9 Aug

Trade War or Fed Policies: What’s Hurting Automakers?

WRITTEN BY Anuradha Garg
  • President Trump bashed the Fed for keeping the US dollar strong, which hurt US companies.
  • He mentioned how the strong US dollar impacts US automakers.
  • US automakers have been hit hard lately. However, President Trump’s policies and the trade war had a greater impact on automakers than the Fed’s policies.

Trump and trade war uncertainty

On Thursday, President Trump targeted the Fed for its hawkish policy. He said that the US economy and US companies need the opposite.  However, US companies need less trade war uncertainty. President Trump mentioned in his tweet that he isn’t happy with the strong US dollar. The US dollar stayed strong due to the Fed’s policies. He added that the strong dollar is “making it more difficult for our great manufacturers like Caterpillar, Boeing,…..John Deere, our car companies, & others, to compete on a level playing field. With substantial Fed Cuts (there is no inflation) and no quantitative tightening, the dollar will make it possible for our companies to win against any competition.”

Trump versus automakers

We’ll discuss Trump’s Fed criticism specific to automakers. President Trump has been targeting the US auto industry for hurting the US jobs market. He doesn’t want any of the automakers to move their production out of the US. In June 2018, he threatened Harley-Davidson (HOG). The company had plans to partially shift its production to avoid tariffs. General Motors (GM) has also been on President Trump’s radar for closing its plants in Ohio, Michigan, and Maryland.

Trade war threatens automakers’ profitability

The US-China trade war is also threatening automakers’ profitability and top lines. China is one of the most important markets for US automakers outside of the US. At a time when the US auto demand is slowing down, US automakers want to focus on other large markets like China for consistent revenue growth streams. However, due to rising tariffs, US automakers struggle to operate in China.

US automakers and Trump’s tariffs

During the second quarter, Ford reported a massive 21.7% YoY decline in its sales in China. General Motors reported a fall of 12.2% YoY in its China sales. Fiat Chrysler Automobiles expects a dramatic increase in input costs due to tariffs, which could cost the company 750 million euros for the year. Other automakers expect a significant increase in manufacturing costs due to the tariffs.

In addition to the tariffs’ direct, the slowdown in China is also taking a toll on US automakers. China’s vehicles sales have fallen for 12 consecutive months through June.

Impact of Fed versus President Trump on US dollar

The Fed’s tighter policy has been supporting the US dollar. In July, the Fed cut the interest rates by 25 basis points—the first cut in more than ten years. Higher interest rates in the US compared to other countries make US investments attractive to foreign investors, which strengthens the US dollar.

Trade war tensions ignite demand for US Treasuries

However, we shouldn’t ignore one of the other factors that made the US dollar stronger—the trade war. Due to rising trade war tension, investors are concerned about the upcoming downturn or an outright recession. They’re piling into US Treasuries, which leads to a stronger US dollar. According to Bloomberg, foreign ownership of US government debt has soared to record highs. The Invesco DB US Dollar Index Bullish Fund (UUP) has gained 3.8% year-to-date.

Chinese yuan devaluation and US automakers

The Chinese yuan devaluation earlier this week was a retaliation to President Trump’s latest tariff threats. The devaluation strengthened the US dollar, which is also weighing on US automakers. On Thursday, in Tesla Might Raise Prices in China Due to Yuan Uncertainty, we discussed that Tesla (TSLA) might increase prices in China due to “yuan-related uncertainty.” Currently, Tesla imports all of the cars it sells in China. However, the company is in the process of building a factory in Shanghai.

Other automakers that make the cars outside the US and ship them to the US will be hard hit. BMW and Daimler AG are the biggest importers of US-built vehicles into China.

So, while the Fed might have led to a stronger dollar, President Trump’s policies, knowingly or unknowingly, have hurt US automakers more.

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