Automakers face 'material and negative ramifications' over the escalating US-China trade war

Paul Sancya / AP

In this Monday, May 22, 2017, file photo, Jim Hackett speaks after being introduced as Ford Motor Company CEO, in Dearborn, Mich. Hackett revealed a little about his plans, and a lot about himself, when he talked to media after his appointment. "The number one vehicle in the world is built by Ford Motor Company, and that's not lost on me," said Hackett.

• US automakers were under close watch on Monday after President Donald Trump escalated the US-China trade war by threatening to implement new tariffs on hundreds of millions of dollars worth of Chinese goods.
• Trump said the trade talks between the US and China were moving "too slowly."
• Ford shares slipped 1% and General Motors was down 2%.
• Watch Ford and GM trade live.

The US automakers may be under increasing pressure as President Donald Trump turned up the heat in the US's trade dispute with China. Shares of both companies were down as the auto industry is particularly sensitive to Chinese demand.

Trump, on Sunday, threatened to raise the tariffs on $200 billion worth of Chinese goods from 10% to 25%, and slap a fresh 25% tariff on another $325 billion worth of Chinese goods. The new tariffs are set to go in place on Friday. Trump tweeted that the increased tariffs were due to the trade talks moving "too slowly."

In response, China has threatened to cancel trade talks scheduled for this week, and is likely looking at ways it can retaliate. One of the areas that China could go after is imports of US cars. China has been a large and growing market for Ford and GM as growth in the US has stagnated. Chinese companies are also important suppliers to the US manufacturers.

"We believe the threat of incremental trade friction could have material and negative ramifications for the auto industry," wrote John Murphy in a Bank of America Merrill Lynch research note. "This, combined with a fading US cycle and other emerging headwinds, could pressure multiples and limit upside to auto stocks."

Murphy noted that tariffs on auto parts and other raw materials were initially set to become effective in January, but they were delayed indefinitely as trade talks progressed. The industry will be impacted by the outcome of other trade disputes, including those with Japan, Korea, the European Union as well as the uncertain situation with Brexit.

Given the industry employs millions of people in the US, it is a particularly sensitive one as campaigning for the 2020 US presidential election kicks off. Trump has continually highlighted the strength of the US employment and the health of the economy under his watch.

"JOBS, JOBS, JOBS!" Trump tweeted after Friday's blockbuster employment report.

Get the latest Ford stock price here.