The US imposes a 25% tariff on imported auto parts on Saturday, allowing prices for new and used cars, repairs and insurance to be sharply raised.
The latest tariffs that President Trump ordered in March as part of his plan to promote domestic manufacturing came after the collection of 25% of imported cars that came into effect in early April.
Even cars made in the US often have engines, transmissions, batteries, or other components produced in other countries, so this second round of imported parts has a wider impact.
The administration said Tuesday that tariffs are “intended to protect national security by encouraging domestic automobile production and reducing the US's reliance on imports of foreign cars and its portions.”
Tariffs on parts do not apply to Canadian or Mexican components as long as these products meet the requirements of the North American trade agreement negotiated during Trump's first term. In particular, the transaction requires that the minimum percentage of automotive parts content come from within North America.
The administration also said imported auto parts would not be subject to other taxation such as aluminum and steel. And companies that make cars in the US are exempt for two years because they don't have to pay a portion of the customs duties on imported parts.
Trump's tariffs have already pushed up new car prices as customers flock to dealers and buy vehicles before taxes come into effect. Tariffs have ripple effects on the second-hand car market as more people are looking for affordable alternatives to new cars and seeking increased demand and prices.
Tariffs on new auto parts are expected to increase repair and insurance costs as replacement parts become more expensive. The rise in car prices contributed to overall inflation, and Trump had promised to defeat it.
The president argued that tariffs would bring manufacturing back to the United States. But even if that policy is successful, consumers will still pay more for the car. Many products, including many auto parts, are often made at much cheaper prices in China, Mexico, or other countries outside of the US.
“There are not many parts available, such as fasteners, washing machines, carpets, wiring looms, and many more. You can't even buy these parts here,” Ford Motor CEO Jim Farley told CNN this week.
Automakers and suppliers say it will take years to move their assembly lines. And they are unlikely to commit billions of dollars to domestic manufacturing due to uncertainty about the direction of their trade policy.
Trump frequently changed his mind about the scale of tariffs and how they were applied. On Tuesday, he changed several rules to allow carmakers to avoid paying for some duties for components they import for two years. The measure will provide some easing to the industry, but car prices will still rise by several thousand dollars, analysts said.
There are unpredictable side effects. Financial stress can cause some suppliers to go out of business and create parts shortages.
“Automobile suppliers are already on a thin margin,” said Lenny Larocca, leader in the US automotive industry at consulting firm KPMG. “They can't afford to pay the full 25% tariff.”
But Trump's decision to exempt many parts from Canada and Mexico will ease the burden on some businesses.
The automotive industry accounts for around 5% of Mexico's gross domestic product and employs around 1 million people in the country. Vehicles and parts are Mexico's largest exports to the US.
“A little by little, this haze is clearing,” Mexican economy minister Marcelo Ebrard said at an event with business leaders and diplomats on Wednesday. “What we're facing is probably not as bad as many people would have expected.”
However, in Canada, many parts manufacturers supply automotive factories in the country, said Flavio Volpe, president of the Auto Parts Manufacturers Association. And when the vehicles produced by those plants are exported to the US, they are hit by tariffs.
“The health of the Canadian Auto Parts sector is that there are clusters of manufacturing that can be supplied locally,” Volpe said.
On Friday, General Motors said it was eliminating a third shift at the pickup truck assembly line in Oshawa, Ontario due to tariffs. The factory will build more trucks for Canadians, the company said. Unifor said the cuts would eliminate nearly 700 union jobs and likely parts makers would fire another 1,200 people.
Prime Minister Mark Carney said the GM decision was a “terrifying symptom” of the economic crisis created in Canada by Trump's tariffs.
Tariffs will strike some carmakers more violently than others. Tesla and Ford are not somewhat vulnerable. Tesla manufactures all cars for sale in the US in California and Texas. Ford says it sells nearly 80% of vehicles it sells in the US, including the F-Series pickup, the best-selling vehicle in the country.
Analysts say General Motors will suffer even more, as it often accounts for more than half the value of a Chevrolet or Cadillac made in the US. GM also imports cars from Canada, Mexico and South Korea.
Volvocar, which has its factories in South Carolina but uses many parts of China, will also be hit hard, analysts say.
Even companies that make vehicles in the US will feel pain. Libian will build electric pickups in Illinois, but import batteries from South Korea and China, which are subject to tariffs.
Tariffs are expected to reduce the supply of cheaper vehicles. About 80% of prices priced under $30,000, including popular vehicles such as the Honda Civic, Toyota Corolla and Chevrolet Trax are subject to 25% tariffs.
Most car manufacturers and their dealers have stocks of cars manufactured before the tariffs take effect, so car prices probably won't surge anytime soon. Ford, Hyundai and Volkswagen are among the automakers who say they won't raise prices for months. However, automakers are not making enough profits to absorb the increased tariff costs indefinitely.
Management staff will continue to discuss customs duties with the automaker, and obligations may change. But uncertainty has caused a major headache for automakers. GM said Thursday that tariffs will cost up to $5 billion this year. Other companies like Stellantis and Mercedes-Benz have told investors they will no longer be able to make reliable forecasts about sales and profits in 2025.
Ian Austen and Emiliano RodrÃguez Mega contributed the report.
