrisis Asian

Financial Crisis

Brexit

EU DebtCrisis

BRLCrisis

China Stock Market Crash

ARS Crisis

GlobalFinancial

Crisis

Bank stocks collapse

Sources: The Wall Street Journal, Energy Information Administration, Haver Analytics; Calculations: General Motors

Pre-IraqWarTensions

NAFTAtalks

TradeWarRisk

Data through March 2018

5

Global exports surged following

China’s entry into the WTO

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

World Exports, Billions of USD

Sources: IMF, Haver Analytics

WTO Replaces GATT

China joins WTO

Maastricht Treaty: Start of EU

Start of NAFTA

Start of Euro Zone

March 2018:CPTPP signedAPEC EstablishedStart of ASEAN

Collapse of Bretton Woods system of fixed exchange rates

Data as of 2016

Y/Y% Growth of Nominal World GDP and Exports6

After its accession into the WTO,

China became a more important

export market for many countries

0%

10%

20%

30%

40%

50%

60%

0% 5% 10% 15% 20% 25% 30% 35% 40%

Percentage of Exports to China: 2001 versus 20162016

2001

JapanNew Zealand

Ecuador

ChileAustralia

Kuwait

Korea

Oman

Angola Hong Kong

Colombia

Turkey

Canada

US ArgentinaRussia

Saudi ArabiaVenezuela

Uruguay

Peru

Brazil

Vietnam

Mexico EU

Sources: IMF, Haver Analytics; Calculations: GM Economics Team

Singapore

Countries above the red line reflect increased share of exports to China

7

Widening trade deficit has been the key

factor behind U.S. tariffs against China

0

100,000

200,000

300,000

400,000

500,000

600,000

1985 1990 1995 2000 2005 2010 2015

U.S. Goods Trade with China

Source: U.S. Census Bureau

USD, Millions

Imports

Exports

2017: USD375.2B Deficit

Dec 2001: China enters WTO

Data through 2017

8

Trade deficits with Mexico and Korea have

also been the basis for the U.S.

renegotiating NAFTA and KORUS• A renegotiated KORUS is in the process of completion

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

1985 1990 1995 2000 2005 2010 2015

U.S. Goods Trade with Mexico

Source: U.S. Census Bureau

USD, Millions

Imports

Exports

2017: USD71.1 Bn Deficit

1994: Start of NAFTA

Data through 2017

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

1985 1990 1995 2000 2005 2010 2015

U.S. Goods Trade with Korea

Source: U.S. Census Bureau

USD, Millions

Imports

Exports

2017: USD22.9 Bn Deficit

June 2007: KORUS Signed

Dec 2010: KORUS Renegotiated

Data through 2017

9

Risk of retaliation by China

2017

Transportation Equipment 29.5

Computer & Electronic Products 17.1

Agricultural Products 15.9

Chemicals 15.2

Machinery Except Electrical 9.3

Oil & Gas 6.9

Waste & Scrap 5.6

Food & Kindred Products 3.3

Elec Equip/Appliance/Component 3.3

Misc Manufactured Commodities 3.2

Source: U.S. Census Bureau, Haver Analytics

Top 10 U.S. Exports to China, Billions of USD

• U.S. has a favorable trade balance in transportation

equipment with China

0

2

4

6

8

10

12

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

U.S. Trade with ChinaBillion of USD

Exports

Imports

Sources: U.S. Census Bureau, Haver Analytics

Motor Vehicles

02468

1012141618

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

U.S. Trade with China

Billion of USD

Exports

Imports

Sources: U.S. Census Bureau, Haver Analytics

Aerospace Products & Parts

Data as of 2017

Data as of 2017

10

Key drivers of crude oil prices

0

20

40

60

80

100

120

1913 1919 1925 1931 1937 1943 1949 1955 1961 1967 1973 1979 1985 1991 1997 2003 2009 2015

West Texas Intermediate Crude Oil PriceUSD per Barrel

Sources: Energy Information Administration, Haver Analytics

Rapid adoption

of carsPostwarBoom

Arab oilembargo

Iranian Revolution

ChinaJoinsWTO

Commodity Super-cycle

Paris Agreement

Data as of 2017 11

China accounts for 30% of

global new vehicle sales

0

10

20

30

40

50

60

70

80

90

100

1980 1985 1990 1995 2000 2005 2010 2015

New Vehicle Sales

World

China

Decade Average

Millions

Sources: General Motors; Calculations: GM Economics Team

85.3*

62.6

49.7

38.8

* Denotes Average of the period 2010-17

12

Rapid adoption of EVs in China• Since 2015, sales of EVs in China have outpaced the U.S.

• China’s shift toward electric vehicles could be strategic – seeing that the U.S. domestic energy boom

has given the U.S. a cushion against energy shocks by decreasing its reliance on, and need to

address disturbances in, the Middle East

• Despite the U.S. abandonment of the Paris climate accord and focus on fossil fuels, China’s move

toward renewable energy will still encourage auto manufacturers to move in the same direction

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

2011 2012 2013 2014 2015 2016 2017

China New Sales of BEVs and PHEVs

BEV PHEV

Source: General Motors

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

2011 2012 2013 2014 2015 2016 2017

U.S. New Sales of BEVs and PHEVs

BEV PHEV

Source: Wards Intelligence 13

Broad-based movement

toward EVs

14

Diesel/EV engine share by region

EV share by regionDiesel engine share by region

Source: Sunde, Erin, “Powertrain Outlook, Electrification, Engines & Transmissions, 2017-2025,” Presentation to the Detroit Association of Business Economics/Wards Intelligence Conference, January 18, 2018.

