On Dec 11, China reportedly made major commitments in an attempt to resolve lingering trade tensions with the United States. While China has apparently agreed to make concessions on several fronts, auto stocks were the major beneficiaries of the reports regarding this incident. Reportedly, Beijing has agreed to lower tariffs on autos manufactured from 40% to 15%.  

U.S. auto exports to China have declined significantly ever since the world’s second-largest economy decided to impose retaliatory tariffs. However, with tariffs likely to go down in the near future, U.S. automakers will gain access to a market which holds the key to the industry’s future. This is why it makes sense to invest in U.S. auto and related stocks at this juncture. 

China Promises to Cut Auto Tariffs, Per Reports

According to The Wall Street Journal, Beijing has offered to make key concessions to resolve its trade dispute with the United States. Suggested measures include an increase in offtake of soybeans and other crops. The most significant of these measures is a proposal to reduce tariffs on U.S. autos from 40% to 15%.

Of course, at this point there is no indication as to when these tariff cuts will come into force. These concessions were proposed by Chinese vice premier Liu He in a teleconference with U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin. This was the first time that the two sides were meeting since a trade truce was sealed on Dec 1.

Earlier in the day, a Bloomberg News report claimed that a proposal to abolish the 25% surcharge imposed on U.S. auto imports earlier this year had been submitted to the Chinese cabinet. This boosted U.S. auto stocks before the opening bell. Ultimately, Ford (F - Free Report) , General Motors (GM - Free Report) , Tesla (TSLA - Free Report) and Fiat Chrysler (FCAU - Free Report) gained 0.2%, 0.8%, 0.4% and 0.7%, respectively.

Access to Fastest Growing Auto Market Crucial

U.S. auto exports to China had declined substantially ever since it decided to impose retaliatory tariffs. In August, export of vehicles amounted to around $460 million, 55% lower than the same period last year. The year-to-date figure of $5.6 billion is 30% lower than last year’s figures up to October.

Not only is China the fastest growing auto market, it is also the largest, at present. GM and Volkswagen (VLKAY - Free Report) captured substantial chunks of this market quite some time back because of investments it made decades ago. Ford and Fiat Chrysler have a relatively chequered history in China.

North American autos made up $13.5 billion of China’s total vehicle imports, which amounted to $51 billion. Per China’s Passenger Car Association, the United States exported 280,208 vehicles to China in 2017, accounting for 10% of total auto imports. This means that there is still huge scope for U.S. automakers, and a reduction in duties would go a long way toward improving their prospects.

Our Choices

If enforced, a tariff reduction on U.S. auto imports would be hugely beneficial for U.S. automakers. Auto exports from the United States to China have declined substantially in the wake of retaliatory tariffs. If China decides to remove the surcharge, U.S. automakers would once again begin to boost exports.

This is why it makes sense to invest in U.S. auto stocks at this point. However, picking winning stocks may be difficult.

We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM Score.

Allison Transmission Holdings, Inc. (ALSN - Free Report) is a designer and manufacturer of fully-automatic transmissions for commercial and defense vehicles.

Allison Transmission has a VGM Score of B. The company’s expected earnings growth for the current year is 73.4%. The Zacks Consensus Estimate for the current year has improved by 0.9% over the last 60 days. The stock sports a Zacks Rank #1. 

Cummins Inc. (CMI - Free Report) is a leading global designer, manufacturer and distributor of diesel and natural gas engines, electric power generation systems, and engine-related components, fuel systems, controls and air handling systems.

Cummins has a Zacks Rank #2 (Buy) and VGM Score of A. The company has expected earnings growth of 27.9% for the current year. The Zacks Consensus Estimate for the current year has improved by 1.9% over the last 60 days.

General Motors Company (GM) is a leading global automotive company.

General Motors carries a Zacks Rank #2 and has a VGM Score of A. The Zacks Consensus Estimate for the current year has improved by 0.6% over the last 30 days.

Oshkosh Corporation (OSK - Free Report) is a designer, manufacturer and seller of a varied range of vehicle bodies, and specialty vehicles.

Oshkosh carries a Zacks Rank #2 and has a VGM Score of A. The company has expected earnings growth of 11.2% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.7% over the last 30 days.

Cooper Tire & Rubber Co. (CTB - Free Report) manufactures and markets tires and related products.

Cooper Tire & Rubber carries a Zacks Rank #2 and has a VGM Score of B. The Zacks Consensus Estimate for the current year has improved by 48.6% over the last 60 days.