Auto Sector Reels from Trump’s 25% Tariffs

Automakers are facing tough choices in response to new tariffs: absorb the cost of importing auto vehicles, pass the extra expenses onto consumers, or invest in building U.S. factories.

On Wednesday evening, the Trump administration announced a 25% tariff on all cars not manufactured in the U.S. and specific automotive parts. Some components were excluded from these levies.

The tariffs will take effect on April 3, one day after the administration plans to unveil a broader reciprocal tariff strategy. According to a White House statement, the tariffs will target passenger vehicles and select parts like engines, transmissions, powertrain components, and electrical systems. The administration also indicated the possibility of expanding tariffs to additional parts if necessary.

Parts that meet the U.S.-Mexico-Canada trade agreement (USMCA) requirements will remain exempt until further guidelines are established for taxing non-U.S. content.

These tariffs pose significant challenges for automakers, who must decide whether to absorb the added costs, increase prices, or shift production to the U.S.

Sam Fiorani, vice president of global vehicle forecasting at AutoForecast Solutions, highlighted the difficulty of relocating factories. He noted that most cars imported from Mexico are lower-cost models, while high-margin SUVs and trucks are predominantly produced in the U.S. due to a long-standing 25% tariff on imported SUVs and trucks.

“Moving production requires substantial investment and time. It’s not a decision that companies can make quickly,” Fiorani said.

Frank DuBois, a professor at American University’s Kogod School of Business, agreed. He emphasized that carmakers cannot swiftly establish new U.S. factories or supply chains, especially with uncertainty surrounding the longevity of the tariffs.

Despite these concerns, Trump expressed enthusiasm about the tariffs.

“You’re going to see a lot of construction jobs and automobile jobs. It’s exciting,” Trump told reporters. He added that companies with existing U.S. factories would benefit, while those without domestic operations would need to act quickly to avoid the tax.

Support for the tariffs emerged from the Alliance for American Manufacturing. The group’s president, Scott Paul, stated that while tariffs aren’t the only method to encourage U.S. auto production, they are necessary.

However, stock markets reacted negatively. Shares of major automakers dropped on Wednesday. General Motors Co. (GM) fell 3%, Stellantis (STLA) dropped nearly 4%, and Ford Motor Co. (F) managed a slight 0.1% gain after minimizing losses. European manufacturers such as BMW (BMW), Mercedes-Benz Group (MBG), and Volkswagen (VOW) also experienced losses ranging from 2% to 4%.

The broader U.S. stock market followed suit. The S&P 500, Dow Jones Industrial Average, and Nasdaq Composite all declined, breaking a three-day winning streak. Futures for these indices initially fell following the announcement but showed signs of recovery overnight.