Auto stocks were buoyed Monday after the US and Mexico reached a preliminary trade deal, paving the way to replace NAFTA.
Shares of big U. S. automakers climbed on news that the U. S. and Mexico have reached a preliminary deal to update the 25-year old North American Free Trade Agreement, but experts warned that the deal is too narrow to have a major impact on carmakers’ fortunes.
General Motors, Ford Moto r, and Fiat Chrysler all jumped on trading Monday, as Donald Trump announced the agreement at the White House. Here’s how they responded: GM and Fiat-Chrysler rose 4.3 percent, while Ford increased 2.8 percent.
But U. S. Trade Representative Robert Lighthizer, said the deal —that would be called The United States-Mexico Trade Agreement — would not undo the 25 percent tariffs on steel and aluminum that have raised costs at GM and Ford this year.
And experts on U. S.-Mexico trade said that the need for congressional ratification of the deal, coupled with the prospect that the president’s party could lose control of the House of Representatives or the Senate in November’s election, means that the agreement isn’t likely to push shares meaningfully higher.
“There’s a very good chance this will never see the light of day,” said Frank DuBois, a professor at American University’s Kogod School of Business and head of the Made in America Index, which tracks the domestic and imported content of every car model sold in the U. S. “Auto companies will pressure Congress to leave well enough alone.”
The new deal will last 16 years and will be reviewed every six years. It will not cap imports of light vehicles from Mexico.
The deal’s provisions allow for import tariffs on cars and trucks that do not get at least 75 percent of their content from within the NAFTA region of the U. S., Canada and Mexico, or use a higher proportion of labor that makes at least $16 an hour. That provision would incent car makers to push more of their production into the U. S. or Canada from lower-wage Mexican plants, or buy more parts from outside of Mexico.
The expected impact is that makers of cars from existing Mexican plants will pay import duties of 2.5 percent when they are sent to the U. S., DuBois said. But vehicles made in newly-built plants will pay 25 percent. On paper, that gives U. S. automakers a powerful incentive to build in the U. S., but the likelier outcome is that automakers will hold off siting any new plants for as long as they can, DuBois said.
The market’s positive reaction today reflects traders’ dislike of the uncertainty created by Trump’s trade battles and threats, both with allies like Mexico and Canada and with frequent rivals including China, said Jared Bernstein, an economist at the Center for Budget and Policy Priorities in Washington.
“I’m not surprised markets reacted positively to this news,” Bernstein said. “It’s the flipside of sell-offs when the trade war heats up. In other words, markets really don’t like Trump’s trade agenda and the uncertainty it creates. So when things look a bit more certain, markets react positively.” (CNBC’s Steve Liesman has documented the swings markets have made in response to Trump’s trade moves .)
In terms of jobs, the agreement appears to be “much ado about nothing,” said Mark Zandi, chief economist at Moody’s Analytics.
“It won’t materially change the U. S.-Mexican trade balance or increase trade between the two countries,” Zandi said in an e-mail. “Like the trade deal with the EU, the U. S.-Mexican deal is a face-saving way to cool the brinkmanship. It doesn’t move the dial for either the U. S. or Mexican economies.”
“The U. S. gross domestic product and job impacts will be on the margin. And this assumes that the U. S. is able to strike a similar deal with Canada. If not, it could disrupt manufacturers supply chains, particularly for automakers whose supply chains extend across North America.”
Indeed, the administration’s attention is now turning to trying to get Canada to agree to a revision of NAFTA, a name the president says he wants to scrap as part of the talks. Officials in Washington are hoping to make a deal by Friday.
But Wall Street analysts did little to encourage speculation that the deal will boost automakers’ profits.
Morgan Stanley’s Adam Jonas, a voluble media presence on auto issues, didn’t issue a report on the deal and declined to talk about it. Instead, he published a report saying that slowing consumer spending in China could hurt profits at General Motors.
If tariffs on steel and aluminum remain in place, as the administration said, the earnings pressure that caused shares of GM and Ford to tank after second-quarter results came out in July will still be there, CFRA Research analyst Efraim Levy said in an interview.
But he said automakers would benefit from greater certainty about what the rules will be, even if the companies don’t like specific provisions. The full impact won’t be known until agreements are reached with Canada and the European Union, he said.
“Every agreement (gets done) in pieces that have to fall into place,” he said. “The auto makers and parts suppliers have gotten whacked this year on trade issues. Once you have a level of certainty, you can manage for it.”