Automaker shares soar on U.S. proposal to eliminate tariffs

Image from BMW Group

(Bloomberg) — Shares in European carmakers are having their best trading day in two years after a U.S. official floated a proposal to eliminate vehicle-import tariffs on both sides of the Atlantic.

German auto-industry executives met with U.S. Ambassador to Germany Richard Grenell Wednesday, where he was said to have told participants Washington was seeking talks with the European Union and Berlin on lowering car duties to zero, according to two people briefed about the meeting. The news was first reported by Handelsblatt newspaper.

The Stoxx 600 Automobiles & Index rose as much as 3.8 percent on Thursday, the most since July 2016. BMW AG rose more than 5 percent, while Fiat Chrysler Automobiles NV and Volkswagen AG both gained more than 4 percent as of 12:09 a.m. in Frankfurt. The sector is still down almost 8 percent this year, mainly due to past tariff-related concerns that have made it the worst performing industry on the Stoxx 600 in the past few months.

“Autos now look exceptionally cheap, stocks are at a 50 percent discount to the market and close to historical lows,” Goldman Sachs strategists said in a note that helped buoy the sector’s shares.

The proposal would represent a turnaround from U.S President Donald Trump’s tweet less than two weeks ago that threatened to slap a 20 percent tariff on vehicle imports.

Trump’s repeated salvos on trade and push to extract better terms for the U.S., often singling out German carmakers, have prompted various initiatives to avert a full-blown trade war at the European level, which decides trade policy for the bloc. The EU has warned that a 25 percent tariff on U.S. imports would add 10,000 euros ($11,684) to a European-built car’s sticker price. Carmakers and suppliers, including BMW and Continental AG, have previously said they would favor a bilateral removal of tariffs.

“Autos now look exceptionally cheap,” Goldman Sachs strategists said in a note that helped buoy the sector’s shares. Stocks are at a 50 percent discount to the market and close to historical lows, they said.

The automakers’ meeting and U.S. proposal come as the EU is considering new plans to alleviate worsening trade tension. Trump has ordered a probe into whether imports of cars and car parts damage national security. He’s also engaged in a tit-for-tat escalation with China, which will result in a 40 percent tariff on U.S.-made cars — many of them German brands — shipped into the Asian country.

The plan being weighed by EU officials would cut tariffs between the world’s largest car-exporting nations — including the U.S., South Korea and Japan, the FT reported Wednesday.

Painful softening

Separately, German Economy Minister Peter Altmaier is traveling to Paris next week to help coordinate a new EU initiative for talks with the U.S. on steel tariffs.

“While the prospect of zero tariffs is unlikely, the market seems to have under-priced that probability,” Northern Trust Capital Market’s Gary Paulin said in emailed comments. “Any softening away from hard-line trade wars towards something else could be painful” for those not holding enough auto shares, he wrote.

Some analysts also improved their ratings on specific companies. Daimler was raised to a buy rating by Bankhaus Lampe, and to a hold at Jefferies, which also upgraded Fiat Chrysler to recommend buying the stock.

The EU isn’t allowed under global rules to reduce its 10 percent tariff on American cars unless the bloc either does so for World Trade Organization members as a whole or reaches a bilateral accord with the U.S. that covers “substantially all” two-way trade.

European trade chief Cecilia Malmstrom said last week there is “no way” EU governments would agree to scrap the bloc’s car-import duty for all WTO members, leaving the option of going for a broader commercial deal with the U.S.

The EU unsuccessfully sought a permanent waiver from Trump’s metals tariffs imposed in March. As part of those demands, the EU said it was willing to start negotiations with the U.S. on a relatively narrow trade deal focused on eliminating tariffs on industrial goods including cars. The offer went nowhere, according to European officials.

“This is what we offered the American administration, under the condition of course that they did not impose those steel and aluminum tariffs,” Malmstrom told reporters in Brussels on June 26. “They rejected that offer.”

(By Chiara Remondini, Blaise Robinson and Elisabeth Behrmann)

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