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US & China's Likely Trade Truce Places Autos in Top Gear

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The United States and China seem to have reached trade truce, with the countries deciding to temporarily stall imposition of additional tariffs in the next three months. Over the period, both the countries will continue with their trade negotiations. It has also emerged that China has agreed to reduce its import tariffs on products manufactured in the United States. If this materializes, automakers with major production in the United States will get relief from high import rates in China.

Over the past few months, high import tariffs between the two countries have negatively impacted auto stocks. In fact, import from the United States has declined significantly when compared to 2017. This has acted as a significant advantage for exporters in Europe and Japan.

Per Passenger Car Association of China, auto imports amounted to $51 billion in the country in 2017, consisting of approximately $13.5 billion from North America. During the year, imports from the United States to China constituted 10% of total imports or 280,208 vehicle units.

Probable Impact of a Trade Truce

Reduction in import tariffs in China will be a boon for automakers that are struggling to improve their bottom line and gain market share in the world’s largest auto market. Apart from U.S.-based automakers, lowered tariff rates will also aid foreign automakers that export vehicles from U.S. plants to China.

For 2018, German automaker, BMW AG (BAMXF - Free Report) expects the trade tiff to have an adverse impact of 300 million euros ($341 million). In fact, high tariffs have impelled the company to hike prices in China. Nevertheless, to tap customers and raise its market share, BMW is launching several car models in China. Apart from its X3 SUV launch in 2018, the company’s numerous other options for China, which consist of 1-, 3- and 5-Series sedans.

Another Germany-based automaker, Daimler AG (DDAIF - Free Report) also exports its sport utility vehicles from U.S. plants to China. In fact, the company expects to witness a slump in the bottom line in 2018 owing to high tariff costs.

Among the many foreign auto manufacturers, BMW and Daimler will be the major gainers from the probable reduction in tariff rates because six of the 10 best-selling vehicles that are imported from the United States to China are owned by these two German automakers.

A tax cut will also be a major boon for Palo Alto, CA-based Tesla, Inc. (TSLA - Free Report) , which is struggling with lower vehicle sales in China. Last month, the company incurred a 70% year-over-year drop in car sales. The electric carmaker announced that tariff hikes are hampering its sales in China as it imports all its vehicles that are sold in the country.

The second-largest U.S. automaker, Ford Motor Company (F - Free Report) is also suffering from the tit-for-tat tariff hikes at a time when it is trying to improve its financial health and develop new technologies. The company’s vehicles under the popular brand, Lincoln are manufactured in Louisville, KY. Increased tariffs leading to total duty of 40% on U.S. vehicles have compelled Ford to raise its price for Lincoln MKC sport utility vehicle in China. In fact, with an aim to reduce high tariff costs the company is planning to start production of Lincoln models in China by 2019.

Tesla sports a Zacks Rank #1 (Strong Buy) while Ford carries a Zacks Rank #3 (Buy). Moreover, BMW and Daimler currently carry a Zacks Rank #4 (Sell).

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

The long-term growth rate of Tesla, Ford, BMW and Daimler is 35%, 5.3%, 2.7% and 4.5%, respectively.

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