Just a month after President Donald Trump had threatened to put a tariff on Canadian and Mexican goods only to pause them, the US President has made good on his promise by placing a 25% tariff on vehicles imported into the US.
The President said the move will spur growth and encourage greater domestic automotive manufacturing. The White House expects to raise US$100 billion in revenue annually from this move, set to take effect on April 3, 2025.
However, many experts say this will only raise prices as automobile manufacturing — even those based in the US — are highly dependent on imported parts.
This new set of tariffs is expected to not only affect vehicles imported from Canada and Mexico, but European and Asian automakers as well. The new tariffs will apply to both finished autos and the parts used in the vehicles. The tariffs will be placed on top of any existing taxes already levied on the vehicles.
This new ruling will not only affect American brands like Ford, Chevrolet, and Dodge, and Jeep, but also European brands like Mercedes-Benz and BMW, or Asian brands like Kia, Hyundai, Toyota, Nissan, and Honda. All of these brands have some facilities to manufacture vehicles in the US, but import a greater portion of their vehicle lineup from abroad.
Tariffs are set to be levied on completely built-up units (CBUs) and parts imported to the US, however, part of the tariff can be off-set depending on the amount of amount American-made components of the vehicle or parts. Car buyers can also deduct from their federal income taxes the interest paid on auto loans, so long as their vehicles were made in America.
Unraveling the supply chain
The directive is hoped to only apply to non-U.S. content. The details of how this will apply are still unclear as the US Government has not actively distinguished between US- and Canadian-made parts, owing to the fact that there has been no tariff on these cross-border parts in the past.
Take the piston, for example, which is a vital part of a car’s engine. This is typically made from aluminum sourced from Canada, which is them machined into a piston in a factory also in Canada. They are then shipped to Detroit in the US for further refining. They are fitted into an engine in a facility in Canada once again. Then, these engines are then shipped back to a factory in the US to be installed into a car.
It is still unclear if this piston will be tariffed for each trip across the border, which could potentially snowball a 25% tariff on a car part into a much larger percentage. This is just one example as many other parts also cross the border multiple times from the US into Mexico, Europe, or Asia.
Applying this tariff may be the most complicated part. U.S. and foreign automakers have built plants around the world in order to build vehicles at the most competitive prices. The location of these facilities are often dictated by their proximity and price of raw materials, available workers, and favorable legislation.
The new tariffs have thrown all of this careful planning into disarray and it could take years for automakers to plan, build, and open new factories to build more cars and parts in the US.
Bringing jobs back to the US
Nonetheless, the US administration is reasoning that U.S. automakers have excess capacity and will be able to ramp up production to avoid the tariffs by manufacturing more domestically.
Almost half of all vehicles sold in the US are imported. Mexico, Japan and South Korea were the top sources of foreign vehicles.
A little over one million Americans work in the auto manufacturing sector, and an additional 2.1-million people work at auto and parts dealerships. The White House believes discouraging imports with tariffs and moving vehicle manufacturing back into the US could provide even more jobs.
These auto tariffs are part of a broader reshaping of global trade relations by the President, who plans to narrow down the trade deficit of the US to other countries.
President Trump has already placed a 20% import tax on all imports from China, which also supplies a number of electronics to US automakers. There’s also an existing 25% tariff on all steel and aluminum imports. He also plans tariffs on computer chips, pharmaceutical drugs, lumber and copper. All these raw materials and components are essential to vehicle manufacturing and could still raise vehicle prices even if auto manufacturing is moved back into the US.
As such, many experts doubt that bringing auto manufacturing back to the US will produce the expected economic windfall the White House is anticipating.