Introduction to Tariffs on Imported Vehicles

The 25 percent tariffs for imported vehicles that came into force last week are already trembling through the auto industry. Companies are being forced to stop sending cars to the USA, close factories in Canada and Mexico, and lay off workers in Michigan and other states. Jaguar Land Rover, based in Great Britain, has said that it will temporarily stop exporting its luxury cars to the United States. Stellantis has idled factories in Canada and Mexico that manufactured Chrysler and Jeep vehicles and laid off 900 US workers who supplied these factories with engines and other parts.

Effects on the Auto Industry

Audi, the Volkswagen luxury division, has also halted exports of cars from Europe to the USA and asked dealers to sell off everything they still have on their lots. If other car manufacturers take similar steps, the economic effects could be serious, leading to higher prices and widespread layoffs. The tariffs on cars are among the first of several industry-specific taxes that President Trump has in sight and could provide early indications of how companies will react to his trade policy, including whether they raise prices or increase production in the USA.

Increased Costs for Consumers

The application of the new tariff to imported cars could increase their costs for consumers by thousands of dollars and significantly reduce the demand for these vehicles. For some Jaguar Land Rover or Audi models, the tariffs could amount to more than $20,000 per car. While the majority of the initial effects of the tariffs were disturbing, Mr. Trump’s duties had the intended effect of increasing production in the United States in at least one case. General Motors said it would increase the production of light trucks in a factory near Fort Wayne.

Long-term Effects

The longer-term effects of the 25 percent tariffs are unclear. Many car manufacturers are still trying to figure out how to avoid raising prices so much that consumers can no longer afford new cars. Investors are pessimistic, with the shares of Ford Motor, GM, and Tesla falling in recent days of trading. "Everyone in the automotive supply chain is focused on what they can do to minimize the tariff effects on their own balance sheets and prices," said Kevin Roberts, director of business and market equipment at Cargurus, an online shopping page.

Strategies to Minimize Tariff Effects

Car manufacturers have never had to deal with the introduction of such high tariffs with so little announcement, and they did not have so little insight into what the president will do next, said analysts and retailers. "The traditional game book is not enough," said Lenny Larocca, who heads the auto industry of the consulting company KPMG. Mr. Larocca predicted that car manufacturers would increasingly focus on the production of larger, heavier vehicles for sports companies and pickup trucks. These vehicles, many of which are assembled in US factories, are usually the most profitable and offer companies more room to cover the costs for tariffs instead of passing them on to customers.

Impact on Car Buyers

Many modern assembly lines can produce several models, offering companies flexibility to switch to the most profitable vehicles and give up vehicles that do not earn as much money. Mercedes-Benz has said it will use flexible assembly lines in its factory in Alabama. This strategy comes with disadvantages, as it can be more difficult for car buyers to find new cars with moderately inexpensive prices. The average price of a new car is almost $50,000. Analysts say that one thing is clear: tariffs will not cause companies to open new factories or reopen closed plants immediately.

Future Investments

Companies will not take this expensive step if they are unsure that the tariffs are permanent and that hundreds of millions – or billions – are invested in new production capacity. "I don’t see any big moves," said Larocca. "It’s wait and see." Some car manufacturers and suppliers expanded their US operations before Mr. Trump took office, often reacting to the coronavirus pandemic when it became risky to rely on distant factories for critical parts. Other large investments in factories that produce electric vehicles or EV batteries were made to take advantage of incentives offered by the bidges.

Short-term Effects

In the short term, some foreign car manufacturers can simply stop sending vehicles to the USA, either because they can no longer make a profit or because they can earn more money elsewhere. This can be the case with Jaguar Land Rover, which sells about a fifth of its cars in the USA. When other companies stop selling certain models to Americans, consumers have fewer vehicles to choose from, and the remaining car manufacturers have more scope to increase prices. So far, however, the tariffs have led to no widespread price increases for new cars.

Tariffs on Car Parts

Another tariff shock will take place on May 3 if the Trump administration imposes tariffs on car parts. This means that even cars manufactured in the USA will be affected, because practically all vehicles contain components from abroad. Repairs will also become more expensive. "The public is definitely taking a few steps to beat the tariffs, which I think is smart," said Sean Hogan, Vice President of the Sierra Auto Group, which has a dozen dealers in South California. But the long-term effects of Mr. Trump’s trade policy are still unpredictable, he said. "This administration moves pretty quickly, and you really don’t know what will happen next," added Hogan. "Buckle up."