In the latest action by the Trump administration on the tariff front, President Donald Trump yesterday announced new 25 percent tariffs on cars and other automobiles imported into the U.S.
The tariffs are set to go into effect on April 3rd, a week away. Although the tariffs are targeted at foreign automakers, tariffs will also hit American automobile manufacturers hard. Specifically, Ford Motor Company and General Motors – two of the “big three” auto makers in the U.S. – will see tariffs significantly affect their businesses as components are assembled overseas and shipped into the U.S.
Why are the new 25 percent auto tariffs significant?
Overall, the move to impose tariffs on automobiles will increase consumer prices and disrupt supply chains for the foreseeable future, for many of the same reasons we’ve outlined with tariffs imposed on other sectors of the global economy by the Trump administration.
In the U.S., almost 50% of cars and trucks sold are imported into the country. Additionally, about 60% of vehicle parts are imported from abroad. That means the U.S. automobile supply chain, and by extension, the U.S. economy, are both uniquely vulnerable to the latest round of tariffs.
By enacting the 25 percent tariffs, Trump has essentially enacted them on all components within the automobile supply chain. The car may be sold in the U.S. as an “American-made” car, but it still has many parts that originate in foreign nations, from the U.S.’s close neighbors Canada and Mexico, to the E.U. and Asia.
Markets and world leaders reacted negatively to the news of the new auto tariffs.
Trump believes the tariffs will help U.S. automakers, saying “Anybody who has plants in the United States, it’s going to be good for.” However, very few share that view.
The markets reacted with much concern, given the strength of the U.S. auto industry. Shares of major U.S. automakers including General Motors were down at midday. World leaders reacted with concern and anger. German Chancellor Olaf Scholz said “the U.S. has chosen a path at whose end lie only losers, since tariffs and isolation hurt prosperity for everyone.” Mexican President Claudia Sheinbaum stuck with her broader stance on all tariffs since Trump took office over two months ago, saying “There shouldn’t be any tariffs, that is the essence of the commercial treaty”, presumably referring to the USMCA agreement between the U.S., Canada, and Mexico, agreed-to in 2018 by then-President Trump in his first term.
How dependent is the U.S. auto industry on foreign components and manufacturers?
In general, the American auto industry is anchored by agreements between numerous countries on producing the necessary components for vehicles. The largest importer of automobiles in the U.S. is Mexico. Runners-up included Japan, South Korea, Canada, and Germany.
Trump and his advisors truly believe that the U.S. is being ripped off by automakers having to rely on foreign parts for their vehicles. The solution they have proposed in public is that U.S. automakers construct their own manufacturing facilities for currently foreign-produced parts. But constructing those facilities could take years, so it’s not a short-term fix.
In the meantime, things may get painful for U.S. automakers if the tariffs go into effect as planned. As with all Trump tariff announcements, things could change at any time, the tariffs could be postponed or altered, or a deal can be reached with specific parties.
