European carmakers drove markets higher Tuesday, following last night's rally for U.S. auto stocks on Wall Street, following news of a potential overhaul of the North American Free Trade Agreement that could ease tensions between Washington and Brussels and spare the sector from fresh tariffs.
President Donald Trump said Monday that he had agreed to a bi-lateral trade deal with Mexico that will replace the current NAFTA framework, despite the exclusion of Canada, that would see around 75% of a particular car's content produced in the NAFTA region, up from the current 62.5% threshold, and 40% to 45% made by workers earnings at least $16 an hour. Both figures appear to have fallen short of previous White House demands.
"They used to call it Nafta," Trump said. "We're going to call it the United States-Mexico Trade Agreement. "We will see whether or not we decide to put up Canada or just do a separate deal with Canada."
The Stoxx Europe 600 Automobiles and Parts index, the regional benchmark, was seen 1.36% higher by midday, well ahead of the 0.1% advance for the Stoxx 600 main index, while Volkswagen AG (VLKAY shares rose to the top of the DAX performance index, gaining 2.13% and pulling domestic rivals higher across the board.
BMW AG (BMWYY was marked 2.07% to the good while Daimler AG (DMLRY added 1.35% in Frankfurt while French rivals Peugeot SA (PUGOY and Renault SA (RNLSY rose 1.9% and 1.4% respectively in Paris. Luxury carmaker Porsche rose 1.6% to €55.746 in Milan.
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Last month, Trump and European Commission President Jean-Claude Juncker agreed to move towards a "zero tariff" approach to trade and vowed to hold their current levies on various goods, including automobiles, in place while they negotiate terms of the "breakthrough" arrangement.
President Trump has consistently referenced the European auto sector as a potential target for tariffs in his effort to reduce what he has called "unfair" trade agreements between the United States and its largest economic partners.
Earlier this year, he threatened to apply a 20% tariff on all cars coming into the United States from the European Union, although he did not specify how and when the charge may be put in place. His comments came on the same day that the EU imposed its own retaliatory tariffs on $3.4 billion worth of U.S. goods in response to the Trump administration's charge in non-American steel and aluminium.
The average EU tariff on U.S. goods imported into the bloc is 3%, according to Export.gov data, although non-EU automobiles are subject to a 29% tariff when brought into the bloc, of which 19% is a value-added tax and 10% is a tariff based on current World Trade Organization (WTO) rules.
Cars imported into the United States from countries that don't have existing pacts with Washington are subject to a 12.5% levy, while pickup trucks are subject to a 25% tariff.
That said, some of the largest production facilities of Europe's biggest carmarkers are located in the United States, with plants in Vance, Al. and Spartanburg, S.C. and Chattanooga, Tn., that assemble around a third of the German cars sold domestically.