On Wednesday, President Donald Trump shocked the automotive industry by announcing a 25% tariff on all vehicles and foreign-made auto parts imported into the United States.
If these tariffs remain in place for a long time, they could raise the price of a typical U.S. car by thousands of dollars and disrupt car production across North America. This is due to the complex network of manufacturing operations built by automakers in Canada, Mexico, and the U.S. over the past 30 years.
Nearly half of all cars sold in the U.S. last year were imported, according to research firm GlobalData.
In reaction to the news, shares of General Motors (NYSE: GM) dropped 8% in after-market trading, while shares of Ford and Chrysler-parent Stellantis (NYSE: STLA) fell around 4.5%. In Asia, shares of Toyota (NYSE: TM), Honda (NYSE :HMC), and Hyundai (OTC :HYMTF) saw declines between 3% and 4%. Tesla (NASDAQ: TSLA), which manufactures all cars sold in the U.S. domestically but uses some imported parts, saw its stock fall by 1.3%.
Trump mentioned that the new tariffs could have a neutral or even positive effect on Tesla, claiming that CEO Elon Musk, a close ally, did not provide any advice on the tariffs. Musk later acknowledged the impact of the tariffs on Tesla, saying it would increase the cost of parts for Tesla cars imported from other countries.
The tariffs have created uncertainty in the market and among businesses since Trump returned to the White House in January. On Wednesday, he reiterated that the goal of the tariffs was to encourage automakers to invest more in U.S. production rather than in Canada or Mexico.
Autos Drive America, a group representing foreign automakers such as Honda, Hyundai, Toyota, and Volkswagen (ETR: VOWG_p), argued that these tariffs would lead to higher production and sales costs in the U.S. and ultimately raise prices for consumers, reduce vehicle options, and decrease U.S. manufacturing jobs.
North American automakers have benefitted from free trade status since 1994. The 2020 U.S.-Mexico-Canada Agreement (USMCA) introduced new rules aimed at increasing regional content in vehicles. After imposing 25% tariffs on Mexico and Canada in March, Trump gave a temporary break for vehicles that complied with USMCA rules, which helped American companies. However, the new tariffs will not extend this reprieve.
Sam Fiorani, an analyst at AutoForecast Solutions, warned that companies that have heavily invested in Canadian and Mexican plants could see their profits drop dramatically in the coming quarters. “This will throw everything into chaos,” Fiorani said, indicating that sales and production forecasts would need to be adjusted.
The White House announced that the tariffs on auto parts would take effect by May 3. These parts include engines, transmissions, powertrain components, and electrical parts. Importers of vehicles under the USMCA will have the opportunity to certify their U.S. content to avoid taxes on foreign-made parts.
Cox Automotive, an automotive services provider, predicted that the tariffs would increase the price of a U.S.-made vehicle by $3,000 and raise costs by $6,000 for cars made in Canada or Mexico, with no exceptions. Cox also forecast that the tariffs would disrupt nearly all North American vehicle production by mid-April, potentially reducing output by 20,000 vehicles a day, or about 30% of total production.
The United Auto Workers (UAW), which represents workers at Detroit’s Big Three automakers, supported Trump’s decision. UAW President Shawn Fain stated that the tariffs could bring back thousands of well-paying auto jobs to U.S. communities by boosting production in underused plants.
The news of the tariffs marks another chapter in Trump’s trade policies, which have had a profound impact on the global automotive industry.
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