As testimony to easing trade tensions with the United States, China slashed import tariffs for automobiles and car parts effective Jul 1. The import duties have been reduced from 25% to 15% for vehicles and from 10% to 6% for auto parts including bumpers, doors, and seatbelts.

The auto tariff is still higher than the 2.5% U.S. charges on imported cars but less than the 25% charged by Washington on imported pickup trucks.

The announcement came following China’s pledge to buy more U.S. goods and end restrictions on foreign ownership in the industry. It is also in line with President Xi Jinping’s promise made last month amid rising pressure from Washington to reduce China's multibillion-dollar trade surplus with the United States.

As China is the world’s largest market for autos, the move is a huge boon to global automakers. The decision will allow them to earn more profits by selling more cars in the world's biggest auto market with lower taxes. The news came at a time when higher oil and gas prices are weighing on consumer’s spending power, hurting auto sales.

As a result, the tariff cut would drive the overall auto industry, which has been struggling this year owing to waning consumer demand after a long boom and intensified competition, which has led to more car production, resulting in increased inventory.

Stocks in Focus

Major U.S. automakers, namely General Motors (GM - Free Report) and Ford Motors (F) are expected to benefit from the move. Last year, General Motors sold more than four million vehicles in the country, while Ford sold 1.19 million vehicles. Though both the automakers are currently expected to post earnings and revenue decline for this year, the tariff reduction would reverse its direction, making it a value play for now. GM has a Zacks Rank #2 (Buy) while Ford Motors carries a Zacks Rank #3 (Hold). Both companies flaunt a Value Score of A. 

Additionally, the automakers that import premium-end cars to China such as Germany’s BMW (BAMXF - Free Report) , electric carmaker Tesla (TSLA - Free Report)and Daimler AG’s (DDAIF - Free Report) Mercedes-Benz will also get boost. The trio has a Zacks Rank #2 with BMW and Daimler having a Value Score of B, and Tesla having a top Momentum Score of A.

Earnings at BMW are expected to decline 4.05% for this year while revenues are expected to increase 7.19%. On the other hand, Daimler’s Zacks Consensus Estimate calls for 2.25% earnings growth and 14.15% of revenue growth for this year. Tesla has estimated earnings growth of 4.27% for this year, while revenue growth is estimated at 61.15%.

While an individual stock is certainly an option to take advantage of reduced tariff, a look at the First Trust NASDAQ Global Auto ETF (CARZ - Free Report) , which offers global exposure to auto stocks could be an excellent play to tap the same trends.

ETF in Focus

This fund tracks the NASDAQ OMX Global Auto Index, holding 34 stocks in its basket. It is moderately concentrated on the firms, with each making up for no more than 8.3% share. General Motors, Ford and Daimler are among the top five holdings of the fund. In terms of country exposure, Japan takes the top spot at 34.3% while the United States and Germany round off the next two spots with 20.9% and 19.8% share, respectively. CARZ has a lower level of $20.6 million in AUM and trades in a small average daily trading volume of about 4,000 shares. The product charges 70 bps in fees per year and has a Zacks ETF Rank #3 (Hold) with a High-risk outlook.

Other Factors to Fuel Growth

A strong economy, low unemployment, increasing consumer confidence, higher spending, fuel-efficient and technologically enriched vehicles, and still-low financing rates will spur the industry’s growth. Though the tax reform will encourage rate hikes, it will provide a lift to U.S. car sales.

Further, the auto sector has a compelling valuation with a P/E ratio of 11.18, the lowest of all the 16 Zacks sectors. This could provide an upside to the stocks in the sector.