President Donald Trump signed an executive order that goes into effect April 2 imposing a 25 percent tariff on cars built outside of the U.S.
“We’ll effectively be charging a 25 percent tariff, but if you build your car in the United States, there is no tariff,” Trump told reporters during a signing ceremony March 26. “What that means is a lot of foreign car companies are going to be in great shape because they’ve already built their plant” in the U.S.
Trump said the tariffs will go into effect on the same day the administration will unveil reciprocal tariffs on a slew of imports.
Third Time for Tariffs
This is the third time the Trump Administration has stated a tariff effecting the automotive industry will go into effect. The White House officials announced a one-month tariff exemption on March 5, a day after leaders from General Motors, Ford and Stellantis made the request in calls with President Trump.
The first time the tariffs were announced on Canada and Mexico was Feb. 3, Canadian Prime Minister Justin Trudeau announced later that day that U.S. tariffs on his country’s goods would be postponed by 30 days as negotiations on a border deal took place. Trudeau’s announcement came after Mexican President Claudia Sheinbau negotiated a similar delay that morning.
According to a White House fact sheet, the 25 percent tariff will be applied to imported passenger vehicles (sedans, SUVs, crossovers, minivans, cargo vans) and light trucks, as well as key automobile parts (engines, transmissions, powertrain parts, and electrical components), with processes to expand tariffs on additional parts if necessary.
Importers of automobiles under the United States-Mexico-Canada Agreement (USMCA) will be given the opportunity to certify their U.S. content and systems will be implemented such that the 25% tariff will only apply to the value of their non-U.S. content.
This Time for Real
In signing the order in the Oval Office on cars and light trucks, Trump stated the tariffs would be “permanent” and nothing that would prompt the removal of the import taxes.
Administration officials said tariffs were imposed to nudge automakers to build plants and produce cars domestically. The President has previously stated the tariffs are needed to stop the flow of fentanyl and immigrants into the U.S. as well as to help bring manufacturing jobs back to the states.
The introduction of tariffs on a host of goods being imported to the U.S. is part of Trump’s economic plan to protect American businesses and boost manufacturing. A tariff is a tax on imports collected by a government and paid by the company importing the good. But in protecting domestic businesses, prices for consumers can go up if a company importing goods from abroad passes higher costs on, rather than absorbing them or reducing imports.
Trump Warning
A report from the Wall Street Journal said President Trump warned management from the top automakers in the country not to use the tariffs as an excuse to raise prices on domestic cars during a phone call after the tariffs were announced.
Trump reportedly told the executives that the White House would look unfavorably on such a move, leaving some of them rattled and worried they would face punishment if they increased sticker prices. “The math would tell you that’s going to cost us multibillions of dollars,” one executive told the paper. “So who pays for that?”
USMCA Disruption
Mexico is the top foreign supplier of cars to the U.S., followed by South Korea, Japan, Canada and Germany. The auto industry is deeply integrated between the countries that make up the USMCA trade agreement—Mexico imports 49.4 percent of all auto parts from the U.S. and exports 86.9 percent of its auto parts production to the U.S. Many U.S. car companies have operations in Mexico and Canada as well, set up under the terms of the longstanding free trade agreement between the three countries. It is unclear the impact the tariffs will have on car parts being sent across borders to manufacturing plants.
Earlier this year, Ford Motor CEO Jim Farley characterized the implementation of tariffs as adding “a lot of cost, and a lot of chaos” to the industry.
“Frankly, it gives free reign to South Korean, Japanese and European companies that are bringing 1.5 million to 2 million vehicles into the U.S. that wouldn’t be subject to those Mexican and Canadian tariffs. It would be one of the biggest windfalls for those companies ever,” Farley said. “That’s what I’m talking about with cost and chaos. It’s a little here, a little there, a couple weeks or a couple of months of vehicles crossing the border, components crossing the border, that’s going to be a tariff. This is what we’re dealing with right now.”
Economic Fallout Forecast
Economists focused on the U.S. auto industry have been skeptical that Trump’s economic policy will have the desired effect he is forecasting.
“For economists like myself, the unthinkable is coming true, with tariffs being applied to our free trade partners across North America,” said Jonathan Smoke, Chief Economist for Cox Automotive earlier this month. “We have no history to study for this, but there will be implications. It is not even clear if the U.S. government has a way to efficiently track the movement of goods and impose duties, but set that aside: Production will be disrupted, supply will be restricted, and prices will go up.”
Analysis have estimated the 25 percent duty on a $25,000 vehicle from Canada or Mexico would add $6,250 to its cost, most expected to be pushed on the consumer. Wells Fargo estimates the tariffs would cost the Detroit Big 3 automaker billions of dollars a year. The firm estimates the impact of 5 percent, 10 percent and 25 percent tariffs on General Motors, Ford and Stellantis would collectively be $13 billion, $25 billion and $56 billion, respectively.
Latest Hurdle for Auto Industry
What is most troublesome to those in the industry is that many of the key metrics for the auto industry have returning to long-established norms that were disrupted by the pandemic. New-vehicle inventory had mostly recovered from supply-chain shortages, sales volumes and incentives were both increasing and new vehicle price inflation was relatively tame in 2024.
“But here we go again,” said Cox’s Charlie Chesbrough. “Just as the industry seemed to be finding stable ground, new obstacles are thrown in place. How long higher tariffs are held in place is the industry’s big question right now. Higher prices and border disruptions could result in lower volume.”
