The United States and European Union are set to hold trade talks this week. The prospects of the Trump administration imposing auto tariffs looms over the meetings, with the president reiterating his willingness to take action if negotiations do not go well. NAFTA negotiations have seemingly stalled since talks broke down in late May, and the White House removed the exemption of steel and aluminum tariffs on Canadian and Mexican imports.
The U.S. Department of Commerce has until February 2019 to give its recommendation on foreign automobiles, but many are expecting a decision to be made as soon as the fall of this year. A 25% tariff, which President Trump has hinted at, could dramatically raise the price of autos in the United States and spark a global economic pullback. According to the International Monetary Fund, world economic output could drop by 0.5% in two years.
President Trump has received pushback from industry leaders and dominant sections of his own party. Still, Secretary of Commerce Wilbur Ross and trade hawks like Director of Trade Peter Navarro have staked influential positions beside President Trump. It is wise for investors to prepare for the possibility of the imposition of auto tariffs this year.
Let’s look at two stocks that could be in trouble if auto tariffs are imposed in the near term.
AutoCanada Inc. (TSX:ACQ)
AutoCanada stock has plunged 33.5% in 2018 as of early afternoon trading on July 24. Automobile sales have dipped in 2018 after posting record numbers in 2017. AutoCanada operates a number of car dealerships across Canada. Rate tightening and high consumer debt are just some of the challenges facing this industry in the short term. Auto tariffs could add an entirely new and damaging dimension.
The National Automobile Dealers Association in the United States estimated that tariffs would add as much as $2,270 to the cost of U.S.-built cars and $6,875 to the cost of imported cars and trucks. The Canadian federal government has vowed retaliation if auto tariffs are announced, and the impact on Canadian auto dealers could be even more devastating.
The Canadian Automotive Dealers Association (CADA) warned early this month that retaliatory tariffs could add as much as $9,000 to the sticker price of a new car. CADA chief economist Michael Hatch projected that it would cost over 100,000 jobs and would be catastrophic for the broader economy.
Stelco Holdings Inc. (TSX:STLC)
Stelco has already been wrestling with the impact of steel tariffs by the Trump administration that came into effect in June. Shares of Stelco have dropped 15% over the past month. This is in spite of positive earnings that had bolstered the stock since its November IPO.
Stelco relies mainly on domestic demand and leadership was confident that the company could overcome steel tariffs in the short term because of this. However, auto tariffs could be a different story. Stelco’s growth strategy is reliant on a healthy automotive industry that it plans to tap into. A violent pullback could hinder its outlook and force a reorientation of this strategy.
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Fool contributor Ambrose O'Callaghan has no position in any of the stocks mentioned.