Rising Trade Tiff Puts the Brakes on U.S. Auto Biggies' Ride

Escalating trade tensions between the United States and China, with the latter planning to restart levies on American autos, have impacted the shares of leading U.S. carmakers and dented their prospects in Chinese markets.

Tit-for-Tat Tariffs

A few weeks back, Trump had announced a 10% tariff on $300 billion worth of Chinese goods, to be implemented from December. In retaliation to tariffs implemented on Chinese goods in the United States by the Trump administration, China was forced to take countermeasures and impose tariffs on the country on Aug 23, thereby escalating Sino-U.S. trade tensions.

China will slap tariffs ranging from 5-10% on $75 billion worth of U.S. goods. The Chinese tariffs will be imposed in two batches, one on Sep 1 and another on Dec 15. China also intends to resume tariffs on U.S. cars and auto parts/components, which it had discontinued in April. Beijing plans to impose 25% tariff on U.S. cars and 5% on auto parts, effective Dec 15, 2019.

As a countermeasure, Trump threatened to increase the tariff on $300 billion worth of Chinese imports from 10% to 15%, as early as Sep 1. The United States will also increase the existing tariffs on another $250 billion worth of Chinese imports from 25% to 30%, effective Oct 1.

The rising trade rift between the United States and China, resulting in tit-for-tat tariffs without any meaningful negotiations, is likely to have a negative impact on the auto industry. China’s renewal of 25% tariffs on U.S. auto imports may have an adverse impact on the U.S. automobile industry. Notably, U.S. auto exports to China have declined significantly ever since the world’s second-largest economy decided to impose retaliatory tariffs.The U.S. vehicle exports to the country became half, when China imposed tariffs last year.

Tariff War Pushes Auto Stocks to Low Gear

Amid the intensifying trade tensions and imposed tariffs on U.S. cars and auto parts, shares of major U.S. automakers including General Motors GM, Tesla TSLA, Ford Motor F, among others, slumped. Shares of General Motors declined 3.22% to close the trading session at $36.06 on Aug 23. Shares of Ford fell 2.99% to close the session at $8.77 while Tesla declined 4.84% to $211.40 on Friday.

Per LMC Automotive, Tesla and Ford are the top exporters of U.S. vehicles to China, just behind Germany-based BMW BAMXF and Daimler DDAIF. As such, the tariff imposition is likely to considerably impact these U.S. carmakers.

Although Ford’s performance in China was not very impressive in the first half of 2019, China is an important market for the firm. The company expects Chinese, North American and European markets to be the key growth drivers, going forward. However, with the new rounds of tariffs by China, Ford’s sales in Chinese markets may be affected.

Meanwhile, Tesla’s CEO Elon Musk already considers U.S.-Sino trade tensions as a deterrent to American carmakers. With China being the largest market for electric vehicles, Tesla’s sales in China may be hampered. However, once the company completes the construction of the Gigafactory 3 plant in Shanghai, it will be able to avoid the tariff hike partially.

Owing to slowdown in the Chinese economy, General Motors’ income from China declined year over year in the latest quarterly release and the company expects no improvement in the same before 2020. With General Motors already struggling in China, imposition of tariffs may result in a further slowdown in its growth. Nonetheless, the company has production facilities in the country, which could somewhat shield it from tariffs.

Notably, while Ford and General Motors carry a Zacks Rank #3 (Hold), Tesla holds a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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