U.S. Tariffs on Automobiles Announced

U.S. Tariffs on Automobiles Announced  

• President Trump announced that on April 3rd, the U.S. will place 25% tariffs on all imported passenger cars and light trucks. However, imported vehicles from Canada and Mexico that are compliant with the USMCA will face the 25% tariff only on the value of content produced outside of the U.S.
• In addition to the tariffs on finished vehicles, certain automobile parts, including engines & engine parts, transmissions & powertrain parts, and electrical components, will also face 25% tariffs by no later than May 3rd. USMCA-compliant automobile parts will be exempted from this deadline, but are expected to be included at a later date, yet to be determined.
• The situation remains fluid. One Canadian media outlet reported that Commerce Secretary Lutnick indicated to Ontario’s premier, Doug Ford, that the deep integration of the auto sector was under consideration for a lesser tariff rate for Canada. 
• Note that these tariffs are in addition to the 25% tariffs on steel and aluminum that were announced earlier in March and are already impacting the automobile industry.
• The nations likely to be the most impacted by the new tariffs include Mexico, Canada, South Korea, Japan, and Germany. These nations have not yet announced retaliatory measures, with some citing patience until the broader April 2nd reciprocal tariffs are known. 

What does this mean for the automobile industry?

• The impact of tariffs is primarily a function of magnitude and duration. President Trump stated during his press conference that these tariffs would be permanent. The executive order did not indicate an easy “off ramp” for countries by stating that tariffs “shall continue in effect, unless such actions are expressly reduced, modified, or terminated.”
• In 2024, a little over 20% of the vehicles sold in the U.S. - equal to 4 million units - were imported from outside North America. These would be subject to the full 25% tariffs on April 3rd. An additional 4 million units were imported from Canada and Mexico, which would face the 25% tariff on the value of their non-U.S. content.
• If car manufacturers fully pass through the cost to consumers, we estimate that these tariffs could raise the average transaction price for vehicles in the U.S. by up to $5,000. If the exemption for USMCA-compliant parts is removed, the price increase would likely be closer to the range of $7,000-10,000. Steel and aluminum tariffs would amount to another $1,000 in additional costs. We suspect producers will absorb some of these costs to remain competitive on those makes and models. 
• If these policies are left in place through year-end, we expect U.S. light vehicle sales to fall by 2.5% in 2025 relative to last year. Note that the hit to annual sales is partially mitigated by some front-loading in vehicle sales in the first quarter of the year, as consumers attempted to avoid getting snared in tariff policies.
• Over the coming quarters, some existing unused vehicle production capacity in the U.S. is likely to be put into operation, but according to Wards Intelligence, this is only estimated to be roughly 1.6 million units. If the goal is to replace all foreign imports, this figure falls about 6 million units short. Further capacity could be added through new facilities, but it would likely take years for these to become operational, especially if upstream supply chains also need to be developed.
• As noted above, the situation remains fluid and much attention remains on the so called, April 2nd “Liberation Day”, for a more complete lens.

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