Auto Tariff Rollback to Have Small Impact

December 3, 2018
868 Views

China and the United States had a highly positive dialogue at a dinner on the sidelines of the G20 summit during the weekend. President Trump and other representatives were able to come to some important agreements with President Xi Jinping and his delegates. Both countries agreed to work towards dropping trade boundaries, and no new auto tariff will be implemented for the foreseeable future. This is great news for investors and Dow Futures were up by over 500 points following news from the weekend.

In addition, President Trump announced on early Monday morning that “China has agreed to reduce and remove auto tariff coming into China from the U.S. Currently the tariff is 40%”. While this indicates definite progress regarding the fragile trade relationship with China, actual benefits to the U.S. economy will be minor.

U.S. Automakers Produce Locally in China

General Motors and Ford both have a significant market presence in China. Importing U.S. built cars to the Chinese market would be cost prohibitive, which is why the majority of all Ford and GM cars sold in China are also made there. Elimination of auto tariff will have almost no benefit on both companies

Only 250,000 cars were exported from the U.S. to China in 2017. Numbers at the end of this year are expected to be similar.

For Ford, only 2% of its cars sold in China originate from the U.S.

All of GM’s Chinese vehicles are made locally through a joint Chinese-American private venture. GM has a 50% holding in the venture.

Tesla an Outlier That Could Benefit in the Short Term

Tesla is the only notable U.S. manufacturer that could benefit from an elimination of auto tariff on U.S. autos. Tesla is yet to build its production facility in Shanghai, meaning that every car it sells in the region is subject to tariffs.

Tesla recently cut its prices to increase competitiveness in the Chinese Market. This latest news will be hugely beneficial to the electric car manufacturer, and it could make for some interesting stock price movement in the coming week.

The elimination of China’s tariffs on U.S. autos is mostly a symbolic improvement of the current trade tensions. At the very least, markets should become more confident as it is evident that dialogue between Trump and Xi is leading to positive changes.

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