• While diesel is a niche market in N.A. and China, it has a large, but declining, presence in Europe

• As a means of reducing carbon emissions – including vehicle restrictions in major cities – China,

Europe, and N.A. are each expected to see a rising share of electric vehicles

15

Movement toward EVs shifts resource

dependency to foreign countries, some with

tainted reputations

• Just as shale oil helped the U.S. gain energy independence and

energy security, rapid movement in the short term toward EVs – all

things constant – reduces energy independence and security

23,000

35,000

48,000

60,000

2,000,000

2,700,000

3,200,000

7,500,000

0 2,000,000 4,000,000 6,000,000 8,000,000

Zimbabwe

United States

Brazil

Portugal

Argentina

Australia

China

Chile

Lithium Reserves, Metric Tons

23,00029,00051,000

150,000250,000250,000270,000280,000

500,000560,000

1,200,0003,500,000

0 1,000,000 2,000,000 3,000,000 4,000,000

United StatesSouth Africa

Papua New GuineaMadagascar

RussiaCanadaZambia

PhilippinesCuba

Other CountriesAustralia

DR Congo

Cobalt Reserves, Metric Tons

Sources: U.S. Geological Survey, Statista 16

Price risk as shift is made

toward EVs

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

USD

(per

MT)

Cobalt

3/29 spot - $93,550

Source: Bloomberg

17

Cushion against

geopolitical risks

• While broad-based geopolitical risks are difficult to offset, such shocks can be mitigated by

– Synchronized global growth

– Strong institutions• The institutional structure of the EU has prevented Brexit from

becoming a major negative trade shock

– Well-integrated supply chains • NAFTA as a key example

18

Fundamental and External Drivers of the Vehicle Market

InNew Vehicle

Sales

Regulations

Confidence

New/UsedVehicle Prices

Income

Credit Availability

Employment

Interest rates

Technology

Foreign Exchange

Electrification

GeopoliticalRisks

International Trade

Commodities

Societal/Demographic

Fundamental drivers

External Influences

Aging Population

Wealth

• Geopolitical risks can have an indirect impact on new vehicle sales through

international trade, foreign exchange, and commodity channels, and an

immediate direct impact via consumer, business, and investor confidence

19

Risk of trade war first reflected in

financial markets• If realized, a trade war would have a broader economic impact

1,500

1,700

1,900

2,100

2,300

2,500

2,700

2,900

3,100

2014 2015 2016 2017 2018

S&P 500: Index and 200-Day Moving Average

Sources: The Wall Street Journal, Haver Analytics; Calculations: General Motors

200-Day Moving Average

Risk of trade war pushes stock prices lower

Data as of April 6, 2018 20

Overlapping Institutions and

Trade Relationships

Russia

Australia

US

Saudi Arabia

South Africa

India

Japan

France UKItaly Germany

European Union

TurkeyIndonesia

Canada

Mexico

ChinaKorea

NAFTAG8 G7

BrazilArgentina

Mercosur

Euro Zone

ASEAN

New Zealand

Malaysia

PeruChile

Brunei Singapore

Vietnam

CPTPP

G20WTO

APEC

• Strong institutions can help mitigate trade disruptions

21

Summary• Geopolitical risks can be monitored via published indices and financial market data, but the

realization of such events is largely uncertain – thus highlighting that their economic and financial

impact is unpredictable

• The evolution and structure of global institutions today could provide a buffer against international

trade shocks

– Overlapping institutions and trade arrangements could, in part, mitigate the impact of isolated trade shocks

• By contrast, new energy sources, policies, and institutions are still evolving, suggesting that the

geopolitics of energy remain uncertain and difficult to predict

• The uncertain nature of geopolitical events makes their influence difficult to forecast

– Generally, their immediate impact is felt in the financial markets which, in itself, could overreact to such risks

– Cumulative evolution of economic relationships and institutions makes past references of geopolitical events

difficult to extrapolate to today’s risks

– The global economy is dynamic and adaptive, thus adding to the challenges of estimating the impact of

random shocks 22

Key References

• The Economist, “The New Power Superpowers,” Special Report on the Geopolitics of Energy, March 17, 2018.

• Jaffe, Amy Myers, “Green Giant, Renewable Energy and Chinese Power,” Foreign Affairs, March/April 2018.

Sources for Headlines on slide 14:

• https://www.citymetric.com/transport/volvo-going-all-electric-it-s-not-revolutionary-it-seems-3171

• https://www.reuters.com/article/us-autoshow-detroit-ford-motor/ford-plans-11-billion-investment-40-electrified-vehicles-by-2022-

idUSKBN1F30YZ

• http://www.autonews.com/article/20171217/OEM/171219765/toyota-electric-vehicle-plans-future

• http://fortune.com/2017/10/02/gm-20-all-electric-vehicles-2023/

• https://cleantechnica.com/2018/01/29/2017-china-electric-car-sales-blow-world-water-baic-ec-series-superstar/

• https://www.bloomberg.com/news/articles/2018-02-27/china-s-drive-to-become-the-detroit-of-electric-cars-quicktake

• https://www.forbes.com/sites/salvatorebabones/2018/03/06/china-could-be-the-worlds-first-all-electric-vehicle-

ecosystem/#31b3d31130f5

• https://www.reuters.com/article/us-germany-emissions/diesel-cars-can-be-banned-from-german-cities-court-rules-

idUSKCN1GA2XD

• https://www.wsj.com/articles/electric-vehicle-bulls-shake-up-metals-markets-1512910800 23

Thank you for your attention