Business Essentials for Professionals

This Non American Car Maker would Benefit from TPP’s Demise


This Non American Car Maker would Benefit from TPP’s Demise
U.S. President Donald Trump has touted as the ushering in of a golden age for U.S. companies long hobbled by unfair trade deals his move to scrap the Trans-Pacific Partnership (TPP).
However this move has resulted in benefits for an unlikely beneficiary – Hyundai Motor.
Daiwa analyst Sung Yop Chung said in a note this week, describing Trump's move as a "sigh of relief" for South Korea's carmakers, that by scuttling the advantage Japanese carmakers would have garnered from TPP, the scrapping of the deal will likely benefit Hyundai.
The TPP would have created a 12-country free-trade bloc and Trump on Monday formally pulled the U.S. out of the TPP. The Congress had not yet voted or ratified the TPP which was negotiated during President Barack Obama's term in office.
The North American Free Trade Agreement (NAFTA), enacted in 1994, which eliminated most tariffs between Mexico, the U.S. and Canada is also planned to be renegotiated by Trump.
South Korean company Hyundai would be helped because its home nation wasn't a party to the 12-country TPP.
 "If TPP were to be implemented, Japanese carmakers such as Toyota and Honda could have benefited, based on the current tariff of 2.5 percent imposed on exports," Chung wrote. The cars that are imported from Japan into the U.S. attracts a tax of 2.5 percent at present.
Additionally, compared with the present 60 percent requirement, Japanese carmakers would have benefited from a lower local-content ratio of 45 percent, Chung noted.
How much of a car must be made within a trade bloc to qualify for the trade-deal's benefits is determined by the local-content ratio.
It is likely that cheaper parts from a greater number of locations would be sourced by the Japanese automakers due to the lower content ratio, Chung also pointed out.
"In other words, Japanese automakers could have gained stronger price competitiveness, coupled with the recent weakness in the yen versus the U.S. dollar given the widening gap between their interest rates," Chung said.
Estimating that every 1 percent rise in the greenback against the South Korean won would boost the auto maker's earnings per share by 1.4 percent this year, he also noted that the if the recent strength of the U.S. dollar persists, it would also boost Hyundai's earnings.
However, Chung noted that Hyundai Motor's affiliate Kia Motors would not easily get the benefits that are to flow from the TPP's demise.
Since Kia manufactures in Mexico for export to the U.S., therefore renegotiating NAFTA and/or imposing a border tax of as much as 35 percent would be negative for the company.
With a potential downside of as much as 15.2 percent to his 2017 earnings per share forecasts, Chung estimated in a note from November that Kia had an 1.8 percent exposure to U.S. imports from Mexico and an 18.3 percent revenue exposure to exports to the U.S.
concerns about how a Republican border tax plan could impact the U.S. economy have been expressed by other analysts.
U.S. demand of cars would be reduced by 1.2 million units a year in the short term due to a potential increase in the cost of the average vehicle by $2,300, if the U.S. introduced a "border adjustment" for imported products, Deutsche Bank estimated in a report dated Monday.