Tariff troubles, part 3 – Going after autos

Executive summary

• President Trump unveiled new 25% tariffs on autos starting on April 3rd. These were ahead of the so-called Liberation Day reciprocal tariffs scheduled to be released on April 2nd. 
• Despite headlines that there would be no exemptions, our read is that USMCA-compliant auto parts would still be tariff-free. 
• It complicates the North American operations for all automakers, which have highly integrated supply chains throughout the continent. 
• Still, roughly half of the autos sold in the U.S. last year were imported. Reducing the overall supply would increase prices, which means more inflation.  
• This would have an immediate inflationary impact on American consumers, which would likely outweigh any offsetting longer term positives, such as increased U.S. auto production.  

What happened

President Trump announced new 25% tariffs on imported passenger vehicles and auto parts using authority under Section 232 of the Trade Expansion Act of 1962, which relates to national security concerns. 

These tariffs will be stacked on top of existing levies, which is currently 2.5% for most countries, and will begin on April 3rd. Moreover, that’s also stacked on the existing 25% tariffs on light trucks, which is known as the “chicken tax.”

The line in the sand appears to be final assembly of the vehicle. According to the White House factsheet, imports of automobiles and certain automobile parts that comply with the United States-Mexico-Canada Agreement (USMCA) would not face these new tariffs. That contradicts other pronouncements that there would be no exemptions or opportunities for countries or companies to negotiate. 

That said, it appears that these tariffs will hit non-U.S. content for manufacturers regardless of final assembly in the United States. In other words, it would apply to imported parts used to make Honda, Toyota, and BMW models with final assembly in places like Ohio, Kentucky, and South Carolina. 

That equates to tariffs adding roughly $3,000 to the cost of vehicles with final assembly in the U.S., and at least $6,000 for vehicles assembled in Canada or Mexico, according to Cox Automotive. 

Our take

We view these tariffs as inflationary in the near term, shifting the cost of vehicles upward and negatively impacting supply.  

For those wondering how this would be inflationary without the printing of money, this is essentially a tax. As Milton Freidman said, “inflation is always and everywhere a monetary phenomenon. It’s always and everywhere a result of too much money, of a rapid increase in the quantity of money than in output.” He also said that governments are responsible for it (inflation). In this case, the tariffs are a direct tax. Thus, like all taxes, tariffs, and duties – along with spending – the government is creating inflation. In other words, printing money isn’t the only way that the government can create inflation. 

Among our concerns are a raft of unintended consequences, particularly foreign buyers shunning all American made goods and services, not simply autos. We’ve already seen some evidence of this – flight bookings between Canada and the U.S. are down by over 70% in every month through to the end of September, according to air travel analytics firm OAG. 

There will most certainly be retaliatory tariffs; Europe and Canada have already announced tariff increases. China added 15% tariffs on U.S.-made chicken, wheat, corn, and cotton, and 10% on soybeans, pork, and beef. China also announced a halt on liquefied natural gas imports (LNG) from U.S. In 2024, China imported $2.4 billion worth of American LNG. And others will likely follow. 

We are especially concerned about the impact for American consumers, who are extremely auto-dependent. That’s especially true in the aftermath of the pandemic as transit ridership remains roughly 10% below pre-COVID levels, more so depending on the city. While new car affordability has improved in recent months compared to peak levels in late 2022 and early 2023, it remains a challenge for American consumers. 

The average new car price has climbed more than 20% since COVID, or $11,000 per vehicle. Likewise, used car prices are off their peak, but remain more than 30% above pre-COVID levels. 

Bottom line 

This is yet another example of the likelihood of disruptions and the potential for wider policy outcomes that we discussed in our annual outlook. We are hopeful that cooler heads will prevail, ratcheting down the rhetoric on all sides, perhaps backing down the tariffs. In the meantime, uncertainty for the economy and volatility in markets due to the threat of tariffs remains front and center. Ultimately, we believe that the U.S. economy should be able to power through the uncertainty, but it will take several months to reach the other side. To be sure, we expect a bumpy path forward.