President Trump said Wednesday that he would impose a 25% tariff on cars and auto parts imported into the United States.
The duties come into effect on April 3rd and apply to both completed vehicles and trucks shipped to the United States, as well as imported parts included in vehicles assembled at American automobile factories. These tariffs collide with foreign and American brands, such as Ford Motor and General Motors, which assemble several cars overseas, including Canada and Mexico.
Almost half of all vehicles sold in the US are imported, and almost 60% of the parts of vehicles assembled in the US are imported. This means that if inflation already makes cars and trucks more expensive for American consumers, tariffs could significantly boost the price of cars.
In his remarks at the White House, Trump said tariffs would encourage car companies and their suppliers to set up stores in the US.
“Anyone who has plants in the US, that's a good thing,” he said.
However, the automotive industry is global and built around trade agreements that allow factories from various countries to specialize in specific parts and types of automobiles, and we expect little or no tariffs to be faced. This is especially true in North America, where trade agreements have been sewn together nationwide.
The stock market fell into the news that automobile prices would be charged. Stocks of major automakers fell further in after-hours trading after the White House announced that tariffs would also cover imported auto parts. General Motors fell nearly 7%, while Ford and Stellantis fell more than 4% after the market closed. Tesla stocks fell 1% in expanded trading.
Trump has argued that tariffs will increase domestic production, but it is unclear how that goal will be achieved. Tariffs can encourage businesses to use more products from the US to expand production, but new factories can usually take years and could cost billions of dollars to build.
Meanwhile, the additional costs introduced by tariffs can backfire economically, damaging the US automotive industry by disrupting supply chains, squeezing its profits and cooling its ability to make new investments.
The measure could also cause more trade clashes with foreign countries, particularly European countries, Japan and South Korea, and the companies will send more cars to the US.
Capital Economics economists said tariffs could promote domestic investment and production. “But in the short term, it's inflation and assuming domestic producers respond significantly with domestic prices increasing in the country,” they said.
The Canadian Chamber of Commerce said in a statement that automobile fares hurt the United States just like any other country.
“Dropping tens of thousands of jobs on both sides of the border means giving up the role of North American car leaders and encouraging businesses to build and hire anywhere else,” they said. “This tax hike puts plants and workers at risk for generations, if not eternal.”
Some groups praised the tariffs. In a statement, United Auto Worker Union President Sean Fain said tariffs “end the free trade disaster that has devastated working-class communities for decades.”
“Ending the race to the bottom of the automotive industry started with fixing our broken trade deals, and the Trump administration made history with what we do today,” he said.
The administration said a 25% tariff would apply to both cars and auto parts made in Canada and Mexico, despite trade agreements with the US signed with these countries. It created a small exception to those taxation by saying that content and materials built into vehicles that occurred in the US but finished in Canada would be exempt from Mexico.
According to the administrative authorities, if a car from Mexico is shipped to the US with 50% and 50% foreign parts of the US, a 25% tariff is only collected on foreign parts for an effective 12.5% tariff.
The taxation is set to take effect on April 3, but Canada and Mexico will have a short grace period for auto parts coming to the US. That's because of the complexity that comes with determining how much of these parts ultimately comes from the US.
The automotive company has set up a supply chain for snakes across the border between Canada and Mexico. These supply chains are sourced to U.S. automotive factories, and production can be seen to be disrupted by a rapid rise in part prices and availability.
According to the Bureau of Labor Statistics, around 1 million Americans are employed by car and parts manufacturers, and another 2 million are employed by dealers who sell cars and parts. Both groups could be hit hard by lower car production and higher prices that lead to lower sales. And cars are often the only biggest purchase for American families. In other words, additional costs from customs duties are heavy on consumers.
Trump's decision to impose tariffs on cars expands his aggressive trade approach. Since taking office, he has placed an additional 20% tariff on all US imports from China. He also imposed a 25% tariff on almost all goods from Canada and Mexico before exempting them from about half of imports traded under the rules of the North American Trade Agreement.
Trump is expected to introduce more taxes next Wednesday when he said he would announce “mutual tariffs” that are consistent with the high tariffs and other trade barriers other countries are leviing on American exports. Trump said on Wednesday the tariffs were “very fair” and “very good.”
“We're going to be very generous about it,” he said. “I think people will be very surprised.”
Trump's automobile fares are levied under an old trade lawsuit using national security-related legal authority known as Section 232. During his first semester, his administration conducted an investigation into car imports, and concluded that it had threatened US national security.
The White House tried to bring early rebuttal to concerns that the president's new car rate could lead to a significant rise in car prices. Officials pointed to Trump's push to secure new tax credits for interest payments on car loans, limited to American cars. They also said Trump was trying to lower gas prices.
Before details of the tariffs were announced, Jonathan Smoke, chief economist at market research firm Cox Automotive, estimated that a 25% tariff on goods from Mexico and Canada would add $3,000 to the cost of vehicles built in the US.
According to COX estimates, tariffs add an average of $6,000 to categories that include prices for cars made in Mexico or Canada, including Toyota Tacoma Pickups, petrol and electric versions of the Chevrolet Equinox, and several models of RAM pickups. The RAM is owned by Stellantis and also produces Dodge, Chrysler and Fiat Vehicles.
Higher prices will block buyers and force automakers to cut production, Smoke said. He estimated that U.S. factories produce 20,000 cars a week, or about 30% less than usual.
“By mid-April, we expect disruptions in almost all North American vehicle production,” Smoke said in a conference call with clients and reporters on Wednesday. “Conclusion: Lower production, narrower supply, rising prices are turning the corner.”
There could be temporary benefits for companies like Ford, Hyundai and Stellarantis, which have a large number of unsold vehicles in the dealer lot. Vehicle shortages caused by customs duties allow stock to be cleared without lowering prices. But profits are short-lived.
Automakers may be able to blunt some of the impact from tariffs as they designed their factories to produce different models on the same assembly line.
“Modification in production is always an option,” said Jorg Baser, a member of the management committee of Mercedes-Benz, which oversees production at a German car manufacturer.
However, it is impossible for Mercedes to completely avoid the impact of tariffs. This will add a significant price to the new car. In an interview last week in Berlin, Burzer said tariffs “will definitely increase costs.”
To appease the Trump administration, some foreign automakers have pledged to expand their manufacturing operations in the United States.
Hyundai Motor said it would invest $21 billion in the US over the next four years at an event with Trump at the White House on Monday. The Korean company, which already has large factories in Georgia and Alabama, said the new investments include factories in Louisiana that produce iron for Hyundai, Kia and Genesis vehicles.
Mercedes, which produces SUVs in Alabama, is planning to expand its operations in the US, its CEO OlaKällenius said in an interview in Rome this month. “We are 100% committed to the US, and we are still poised to do more,” he said without detailing.
Celenius acknowledged that there was an imbalance between the tariffs that Europe and the US imposed on automobile imports. The US will charge 2.5% tariffs on cars from Germany and other European Union countries, and the European Union will charge 10% tariffs on American vehicles.
“Would you like to go to Zero Zero?” asked Mr. Celenius.
