President Donald Trump’s 25% tax on imported cars, mild trucks and auto parts could raise prices when many Americans are already struggling to buy a new set of wheels. Tariffs also force car companies to rethink which cars will make and where to make them.
For years, Trump has been itching to tax foreign cars. In his first term, he declared that the automobile would import a threat to national security, which gave him the power to impose tariffs on them. On Wednesday, he went ahead and imposed taxation. They will work in the middle of the night on April 3rd.
During the first few weeks of Trump’s return to the White House, he’s the latest in many of Trump’s operations in the automotive industry. Car companies are also navigatingReversal of fuel economy standardsdialDown greenhouse gas emission standardsAnd aHost of electric vehicle policy rollback.
Some of Trump’s car pricing details have yet to be resolved.
For example, it is unclear whether new car rates will accumulate on top of the 25% import tax that will be collected next week on all goods from Canada and Mexico. That means cars from Canada and Mexico could face 50% new tariffs.
And for now, the Trump administration has exempted tariff vehicles, mild trucks and auto parts that are subject to tax exemption under the US-Canada agreement, a regional trade agreement negotiated by the president five years ago. Trump intends to narrow that exemption for content made in the United States, not Canada or Mexico. But that requires you to set up a process to determine what is US-made qualifying, which could take weeks or months.
The White House also said import taxes “keys” and “applies to automotive components,” including engines, transmissions, powertrain components and electrical components. It also could expand customs duties to other automotive parts “if necessary.”
Here’s other things you need to know:
Why are tariffs so difficult for the automotive industry?
As automakers expanded globally, they created complex and efficient supply chains across the country. In North America, for example, Mexico supplies low-wage labor and creates smaller, cheaper cars and trucks, while Canada and the US offer more skilled labor and technical know-how.
Trump’s tariffs are intended to bring car manufacturing back to the US. But that’s not easy.
It takes years to re-rout the procurement of thousands of parts imported into the US and uproot the assembly work.
“The industry’s supply chains are global in nature and are optimized around components that travel across borders where free trade agreements existed in the past, adding to the uncertainty that all automakers face.”
Sam Fiorani, an analyst at Autoforecast Solutions, said that while European manufacturers of luxury cars and their buyers can afford to adjust prices, “companies like Toyota, Mazda and Subaru are companies that import most of the fleet.”
“Polling tariffs on some of the vehicles built in Mexico and Canada that are not sourced from the US will hurt the profits of General Motors, Stellantis and Ford over the next few quarters and cost billions of dollars,” he added.
Trump’s tariffs he claims to be permanent will force businesses to make tough choices.
“If you want to dodge import taxes, “it has the effect of forcing businesses to increase our content,” said Richard Mozica, trade lawyer for Miller & Chevalier.
And Vanessa Miller, chairman of the law firm Foley & Lardner’s automotive team, admits that some companies can visit the US, while others are too tied to factories in Mexico and elsewhere to move quickly.
Automakers may have to stop manufacturing some vehicles as they do not make profits due to tariffs being enforced. The tariffs “stricken everyone in a way that rethinks everything,” said Ivan Drury of Edmunds, the car website. “This has been at least three or four years. We haven’t seen anything you can just ride.”
What does this mean for car buyers and new car prices?
Beata Caranci and Andrew Foran of TD Economics estimate that if an automaker handed all the costs to consumers, it could raise the average price (over $47,000 last month) for US cars and lightweight trucks. If the Trump administration applies taxes on cars made in Mexico and Canada, the price hike could be higher – up to $10,000.
Automakers and their suppliers are currently recoveringAn unstable yearThe pandemic-intensive production halt, aSweeting semiconductor shortageLow inventory from dealer lots. That meantPrices were sky high, low incentives and few trades.
During the peak of the pandemic, consumers still bought vehicles at high prices. However, stacked tariffs can put new vehicles out of reach for many buyers, especially given the rising potential signsWide inflation across the economy.
“Nearly instantly, consumers will see that already expensive new vehicles cost hundreds to thousands of thousands and that their prices will escalate further as the supply of many major vehicles drops,” Filani said. “Imagine prices rise during the semiconductor shortage and growing it across all brands and manufacturers.
How about used cars?
By increasing the price of new vehicles, tariffs will likely send buyers to the second-hand market. However, with limited stocks used, buyer inflows can also shake up the price of used cars. And they already average $25,000.
According to Edmunds data, the number of lease penetration or lease vehicle transactions averaged around 30% over the past decade.
However, the industry saw a lower lease ratio, particularly between May 2022 and January 2023.
So, just as more buyers start shopping, there is a chance that there will be a shortage of second-hand cars.
How did the industry respond?
Gov. Matt Blunt, chairman of the American Auto Policy Council, which represents the American automakers, said the manufacturers supported Trump’s efforts to boost domestic automobile manufacturing. However, he warned that it is important that tariffs are implemented in a way that avoids consumer prices hikes and that it is important that the integrated North American automotive sector is still competitive.
The United Autoworkers Union praised the tariffs. “Ending the race to the bottom of the automotive industry started with fixing broken trade deals, and the Trump administration made history with what it is today,” UAW President Sean Fein said in a statement. “These tariffs are a major step in the right direction for autoworkers and blue-collar communities across the country, and are currently in automakers who are trying to get good union jobs back in the US, from Big 3 to Volkswagen.”
However, Jennifer Safavian, president and CEO of Autos Drive America, the representative of international automakers, denounced the tariffs.
This story was originally featured on Fortune.com.
