Trump threat hits Canadian auto sector
Parts makers fall on German car tax remarks
Incoming U. S. presidentelect Donald Trump’s threats about trade sent another ripple through global financial markets Monday, with the auto sector falling victim once again.
While U. S. markets were closed for Martin Luther King Jr. Day, Canadian auto parts makers Magna International Inc. and Linamar Corp. both took a hit after Trump targeted German car manufacturers.
Tr ump told German newspaper Bild that he will impose a 35 per cent tax on German cars imported to the United States. Volkswagen shares closed down 2.2 per cent, while BMW and Daimler’s shares ended 1.5 per cent lower.
The Toronto Stock Exchange’s S& P/ TSX composite index closed down 17.99 points, or 0.12 per cent, at 15,479.29. Six of the index’s 10 main groups ended lower. MSCI’s broadest index of Asia- Pacific shares outside Japan eased 0.6 per cent, Japan’s Nikkei lost one per cent as the strong yen hit exporters.
“The Trump administration’s rhetoric seems to have shifted to target advancedcountry trading partner,” said Jimmy Jean, senior economist at Desjardins Group.
On Friday, Trump spokesman Sean Spicer said that an auto border tax was not specific to any country. He also said Trump would “do everything to deter” any displacement, whether to Canada and Mexico.
“The comments seem oblivious to the fact that the auto industry has been operating in Canada for multiple decades, and that the Canadian industry has been just as much hampered by competition from low-cost producers,” Jean said.
Both Magna and Linamar have plants in Germany. Magna shares fell three per cent to $ 56.98 in Toronto, while Linamar ended the day at $55.65, down 3.5 per cent.
In Magna’s annual report for 2015, the company noted that Daimler accounted for US$3.78 billion of sales, while Volkswagen and BMW each contributed US$3.3 billion.
Together, the three auto makers accounted for about 32 per cent of Magna’s total 2015 revenue of US$32.1 billion.
Linamar does not break down its sales by automaker.
“Until specific policy changes are announced, it is difficult to determine what the impact on the auto sector and Magna may be from potential trade/taxation changes in the U.S.,” Steve Arthur, analyst at RBC Capital Markets, said in a Jan. 12 report.
Magna chief executive, Donald Walker, said recently it would be surprising if drastic changes were made, although he expects a slowdown of new capital flowing into Mexico.
U. S. automakers have come under attack by Trump, with Ford Motor Co. facing his wrath during the elec- tion campaign because of its operations in Mexico. The company has since abandoned its plans for a car factory in Mexico, and moved to add more jobs in Michigan. General Motors Co. was singled out by Trump, who said the company is sending a Mexican- made model of the Chevy Cruze to U. S. car dealers tax- free. “Make in U.S.A. or pay big border tax!” Trump said in a tweet.
Meanwhile, Trump’s pick to lead the U. S. Trade Representative office, Robert Lighthizer, has been vocal critic of what he considers China’s unfair trade practices. But now that Trump has expanded his attack to foreign companies he believes aren’t producing enough vehicles in the U. S., who’s next is anyone’s guess.
Still, with Congress notorious for moving slowly, it will likely be some time before Trump’s policies are signed into law.
However, BMO Cap- ital Markets economist Sal Guatieri noted that Trump will have more unilateral scope to set trade policies, such as imposing temporary tariffs on goods from countries he deems have an unfair trade advantage.
Trump has also threatened to impose an import tax on U. S. companies that offshore production, although he has revealed very little about a broad border adjustment tax (BAT).
Guatieri warned that this could be the main thrust of the House Republican’s plans to reform business taxes and quench Trump’s thirst to level the playing field for American factory workers.
“While the president-elect wouldn’t be mistaken for Milton Friedman on free trade, you can’t pin this one on him,” the economist said. “It was considered well before the election (in early 2016) by the House Republicans.”
The BAT is a tax on imports, and is intended to discourage U.S. companies from locating production overseas, since exports will no longer be taxed.
Guatieri noted that Canadian manufacturers of transportation equipment, chemical products, computer and electronic products, primary metals, machinery, and textiles are all vulnerable, as they depend on American buyers for at least half of their production.
However, he called transportation equipment companies — autos — the “runaway leader” with more than two- thirds of production heading to the U.S.
It is unclear whether the World Trade Organization would approve of the BAT, and how successful Corporate America’s inevitable lobby against it would be.
A major hurdle is the fact that the U. S. imports many parts and finished products it originally produced.
Guatieri noted that in the auto sector, parts often cross the Canadian and Mexican borders several times.
“Will a U. S. automaker in Michigan be forced to pay the border tax each time one of its parts is imported back to the country?” the economist asked. “Suffice it to say, the tax could wreak havoc on tightly woven supply chains for North American auto producers and other businesses.”