1、Please refer to important information at the end of this report 21 February 2019 Luigi Speranza,Global Head of Market Economics Spyros Andreopoulos,Senior European Economist Paul Hollingsworth,Senior European Economist and Head of UK Economics Stefan Ubovic,Macro Quantitative Strategist Alex Jekov,F
2、X Strategist Edmund Shing,Global Head of Equity Derivative Strategy Eric Oynoyan,Senior G10 Rates Strategist EU:Counting Cars 2 National security investigation into automotive imports:negotiating positions and near-term outcome(slides 3-5)The US President has 90 days to respond to the Section 232 re
3、port,which reportedly includes three options:a)a blanket tariff on autos and auto parts of 20-25%;b)more targeted tariffs on advanced auto technology(such as electric cars);and c)a combination of the above.The negotiating positions of the two sides are far apart,with the widest gap being on agricult
4、ure and to a lesser extent cars.We see a significant risk of escalation given the political timetable and the fact that the EU is unable to respond constructively in the near term.Our central case is for tariffs to be imposed,but for the EU to benefit from a short-term exemption.Current terms for ve
5、hicle trade(slide 6)Car tariffs are currently asymmetric:the US imposes a 2.5%tariff on EU-built cars and a 25%tariff on EU-built trucks,but the EU tariff for US-built cars and trucks is around 10%.The US has a USD44bn vehicle trade deficit with the EU,equivalent to around 0.25%of US GDP.Gross bilat
6、eral trade(exports+imports)amounts to USD80bn.Impact of car tariffs on the economy(slides 7-13)Direct and indirect automotive manufacturing accounts for around 3.3 million jobs,or 1.5%of total EU employment.Germany and the CEE countries are the most exposed to any hit to the automotive industry.The
7、US is the main destination for EU car exports,accounting for around 25%of total export demand.However,EU domestic demand is a significantly larger market,absorbing around two-thirds of total EU car production.Including second-round effects,we estimate the impact of a 20-25%tariff at 0.1-0.25pp of Eu
8、rozone GDP,with some countries hit more than others we estimate the impact in Germany at around 0.15-0.45pp of GDP.The possibility of tariffs adds a substantial headwind to the German and eurozone economies,the former,in particular,suffering from a shock to automotive production as well as a slowdow
9、n in export demand.There is a material risk that auto tariffs through their possible income and employment effects would deal a blow to confidence,causing a retrenchment of the consumer the most resilient sector so far.Market View:Whats the collateral damage?3 G10 FX Concerns about an escalation of
10、auto trade tensions seem likely to weigh somewhat on the EUR in the weeks leading up to the Presidents decision.However,we think an ultimate outcome in line with our base case where Europe is granted exemptions would not significantly damage the currency.BNP Paribas FX Positioning Analysis signals t
11、hat EUR positioning is short with a score of-16(-/+50 scale).Given the market is already short EUR and limited scope for further ECB easing measures,we would expect the market impact to be relatively muted barring a worst case scenario where Europe is hit with broad tariffs on exports and retaliates
12、 significantly against the US.A worst-case scenario like that would likely require some downward revisions to our EURUSD forecast of 1.25 by year-end.We continue to favour buying a 6m EURJPY 120 European Digital to protect against a range of downside risk scenarios in Europe,including possible impos
13、ition of broad US tariffs on European autos.As noted,we would expect the impact of broad auto tariffs to be a material negative for Eurozone growth and would anticipate that damage to the broader risk environment would also support the yen.The JPY could also benefit if investors believe concurrent U
14、S-Japan auto negotiations would include discussion of addressing the yens current undervaluation.G10 Rates The front end of the Eonia curve has already priced in the scenario of a delayed deposit facility normalisation due the eurozone slowdown in 2019.However,we believe that an additional 0.2%negat
15、ive impact on Eurozone GDP growth due to an escalation of auto trade tensions would favour further flattening of the EUR curve up to the 10y area as investors will expect a more prolonged ECB status quo.The heavy rate locking flows on the 10y bucket over the past few months have distorted the Eur sw
16、ap curve with the 10y bucket becoming too cheap on the 5s30s curve.We think that the likely end of those flows in Q1 combined with a scenario of trade tensions between the US and the EU would lead to a swift normalisation of the 10y bucket on the EUR swap curve.Hence,we favour receiving EUR 5y5y swa
17、p positions versus long 5y5y USD inflation or would recommend receiving EUR 10y swap in the Eur 5s10s30s swap fly on any correction.Market View:European Autos sector(SXAP)4 However,note that in order to naturally hedge their FX exposure,German and Japanese carmakers have made great efforts to increa
