If Your New Car Is Way More Expensive, Thank Trump's Tariffs

Update February 3: The morning and afternoon before the tariffs were set to go into motion on Tuesday, Mexico, Canada, and the U.S. announced an agreement that would forestall the tariffs' implementation by one month (30 days). The anticipated effects of the tariffs if or when they activate then continue below:

President Trump’s imposition of 25-percent tariffs on products from Canada and Mexico (and 10 percent on Canadian energy and Chinese products) over the weekend will add an average of about $3,000 to the price of your next car, truck or SUV, analysts have warned. And among the companies hit hardest by the tariffs will be Detroit’s automakers. Barclays, a bank, says the 25 percent tariff will wipe out those companies' profits unless they increase prices or change production.

Last year about 3.6 million vehicles were imported from Canada and Mexico, the latter accounting for 2.5 million of them. About 40 percent of Stellantis’ total U.S. sales are of vehicles made in either Mexico or Canada. For GM, the total is about one-third, and for Ford about 25 percent. And it’s not just complete vehicles that will be hit by the tariffs: Of the approximately $200 billion worth of automotive goods imported into America from Canada and Mexico last year, about half was components for vehicles assembled in America.

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Almost all vehicles made in America have parts in them imported from Canada and Mexico. That’s why, for example, using its five key criteria—assembly location, parts content, engine origin, transmission origin and U.S. manufacturing workforce—iconic American vehicles such as Ford’s F-150 rank a lowly 58th on cars.com’s annual American-Made Index. Chevy’s Corvette ranks 35th on the index, and Jeep’s Wrangler 30th.

Detroit’s automakers simply can’t afford to soak up the huge cost of these new tariffs on their imported vehicles or imported components; under the current U.S.M.C.A. trade agreement covering North America, most of these goods and vehicles aren't currently taxed at all as they jump back and forth across borders. Even Elon Musk’s Tesla will be hit: 25 percent of the parts used to build its electric vehicles are currently imported from Mexico. Moving vehicle production or component supply from Mexico and Canada back into the U.S. is not something automakers can quickly do. Even if an automaker has an idle plant at the ready, it would need to tool it up—which costs tens to hundreds of millions of dollars and takes time—then reroute supply chains, run pilot builds to validate the assembly line's quality, and so on. And who's to say the tariffs are long-lasting or temporary? (To wit: the eleventh-hour deal secured by Mexico to delay its tariffs by one month.) What automaker will commit to such drastic, expensive action in a newly uncertain trade environment—or any new investments at all? The bottom line: American consumers will pay more for their vehicles, and they will have less choice.

Of course, Trump’s tariff hikes won’t just impact Detroit. Japanese, Korean, and European automakers selling and assembling vehicles in the U.S. will also be hit. About 40 percent of the vehicles Volkswagen sells in the US, for example, are made in Mexico. Beyond that, European automakers face the specter of new tariffs on vehicles and parts made in the European Union. “It will definitely happen with the European Union,” President Trump said over the weekend. “We have over $300 billion trade deficit. They don’t take our cars; they don’t take our farm products. They take almost nothing, and we take everything.”

The impact of steep tariffs on EU vehicles and components would be substantial. For BMW and Mercedes-Benz, the U.S. accounts for about 10 percent of their worldwide exports, and their U.S.-market vehicles are generally more highly equipped—and thus more profitable—than in other markets. Volkswagen Group, which of course includes Audi, Bentley, and Lamborghini, would be even harder hit as the U.S. accounts for about 15 percent of its total exports from Europe.

Not surprisingly, news of the Canada-Mexico tariffs, combined with fears the E.U. is next on President Trump’s hit-list, sent auto stocks tumbling as markets opened in Asia and Europe. Honda shares fell seven percent, Nissan 5.5 percent and Toyota five percent. In Europe, Stellantis shares are down six percent, Volkswagen by 5.7 percent, Mercedes-Benz 4.4 percent, and BMW four percent. Billions has been wiped off the value of the world’s auto industry.

One of the more bizarro notions of Trumponomics is that tariffs are a tax on foreigners. They are not. Tariffs simply mean goods imported into American become more expensive, as it's the importer that pays the tariff. Typically, those companies pass along the cost to consumers, as few can absorb such overhead without doing so. And American consumers will end up paying the price.