U.S. President Donald Trump said last week he intends to impose auto tariffs “in the neighborhood of 25%” and similar duties on semiconductors and pharmaceutical imports, the latest in a series of measures threatening to upend international trade.
Industry experts warn that prolonged tariffs would have an adverse effect on vehicle prices and supplier solvency. However, the tariffs could also motivate some manufacturers to consider investing in U.S. production capabilities.
Trump is delaying the tariffs until spring in theory to give automakers the opportunity to move their operations to U.S. and ramp up production. But according to a CNN.com report, that aggressive type of timeline is difficult, if not impossible. Even with excess capacity at U.S. plants, they can’t ramp up production that quickly in a new location. The article stated it can take “years to shift production of cars to a new line.” Trump did not say if the tariffs would apply to all, some, or any auto parts.
“If the administration moves forward with a 25% tariff on all auto imports, car shoppers should get ready for some sticker shock at dealerships,” David Greene, an industry analyst at Cars.com, told CNN.[MS1]
While the price of new vehicles would likely rise for makes and models that are partly produced in Canada and Mexico, it’s why the prices would rise that’s perhaps the bigger issue. Sam Fiorani, Vice President of Global Vehicle Forecasting for automotive database supplier AutoForecast Solutions, says that 25% tariffs would disrupt the production of vehicles lower down in the supply chain. In many cases smaller suppliers would not be able to survive with higher costs.
The OEM will then have two choices: either absorb the cost or pass it along to the supplier. The OEMs would likely absorb the cost for a short period of time, but if tariffs existing for several weeks or months, they would look to recoup those costs from their suppliers, Fiorani says.
“You have a lot of (smaller) part supplies who can’t handle higher costs of 25 percent,” Fiorani says. “They could go out of business and stop the production of the vehicle altogether if the part that they provide is critical to the final product.
Automotive suppliers are extremely interlaced and the parts they manufacture may be shipped over multiple borders before they are integrated within production, says said Amy R. Broglin-Peterson, an industry consultant and supply chain management instructor at Michigan State University.In theory, a part could have a tariff imposed on it multiple times, which is another reason why persistent tariffs would eventually raise consumer prices.
“They journey a part makes can be quite substantial to and from suppliers,” she says.
Those suppliers could exist anywhere in the supply chain, Fiorani adds. Automotive OEMs and tier one suppliers generally are building vehicles just-in-time with little inventory. Fiorani estimates that the loss of a critical part could halt production on a given model within a week, assuming that supplier is in Canada or Mexico.
“Many vehicles built in Canada or Mexico don’t have an alternate source for some of their components,” Fiorani says.
The discussion around tariffs remains fluid, and it can be hard to get a true understanding of the impact they will have unless you know where the parts are being made and where they will end up, Broglin-Peterson says. She surmises that the Trump administration aims to not only level the tariff playing field, but to entice companies to invest in U.S. manufacturing capabilities. Applying tariffs is one way to align with the goal of creating a domestic production boost.
This is an important consideration given our fragile supply chains in the automotive sector can be, Broglin-Peterson adds. The industry was reminded of these supply chain disruptions regularly over the years, most recently in 2020 to 2023 during the COVID pandemic when disruptions caused shortages and other issues globally.
“If you take the politics out of it and think more long-term, (tariffs) can force industries to establish domestic capacity,” Broglin-Peterson says. “Today’s world is different than it was in World War II. Many of the allied nations don’t have the capability to sustain themselves because of a lack of heavy industry.”
The European Union collects a 10% duty on vehicle imports, four times the U.S. passenger car tariff rate of 2.5%, according to Reuters. The U.S. on the other hand collects a 25% tariff on pickup trucks from countries other than Mexico and Canada. That’s one reason why pickup trucks are highly profitable for U.S.-based OEMs.
Late last week, Trump indicated that additional tariffs would start April 2. More might come after that as Trump plans to meet with cabinet members to discuss import strategies, including new tariffs.[MS2]
The Honda CR-V and Toyota RAV4 are two models that are built in a combination of Canadian and American plants, Fiorani says. But long-term tariffs could make it difficult for those vehicles to be imported into either country.
“The hope for most of these (auto companies and suppliers) is that the tariffs are short-lived, and that the (threat of tariffs) will lead to the type of renegotiation that the Trump administration wants,” Fiorani says.
Even if the tariffs are short-lived, some small suppliers may not survive, placing more stress on the supply chain. Additionally, the Trump administration has threatened tariffs on auto industry imports from Europe and other parts of the world as well. That could affect the cost and supply of both luxury vehicles from Europe and compact vehicles from South Korea and Japan.
“Tariffs of this size will affect pricing,” Fiorani says. “This is all bad for the consumer.”
While the administration’s goal may be to nearshore more of the auto industry’s manufacturing, the time it takes to develop new domestic sources could be a year or more, Broglin-Peterson says. Even a small part like a gasket endures multiple rounds of production design and quality testing before it can be ready to be made in a new plant in the U.S.
“It’s not an overnight thing to move the production of one component to (a new) supplier at a new plant,” Broglin-Peterson says.
