The President of the United States, Donald Trump, announced on Wednesday that he will impose a 25% tariff on automobile imports, a measure that, according to the White House, would promote domestic manufacturing but could also put financial pressure on automakers that rely on global supply chains.
“That will continue to stimulate growth,” Trump told reporters. “Indeed, we are going to charge a 25% tariff.”
The tariffs, with which the White House expects to raise 100 billion dollars annually, could be complicated because American automakers source parts from different parts of the world. The tax increase starting in April means that automakers are likely to face higher costs and lower sales, although Trump claims that the tariffs will lead to more factories opening in the United States and the end of what he considers a “ridiculous” supply chain where car parts and finished vehicles are manufactured in the United States, Canada, and Mexico.
The president emphasized the seriousness of the issue and stated, “This is permanent.”
General Motors’ shares fell approximately 3% on Wednesday. Ford’s stocks recorded a slight increase. Meanwhile, Stellantis’ shares, the owner of Jeep and Chrysler, dropped by 3.6%.
Trump has long said that tariffs on car imports would be a defining policy of his presidency, betting that the costs generated by taxes would make a larger portion of production move to the United States while also helping to reduce the budget deficit. However, both American and foreign automakers have plants around the world to accommodate global sales while still maintaining competitive prices, and it could take years for companies to design, build, and open the new factories that Trump is promising.
What will happen with car prices?
“We will see much higher car prices,” commented economist Mary Lovely, senior researcher at the Peterson Institute for International Economics. “We are going to see fewer options... This type of taxes impact more on the middle and working class.”
In their opinion, more and more families will be excluded from the new car market - where prices are already around $49,000 - and will have to hold on to old vehicles.
If tariffs are fully passed on to consumers, the average price of a car could increase by about $12,500, an amount that could fuel overall inflation. Trump returned to the White House after losing the 2020 election largely because voters believed he could lower prices.
When announcing the new tariffs, Trump indicated that he would like to offer a new incentive to help car buyers by allowing them to deduct the interest paid on car loans from their federal income taxes, as long as their vehicles have been manufactured in the United States. This deduction would eat into the revenue that the tariffs could generate.
Tariffs on automobiles are part of a broader reconfiguration of global relationships by Trump, who plans to impose what he calls “reciprocal” taxes on April 2 that would equalize the tariffs and sales taxes charged by other nations.
Trump has already imposed a 20% import duty on all imports from China due to its role in the production of fentanyl. Similarly, he imposed tariffs of 25% on Mexico and Canada, with a lower tax of 10% on Canadian energy products. Some parts of the tariffs on Mexico and Canada have been suspended, including taxes on cars, when car manufacturers opposed them and Trump responded by giving them a 30-day extension that is scheduled to expire in April.
The president has also imposed a 25% tariff on all steel and aluminum imports, eliminating the exemptions from their previous 2018 levies on metals. He also plans to impose tariffs on computer chips, pharmaceutical drugs, lumber, and copper.
Your taxes pose the risk of triggering a broader global trade war with increasingly higher retaliatory measures that could sink global trade, potentially harming economic growth while raising prices for families and businesses as some of the tariff costs are passed on by importers. When the European Union responded with plans for a 50% tariff on American alcoholic beverages, Trump countered with plans to impose a 200% tax on EU alcoholic beverages.
Trump also intends to impose a 25% tariff on countries that import oil from Venezuela, even though the United States also imports oil from that nation.
Trump’s advisors argue that tariffs on imports from Canada and Mexico are aimed at stopping illegal immigration and drug trafficking. However, the government also wants to use tariff revenues to reduce the budget deficit and reaffirm the United States’ supremacy as the world’s largest economy.
The president mentioned on Monday the plans of the South Korean car manufacturer Hyundai to build a $5.8 billion steel plant in Louisiana as evidence that tariffs would bring back manufacturing jobs.
A little over a million people are employed in the manufacturing of motor vehicles and parts in the country, approximately 320,000 fewer than in 2000, according to the Bureau of Labor Statistics. Another 2.1 million people work in car dealerships and parts.
Last year, the United States imported nearly 8 million cars and light trucks worth $244 billion. Mexico, Japan, and South Korea were the main sources of foreign vehicles. Car parts imports totaled over $197 billion, led by Mexico, Canada, and China, according to the Department of Commerce.