18、se their local production in the US,thereby reducing the volume of cars physically exported from Europe to the US.We should also note that investors already have a very pessimistic outlook for this sector,reflected in depressed valuation levels and the under-performance of European autos versus othe
19、r European cyclicals year to date even as equities have rallied sharply following the Q4 2018 sell-off.The European Autos sector(SXAP)has already been buffeted by a perfect storm of negative catalysts since the beginning of 2018,including:1.Dieselgate and the resulting disruption to car production f
20、rom recertification according to the Worldwide Harmonised Light Vehicle Test Procedure(WLTP),from which European car production is only now recovering;2.More expensive loan and lease finance arrangements following higher interest rates and credit spreads,particularly in the US,making zero-rate finan
21、ce deals a thing of the past;3.The slowdown in new car registrations in the key US,EU and Chinese markets;4.The investment cost of accelerating the development of hybrid and electric vehicle models.As a result of these varied drags on the Autos sector and most importantly on earnings,the valuation o
22、f the European autos sector has fallen to under 7x on a 12-month forward basis,while the 12-month forward earnings level itself has already declined by 10%since mid-2018,reflecting these drags on profitability(the autos sectors EBITDA margin has already fallen from an end-2017 peak of 13.3%to 12.4%a
23、s of Q1 2019).Were the US to impose more onerous car tariffs on EU car exports to the US,this would clearly weigh yet further on auto sector earnings given its heavy geographic sales exposure to the US(ranging from 17%to 25%of sales for the big 3 German OEMs).708090100110120130201720182019SXAP Autos
24、 price(rebased)SXAP Autos forward EPS(rebased)Source:Bloomberg,BNP Paribas Fig 1:PE valuation of the Autos sector has already declined US:National security investigation into automotive imports 5 Where are we?The US Commerce Departments investigation covers the imports of cars,trucks and parts,using
25、 Section 232 of the 1962 trade act the same provisions used to justify imposing steel and aluminium tariffs.According to the press,the report has already been submitted to the White House.It need not be made public.From what is known,the report contains three options for the President:a)a blanket ta
26、riff on autos and auto parts of 20-25%;b)more targeted tariffs on advanced auto technology(such as electric cars);and c)a combination.The President then has 90 days to determine whether he concurs with the findings and decide whatever option in the report or not he prefers and to use his statutory a
27、uthority to adjust import tariffs.He then has another 15 days to act on the decision.Potential time-frame The decision on car tariffs will therefore be announced no later than May 2019,but could come earlier.Thus,the decision will come before the European parliamentary elections on 26 May.Following
28、the announcement,key allies may be allowed an exemption period.In the case of steel and aluminium,it took 12 months to fully implement the import tariffs:eight months to conclude the investigation,a month to announce the decision and three months to process exemptions.EU-US trade:Respective negotiat
29、ing positions 6 US Improve the US trade balance and reduce the US-EU trade deficit Industrial goods:comprehensive market access for US industrial goods through lower tariffs and non-tariff barriers(incl.regulatory standards)Agricultural goods:comprehensive market access for US agricultural products
30、through reducing or eliminating tariffs as well as non-tariff barriers and restrictive rules in the administration of quotas EU Comprehensive agreement on reduction or elimination of tariffs for industrial goods,including the willingness to lower tariffs on US car imports(although the EU Commission,
31、which is responsible for trade negotiations,recently was unable to secure a mandate to enter into negotiations with the US)Agreement on conformity assessment,helping to remove non-tariff barriers Rejects including agriculture in the negotiations Fundamental differences EU-US trade negotiations:On a
32、collision course?7 Source:Macrobond,Eurostat,BNP Paribas Fig.1:What matters for French and German economies 1.7%0.7%0.02%0.9%4.9%0.72%0%1%2%3%4%5%6%Agriculture valueadded/total value added(%)Motor vehicles,trailersand semi-trailersmanufacturing valueadded/total value added(%)Motor vehicle exports to
33、the US as%of GDPFranceGermanyFrance and Germany have different interests in EU-US trade negotiations We see a high risk of escalation in the near term On the US side,progress in trade talks with China may allow the Trump Administration to turn to EU-US issues;the Administration may also expect the c
