Why is this shaking up the global auto industry?
Automakers have worked for decades to establish a rules-based system, building complex but efficient supply chains that span the globe.
Trump’s move now throws a wrench in the works.
“You are not going to get equilibrium for years, if not decades, because it took us decades to get there,” Steven Okun, CEO of APAC Advisors, senior adviser at McLarty Associates, told CNA’s Asia Tonight.
“Will the countries come together, and instead of trying to appease Donald Trump to get these tax cut exemptions, will they come together and actually coordinate in a way to retaliate with tariffs that would hurt the United States on goods that the United States must import or export and cares about?” he said.
Even US automakers will be left vulnerable. General Motors and Ford import 46 per cent and 21 per cent of their car sales, respectively, while sourcing many of their parts from abroad.
And although all of Tesla’s production and assembly are done domestically, Elon Musk said his company would not be spared the pain.
“To be clear, this will affect the price of parts in Tesla cars that come from other countries. The cost impact is not trivial,” he wrote on X.
There are very few supply chains in cars that are completely within the US, Dr Tibor Besedes, a professor of economics at Georgia Institute of Technology, told Reuters.
“Many supply chains in the car industry are within the NAFTA, USMCA countries like Canada, Mexico, United States for parts and unfinished cars travel across borders multiple times before they finally produced and assembled either in any of those three countries,” he added.
How will it impact US carmakers?
To reduce the impact of the taxes, US automakers will have to rethink how they can increase the US content of their vehicles.
But rerouting the sources of thousands of parts will be a struggle and could take years to accomplish. And while some manufacturers can afford to pivot operations to the US, others who are too tied to factories abroad might find the move difficult.
Another key question is whether the tariffs will remain after Trump leaves office or be done away with by another administration.
Carmakers will have to evaluate whether it makes sense to build a factory in the US, which might take up to two years, said Dr Tibor.
“And then what happens if tariffs go away?” he said.
“Factories might become more profitable, more cost-efficient in the US because the tariffs are in place. But if they were to be taken away, then we’re sort of back to the old cost calculation and production was cheaper elsewhere.”
In the end, some automakers might have to stop making some vehicles because they will not be profitable with the tariffs in place.
Cox Automotive said it expects disruption to “virtually all” North American vehicle output by mid-April, cutting output by roughly 20,000 cars a day, or about 30 per cent of production.
The American Automotive Policy Council, which represents domestic automakers, said in a statement that it is critical for tariffs to be implemented in a way that avoids raising prices for consumers. They should also be applied in a manner that “preserves the competitiveness of the integrated North American automotive sector”.
How will consumers be affected?
Simply put, costs will likely rise for consumers.
Experts have estimated that the tariffs could raise the prices for cars by US$5,000 in the US. If automakers choose to stop making certain cars, consumers will also be left with fewer options.
Many families could be priced out of the market and have to hang on to ageing vehicles.
“Starting almost immediately, consumers will see their already expensive new vehicles cost hundreds to thousands more and those prices will escalate even more when the supplies of many key vehicles dwindle,” said Sam Fiorani, an analyst at AutoForecast Solutions.
As Trump announced the new tariffs, he indicated that he would like to provide a new incentive to help car buyers by allowing them to deduct from their federal income taxes the interest paid on auto loans, so long as their vehicles were made in America.
So why is Trump doing this?
Trump’s new tariffs are based on a 2019 national security investigation into auto imports during his first presidential term.
The Commerce Department found that the growing market share of imported cars was negatively impacting US national security by eroding the US industrial base and the ability of domestic automakers to develop advanced technologies for military use.
At that time, Trump decided not to impose tariffs and opted to negotiate with trading partners to remedy these concerns.
However, he concluded on Wednesday that these talks had failed, the security threat from imports had worsened, and revisions to USMCA had not improved the US position in automotive trade.
In addition, the revenue from these tariffs will be key to offsetting the US government’s loss from the tax cuts Trump promised during his election campaign, said Mr Okun.
“Remember, President Trump campaigned on no tax on tips, no tax on overtime, no tax on expats. And if he does that, if he throws on the additional tax cuts, he has to find a way to pay for those, and if one of the ways he’s going to pay for those is through tariffs, then that makes a tax Bill more likely to pass,” he added.
The White House expects to raise US$100 billion in revenue from the auto tariffs annually.
Additional reporting by Rachel Lim.
