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China Move to Cut Duties on U.S. Imports Lifts Auto Stocks

Proposal to reduce tariffs on U.S.-made cars  to 15 percent from 40 percent has been submitted to China’s Cabinet.

China Move to Cut Duties on U.S. Imports Lifts Auto Stocks
Chevrolet Sonic vehicles sit parked outside the General Motors Co. Orion Assembly Plant in Orion Township, Michigan, U.S. (Photographer: Jeff Kowalsky/Bloomberg)

(Bloomberg) -- Progress toward easing the steep tariffs China imposed on U.S. vehicle imports this year lifted carmaker stocks across the globe, as investors wagered on a thawing of tensions that have damaged the world’s biggest automotive market.

Toyota Motor Corp. and Hyundai Motor Co. tracked earlier gains for Daimler AG, General Motors Co. and Tesla Inc. after Bloomberg News reported that a proposal to eliminate the 25 percent surcharge slapped onto U.S.-made cars this year has been submitted to China’s cabinet. The plan would be reviewed in coming days, people familiar with the matter said.

The levy forms the backbone of China’s response to a trade war instigated by President Donald Trump as he seeks to reset trade relations and spur manufacturing in the U.S. Car sales in China have fallen for six straight months after decades of almost uninterrupted growth, and while there are other factors, the tit-for-tat jabs between the world’s biggest economies have played a role.

The tension had escalated in recent days with the arrest of Huawei Technologies Co. Chief Financial Officer Meng Wanzhou over alleged sanctions violations. A Canadian court released Meng on bail Tuesday, pending further proceedings on U.S. efforts to extradite her. Trump separately told Reuters that he would consider intervening in the Huawei case if it served national security and helped with a China trade deal.

The move by China would reduce tariffs on cars made in the U.S. to 15 percent from the current 40 percent, in line with what other countries pay, the people said. The step hasn’t been finalized and could change.

Trump claimed he won a concession during trade talks with Chinese President Xi Jinping in Argentina earlier this month. The proposal in the works helped to substantiate his claims. While reversing the retaliatory duty is a major climb-down by Beijing, it could re-focus the two sides toward implementing the trade-war truce.

“Last week, events seemed to conspire to throw the truce into disarray, but the underlying incentives of both sides at the moment are to try to maintain that truce,” said Freya Beamish, chief Asia economist at Pantheon Macroeconomics Ltd. “Now we are seeing the possibility that China will come through with reductions of tariffs on U.S. autos, and that’s another good, concrete step.”

Top Chinese and American trade officials spoke by phone Tuesday morning Beijing time, signaling that dialog between the two nations on trade issues is at least continuing despite the ongoing tension over Huawei.

China’s Finance Ministry didn’t immediately respond to a faxed request for comment sent outside business hours.

A global rally of automaker shares continued Wednesday morning in Asian trading, with Toyota rising as much as 2 percent in Tokyo and Hyundai gaining as much as 7.2 percent in Seoul. On Tuesday, BMW AG, which exports sport utility vehicles from the U.S. to China, rose 1.8 percent while Daimler, which said the tariffs were the key reason for a profit warning in June, gained 2.7 percent.

China Move to Cut Duties on U.S. Imports Lifts Auto Stocks

In July, China boosted the tariff on American-made cars as part of retaliatory measures against the U.S. Following a summit on trade in Buenos Aires earlier this month, Trump jolted global auto stocks by tweeting that China agreed to “reduce and remove” tariffs on imported U.S. models, something China did not confirm at the time.

Trade War

Trump’s tweet came shortly after he agreed with Xi to a truce in the trade war during a meeting at the Group of 20 summit in Argentina.

The discord has taken a toll on automakers that manufacture in the U.S., as tariffs forced the makers of Mercedes-Benz and BMW cars to raise prices in China. Car sales in the world’s second-biggest economy may post their first annual drop in at least two decades. That’s piled pressure on companies that have relied on the country for growth amid declining sales in the U.S.

The tariff reduction benefits Daimler and BMW more than U.S. automakers such as GM or Ford Motor Co. because the German luxury brands dominate the top 10 list of vehicle imports into China.

Longer-term, China has a lot to gain from free trade in autos as Chinese manufacturers such as Guangzhou Automobile Group Co. and Geely Automobile Holdings Ltd. look to move overseas. The U.S. currently charges a 27.5 percent tax on imported cars from China.

China Imports

Of China’s $51 billion of vehicle imports in 2017, about $13.5 billion came from North America, including sales of models made there by non-U.S. manufacturers including BMW. China imported 280,208 vehicles, or 10 percent of total imported cars, from the U.S. last year, according to China’s Passenger Car Association.

U.S. exports of cars and light trucks to China were worth $9.5 billion in 2017 and have dropped off significantly since China imposed the retaliatory tariffs over the summer that gave exporters in Europe and Japan a significant advantage.

For Tesla, a tariff cut will provide a boon until the company sets up local production. The Palo Alto, California-based carmaker has been working with Shanghai’s government on establishing a factory to assemble cars in China.

Foreign carmakers have long pleaded for freer access to China’s auto market, while its own manufacturers are trying to expand abroad. In April, China announced a timetable to permit foreign companies to own more than 50 percent of local vehicle-making ventures.

--With assistance from Ville Heiskanen and Xiaoqing Pi.

To contact Bloomberg News staff for this story: Haze Fan in Beijing at hfan40@bloomberg.net;Yinan Zhao in Beijing at yzhao300@bloomberg.net

To contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, ;Anand Krishnamoorthy at anandk@bloomberg.net, Brendan Scott, Sharon Chen

©2018 Bloomberg L.P.

With assistance from Bloomberg