I Love My Honda

Big profits from unintended consequences of US government policy

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Don’t fight “City Hall” when you invest: That’s a lesson investors in any regulated industry learn early. And if a company truly runs afoul of the law, it’s usually best to just walk away.

That said, governments that aggressively try to force policies on the private sector inevitably create unforeseen consequences. And the more changes they try to make simultaneously, the more opportunities investors will have to bet on those “surprises.”

It’s fair to say the Trump Administration is aggressively trying to impose its will on Americans in an unprecedented number of ways. That includes forcing utilities to keep expensive and rapidly aging coal plants running and threatening to block mergers if companies don’t abandon workplace diversity efforts. But nothing has been as affected as global trade, as the president has claimed the right to impose hefty import taxes on national security grounds.

The US/Japan trade deal announced last week is a good case in point. The administration bills it as a job creator, citing a “promise” by the Japanese government to invest up to $550 billion in “key” American industries. But the cornerstone is a flat 15% tariff to be assessed on all imports to the US from Japan. That’s a steep increase from the paverage of 1.6% under the Biden Administration.

Whether and how the investment will materialize remains to be seen. Some officials have already referred to it as being more of a “target” than a pledge. And targeted areas appear to be industries Japan is already investing in for the purpose of diversifying supply chains.

The tariffs, however, will apparently go into effect immediately, including on products previously taxed at higher rates. That includes automobiles made in Japan, leaving manufacturers like Honda Motor (NYSE: HMC) the choice of either passing on those costs to consumers or taking a hit to margins.

Nonetheless, the day after the trade deal was announced, NYSE-traded American Depositary Receipts of Honda and archrival Toyota (NYSE: TM0 were both up over 10%.

Honda is now ahead 16% for the year while Toyota is up over 11% in the last month, to break out of a year-long slump. GM (NYSE: GM) in contrast is at basically breakeven. And Tesla Inc (NSDQ: TSLA) is down nearly -22%.

Why are Japanese automakers rallying on a trade deal that imposes new taxes on their customers? Because the “protected” US automakers come out far worse after taking into account the Trump Administration’s other tariffs. These now include a 25% tax on all automotive imports (including parts used by US companies) and a 50% tax on imported steel (25% of US consumption), imported copper (50% of consumption) and imported aluminum (54% consumption).

Add to that elevated US labor costs and quite arguably Trump Administration trade policy has greatly advantaged Japanese automakers—as they only face a flat 15% tariff.

Clearly, this is an unintended consequence. And judging from the statements coming out of the administration, it’s one they’re going to deny to the last.

But this is very good news for Honda Motor at what’s an extremely difficult period for the global automotive industry generally, with concerns about demand and competition heating up. And it also comes as the Japanese auto industry is stepping up cooperation to reduce costs and improve competitiveness. One good example is this month’s announcement that Honda will develop common operating software for cars with Nissan Motor Co (OTC: NSANF).

Honda’s US sales have been a bright spot this year. The 8.4% year-over-year lift in Q2 vehicle sales will provide a solid boost to company earnings scheduled for release before the market opens on August 6. And with certainty on US tariffs, US results figure to be solid the rest of second half 2025.

That’s good news for this Dividends Premium stock. But my bet for the biggest long-term winner from the Trump administration’s automobile tariffs is likely to be China’s BYD (OTC: BYDDY).

Companies hit by tariffs must become ever more efficient and innovative to compete. Conversely, the protected companies have no such incentive and therefore inevitably fall further behind.

Despite being backed for years by Warren Buffett’s Berkshire Hathaway (NYSE: BRK/B), BYD is pretty much shut out of the US market now by tariffs of 100% and more. But globally, its electric vehicles are picking up steam, as the company slashes costs and achieves driving ranges of 400 miles plus with charging times of less than 5 minutes.

BYD’s growing global competitive advantage showed up in first half 2025 with a 33% lift in total sales and a 31% increase in output. That’s despite fierce competition in its most important markets including China—where it’s targeting a 30% rise in sales for this year despite recently scaling back some expansion plans and slashing prices.suit

There is unfortunately a non-zero risk to US investors that the Trump Administration will eventually forbid us from owning BYD, as it has numerous other Chinese stocks on “national security grounds.” If that does happen, investors will have to sell, possibly at a less than optimal price.

That plus a higher yield makes Honda a more suitable holding for conservative investors in particularly. Even after it’s recent run, the stock is not expensive trading at less than 10 times earnings. And there’s potential to score additional gains from a continuing boost in the value of the Japanese Yen against the US dollar.