President Trump’s 25% tariff on imported vehicles, which came into effect last week, has already sent tremors through the automotive industry, urging businesses to halt ship cars to the US, shut down factories in Canada and Mexico, and fire workers from Michigan and other states.
The UK-based Jaguar Land Rover said it will temporarily suspend luxury car exports to the US. Stellantis Idled Factory in Canada and Mexico fired 900 US workers who built Chrysler and Jeep vehicles and supplied engines and other parts to those factories.
Audi, Volkswagen’s luxury division, has also suspended exports of cars from Europe to the US, telling dealers to sell whatever they still have in their lot.
If other car manufacturers move in the same way, the economic impact will be severe, leading to rising car prices and widespread layoffs. Auto tariffs are one of the first of several industry-specific collections Trump has in his vision, and can provide early clues as to how companies will respond to his trade policies, such as whether to raise US prices or increase manufacturing prices. The president also said he would like to tax the imports of medicines and computer chips.
Applying new tariffs on imported vehicles could increase costs to consumers by thousands of dollars and significantly reduce the demand for those vehicles. For some Jaguar Land Rover or Audi models, customs duties can be over $20,000 per car.
While many of the initial effects of tariffs were destructive, in at least one case, Trump’s obligations had the intentional effect of increasing production in the United States. Last week, General Motors said it would increase production of light trucks at its factory near Fort Wayne, Indiana.
The long-term impact of the 25% tariff is unknown. Many automakers are still trying to find ways to avoid rising prices because consumers can’t afford a new car. Investors are pessimistic. Stocks of Ford Motor, GM and Tesla have declined in trading over the past few days.
“Everyone in the automotive supply chain is focused on what they can do to minimize the impact of tariffs on their balance sheets and prices,” said Kevin Roberts, director of Economic and Market Information at Cargurus, an online shopping site.
However, automakers have never had to sign such high tariff levys with such little notice. Analysts and dealers also had little insight into what the president would do next.
“A traditional playbook isn’t enough,” said Renee Larocca, who heads the automotive industry team at consulting firm KPMG.
LaRocka predicted that automakers will be increasingly focused on producing larger, heavier sports utility vehicles and pickup trucks. These vehicles are assembled in US factories, but are usually the most profitable and have room to absorb tariff costs rather than handing them over to businesses to customers.
Many modern assembly lines can produce several models, giving companies the flexibility to move towards the most profitable vehicles and abandon vehicles that don’t make much money. Mercedes-Benz says it will use flexible assembly lines at its Alabama factory.
This strategy has its drawbacks. It may be difficult for car buyers to find a new car with a reasonable price. Already, the average price for a new car is almost $50,000.
Analysts say this is clear. Tariffs do not encourage businesses to open new factories or reopen closed plants anytime soon. Companies will not take that expensive step until they are convinced that tariffs are permanent and that hundreds of millions of dollars, or billions of dollars, will be rewarded.
“I’ve never seen a big move,” Larocca said. “Wait and watch.”
Some automakers and suppliers expanded their US operations before Trump took office. Often they were responding to the coronavirus pandemic when it became dangerous to resort to far-flung factories for critical parts. Others have made significant investments in factories that manufacture electric vehicles or EV batteries to take advantage of the incentives offered by the Biden administration.
German parts maker ZF spent $500 million last year expanding its South Carolina plant and produced transmissions for BMW and other automakers. And in recent years, GM has opened two US battery plants using its South Korean partner LG Energy Solution, creating the most important elements of electric vehicles.
In the short term, some foreign automakers simply stop sending their vehicles to the US as they can no longer make profits or make more money elsewhere. That may be the case with the Jaguar Land Rover. Known for its luxury sports utility vehicles made in the UK, the company sells about a fifth of cars in the US.
If other companies stop selling certain models to Americans, consumers will have fewer vehicles to choose from, and the rest of the carmakers have more room to raise prices.
But so far, tariffs have not led to widespread rise in prices for new cars. Last week, Hyundai Motor said it would not raise retail prices for its manufacturers Hyundai and Genesis vehicles until June 2nd.
Of course, car dealers can raise prices even if the car manufacturer pledges not to do so. That’s a lot happened during the pandemic. A shortage of computer chips and other components was limiting the supply of new vehicles.
Dealers and automakers have reported recent active sales as people are rushing to buy vehicles before tariffs come into effect. According to Cargurus, the average time the vehicle spent on lots fell from 77 days at the end of January to less than 50 days at the beginning of April.
Sean Hogan, vice president of Sierra Auto Group, which owns a dozen dealers in Southern California, has been particularly high for Japanese brands such as Honda, Subaru and Nissan, assuming that buyers are imported. All three Japanese companies have factories in the US, but import some cars.
Another tariff shock will occur on May 3rd, when the Trump administration applies tariffs on auto parts. This means that even vehicles made in the US are affected because virtually every vehicle contains components from overseas. Repairs will also be more expensive.
“The educated public is definitely making some moves to get ahead of tariffs, and I think this is smart,” Hogan said.
But the long-term impact of Trump’s trade policy is still unpredictable, he said. “This administration is moving very quickly and we don’t know what will happen next,” Hogan added. “Buckle up.”
Reported by Neal E. Boudette and Melissa Eddy.
