With trade frictions already slowing the economy, one thing the world doesn’t need is for one of its biggest, most globally integrated industries to become a new front in the trade war.
Yet that’s just what President Donald Trump is considering as he weighs a 25% tariff on auto imports, purportedly for national security reasons. Facing a deadline this week to decide on the proposed tariffs, Trump hadn’t announced a decision by Thursday afternoon.
Several reports said the president was likely to delay a decision by six months, as he did when facing a similar deadline last May. Leaving a cloud hanging over such an important industry, however, does the economy no favors.
This isn’t like the steel and aluminum tariffs Trump imposed last year at the request of U.S. producers. Both domestic and foreign carmakers oppose the auto tariffs, as do dealers and parts suppliers.
Auto sales are already soft this year, and a price increase would give consumers another reason to stay away from showrooms. The Center for Automotive Research estimates that a 25% tariff would boost new-car prices by an average of $2,750.
The increase would be greater on imported cars, but even vehicles assembled in the U.S. would become more expensive. They all use imported parts, and Trump’s proposed tariff applies to parts as well as finished vehicles.
Making cars more expensive would eliminate 367,000 U.S. jobs and knock as much as $30 billion off gross domestic product, the Center for Automotive Research estimates. That’s before any retaliation by our trading partners, which would undoubtedly happen.
Kristen Dziczek, a vice president at the center, says the tariffs also would limit consumer choice. Of the 363 models sold in the U.S., nearly one-third are imported in quantities of fewer than 5,000 a year.
Some low-volume brands are luxury cars whose buyers might not blink at a 25% price increase. Others are likely to pull out of the U.S. market.
Trump seems to hope that tariffs will encourage companies to build plants in the U.S. and reduce the nation’s automotive trade deficit. That may not happen, though: Dziczek estimates that building an assembly line makes sense only when a vehicle sells more than 50,000 units in North America. European models like the Mini, the BMW 3-series and the Mercedes-Benz E-class all fall short of that mark.
“Even if the U.S. is the largest market, if we make imports more expensive we may not have that much choice anymore,” Dziczek says.
Moreover, some plants built in recent years are counting on exports. BMW exports more than half the sport-utility vehicles it makes in South Carolina, as does Mercedes with the cars and SUVs it builds in Alabama. If other nations retaliate against Trump’s tariffs, those foreign sales may dry up.
In an industry where a new plant requires a $1.6 billion investment, and retooling an old one costs hundreds of millions, the threat of tariffs is likely to put carmakers’ investment plans on hold.
The trade war with China, and its effect on consumers’ willingness to spend, is already causing plenty of uncertainty for the U.S. auto industry. They don’t need the additional worries about a tariff that could disrupt their global supply chains.
Trump no doubt sees auto tariffs as a red-meat issue for voters in Michigan, Ohio and other swing states, so delaying a decision until next year may fit his campaign strategy. The economy, though, would be better off if he simply made this issue go away.