General Motors and Chinese-owned Volvo Cars have been denied a request for an exemption to a 25% U.S. tariff on their Chinese-made sport utility vehicle models.
Major auto industry ETFs, the First Trust Nasdaq Global Auto Index Fund ETF (CARZ) and the iShares Global Consumer Discretionary ETF (RXI), seem largely unaffected by the news, with CARZ down about 0.21% and RXI up roughly 0.27% on Thursday.
GM, the largest U.S. automaker, and Sweden’s Volvo both claimed they were aware of the respective denials of their nearly year-old petitions. Neither company had raised the sticker price to account for tariffs, which came into play last July.
The denial of GM’s petition for its Buick Envision was related to its correlation with Chinese industry. The rejection arrived on May 29 letter from the U.S. Trade Representative’s office, which explained that the request concerned “a product strategically important or related to ‘Made in China 2025’ or other Chinese industrial programs.”
Due to its anemic U.S. sales volume, “assembly in our home market is not an option” for the Envision, which competes with such mid-size crossover vehicles as the Jeep Grand Cherokee and the Cadillac XT5. Ahead of the July 2018 start for higher import tariffs, GM shipped in a six-month supply of Envisions at the much lower 2.5 percent tariff rate, Reuters reported in August 2018.
Last month, the U.S. Trade Representative’s Office also rejected a request by Volvo Cars for its mid-size XC60 SUVs, its top selling U.S. vehicle.
In addition to Chinese tariffs, Trump’s threat to inflict escalating tariffs on Mexico, one of America’s most significant and important trading partners, has heightened concerns about stagnating economic growth. The United States imported $346 billion of products from Mexico last year, including everything from auto parts and avocados to beer and televisions. Automakers, including Fiat Chrysler (FCAU), General Motors(GM) and Ford (F), rely on Mexico as a vital part of their supply chain.
Mexican plants built a quarter of the nearly 17 million light-duty vehicles produced in North America last year. According to the International Trade Administration, U.S. suppliers embody one third of all original equipment parts suppliers in Mexico. That industry, which is the world’s fifth-largest, exports 90 percent of OEM parts to the U.S. That 5 percent tariff would apply to every last nut and bolt.
For investors looking for continued upside in U.S. equities over international equities, the Direxion FTSE Russell US Over International ETF (NYSEArca: RWUI) offers them the ability to benefit not only from domestic U.S. markets potentially performing well, but from their outperformance compared to international markets.
Conversely, if investors believe that international markets will outperform U.S. domestic markets, the Direxion FTSE International Over US ETF (NYSEArca: RWIU) provides a means to not only see international markets perform well, but a way to capitalize on their outperformance compared to the U.S. markets.
For more thematic investing ideas, visit our Relative Value Channel.