Foreign carmakers with plants in the U.S. may benefit even more than their American rivals if China slashes retaliatory tariffs Beijing imposed during an escalating trade war with President Trump.
Details of a truce between the two countries, which Trump announced via Twitter on Sunday evening, are still unclear, but auto stocks surged on President Xi Jinping’s possible removal of a 25 percent levy on imports from the U.S. It was put in place earlier this year, even though the Communist government lowered tariffs on all other auto shipments, after Trump began adding duties to Chinese goods to curb a trade imbalance.
China has long been a key growth market for the auto industry, and slower sales there have impacted earnings. Vehicle transactions in the country dropped 11.6 percent in September, the third straight month of declines, according to the China Association of Automobile Manufacturers.
Most American automakers do the bulk of their Chinese production by teaming with businesses inside the country, which allows them to avoid the additional cost from tariffs. While the U.S. exported 250,000 vehicles with a combined value of $10.5 billion to China in 2017, the bulk were made by German companies.
For Detroit, that means the impact of Beijing’s tariff reduction would be related more to sentiment than the bottom line, Garrett Nelson, senior equity analyst at investment research firm CFRA, told the Washington Examiner. “U.S. auto manufacturers, they’re not shipping much to China right now, and China is a very small percentage of their overall profits.”
For BMW and Mercedes-Benz, which both operate plants in the Southeast, the news is more significant. BMW previously said it would have to raise prices on several models made in its Spartanburg, S.C., plant due to the tariffs, including the SUV variant X4, midsize X5, and the crossover X6. The Munich-based carmaker’s stock added 4.5 percent on Monday to $28.60.
Mercedes-Benz, owned by Daimler AG, ships vehicles to China from a plant in Tuscaloosa, Ala. Deliveries of its GLE and GLS sport utility models were reportedly stopped in transit in Shanghai for potential safety problems earlier this year as the trade skirmish between the U.S. and China deepened. The company’s stock rose 3.9 percent on Monday to $14.67.
Alongside the two foreign firms, Elon Musk’s Tesla sends electric cars to China from a plant in Fremont, Calif., though the electric carmaker previously said it would ramp up production in its Shanghai plant due to the trade tensions. Tesla’s stock climbed 2.3 percent to $358.49.
“There is going to be some mainstream boost to the domestic brands, but it does seem to be favoring some of the luxury” carmakers, Peter Nagle, a senior auto analyst at IHS Markit, said in an interview.
As for the ‘Big Three’ traditional U.S. automakers, Ford increased 2 percent to $9.60 on Monday, while Fiat Chrysler surged 4 percent to $17.26, and GM gained 1.3 percent to $38.45.
Prior to announcing that China would lift its auto tariffs, the White House said it would delay for 90 days plans to increase prior tariffs on $200 billion in Chinese imports from 10 percent to 25 percent — as well as a proposal to add levies to another $267 billion in products as Trump and Xi pursue a broader trade deal.
The news caps a tumultuous year for the auto industry, which several months ago was also dealing with the uncertainty over the future of the North American Free Trade Agreement. Trump, alongside the leaders of Mexico and Canada, signed a revised deal over the weekend, but it still faces an uphill battle for congressional approval.
Meanwhile, Trump’s double-digit duties on steel and aluminum imports remain in effect and have led to higher production costs for carmakers.
And while the developments in recent weeks should give investors confidence heading into 2019, Nelson warned that the biggest potential hurdle is a slowdown in global sales.
The “highly cyclical global auto industry is either at or near peak demand, and that concern really hasn’t changed,” he said.