34、urrent weakness of the Eurozone economy and Germany,in particular,to strengthen the USs bargaining position.The next presidential election is in November 2020,and a confrontation with the EU may play to Mr Trumps electoral base The EU may be unable to respond prior to the European Parliament electio
35、ns(on 26 May ie,after the 90 days within which the US President is meant to respond to the Commerce Departments recommendation):trade agreements are not popular with European electorates and the issue could be hijacked by populists,in our view.Opposing French and German interests in the near term ma
36、y stifle a unified response:one of the key US objectives seems to be to open up the EU market for agricultural products,which is strongly opposed by France,Ireland and others.While the two countries are certain to find a compromise,in our view,this may well take time.More generally,the EU may not be
37、 able to engage as constructively as China has,since many issues are sensitive with European voters.EU:Vehicle trade with the US 8 Asymmetric tariffs and cross-border exposure to supply chains Source:BEA,Eurostat,OECD,Macrobond,BNP Paribas Fig 1:Vehicle trade between EU and US Fig 2:Import content o
38、f car exports by country Key facts and figures The US has a vehicle trade deficit with Europe:US imports from the EU outpace exports to the EU by USD44bn or 0.25%of US GDP Gross trade(exports+imports)amounts to USD80bn Current car tariffs are asymmetric:The US imposes a 2.5%tariff on European-built
39、cars The tariff on EU-built trucks is 25%EU tariff on US-built cars and trucks is around 10%Implications of import content in the automotive supply chain:EU car exports source few US-originating inputs,which suggests second-round effects of car tariffs on demand for US manufacturing are unlikely.US
40、car exports,however,have non-negligible import content from the EU of around 25%.This means tariffs on parts would push up US input and output prices.The Alliance of Automobile Manufacturers said that with an import tariff of 25%,the cost of US-built cars would increase by USD2,270 dollars on averag
41、e.Source:BEA,Eurostat,OECD,Macrobond,BNP Paribas EU:US share of demand for European cars 9 US is a major export market,but intra-EU sales are more important Source:Eurostat,BNP Paribas Source:Eurostat BNP Paribas Fig.1:Car exports and imports by country Fig.2:EU car manufacturers main export markets
42、 Key facts and figures EU and Japan share the top spot as the worlds largest gross and net exporters of vehicles.The US is the main destination for EU car exports in terms of both value and volume;around 25%of total EU vehicle exports go to the US.Exports account for around one-third of EU car produ
43、ction:The US is therefore the destination for around 8%of cars produced in Europe The intra-EU market is significantly more important for European car manufacturers.EU:Car industrys share of the overall economy 10 Second-round effects to add to a limited first-order impact Source:ACEA,Eurostat,BNP P
44、aribas Source:ACEA,Eurostat,BNP Paribas Fig.1:EU employment in the automotive sector Fig.2:Extra-EU exports EUR2.7trn or 18%of GDP Key facts and figures Direct and indirect automotive manufacturing accounts for around 3.3mn jobs,or 1.5%of total EU employment The share of car exports in the total ext
45、ra-EU exports of goods and services is 6.2%;the share of car exports to the US is 1.6%We estimate that the direct impact of a 20%US tariff would be a drag of around 0.1pp off EU GDP Major car manufacturers such as Germany,Slovakia and the Czech Republic would likely be hit most Main implications for
46、 the Eurozone The first-order impact would in aggregate be not too large,but some countries would be hit more than others Second-round effects are likely,with spill-overs to confidence and employment further weighing on growth For the total impact of a 20-25%tariff,our estimates suggest a range of 0
47、.15-0.45pp of GDP in Germany,and 0.1-0.25pp for the Eurozone as a whole Overall exports to the US (22.6%of total exports)Services exports Goods exports Car exports to the US(1.6%of total exports)EU:Exposure to automotive industry by country 11 Countries with the highest exposure to the automotive se
48、ctor are Germany,Czech Republic,Slovakia,Hungary and Romania Source:ACEA,Eurostat,BNP Paribas Source:Eurostat,ACEA,BNP Paribas Fig.1:Automotive manufacturing employment by country Fig.2:Exposure to US car market by country Germany and CEE most exposed to the sector Source:Eurostat,ACEA,BNP Paribas E
49、U:Domestic automotive demand should pick up 12 Disconnect between firms and retailers in terms of demand expectations,with retailers growing more pessimistic.The share of firms reporting that demand is a limit to production has started to pick up(possibly related to uncertainty over emissions standa
50、rds and driving bans in Germany).However,consumers are still reporting that now is a good time to buy a car.So there is potentially some pent-up demand which should materialise when uncertainty clears.Fig.1:Consumer intentions to buy a car Fig.2:Demand as limit to production Pent-up demand?Source:EU