A round of punishing tariffs affected the automotive industry for less than 24 hours this week.
Less than a day after enacting the levies, the White House announced a 30-day pause affecting just the auto industry, though details on the pause are unclear, and other tariffs remain likely soon. The White House plans several additional rounds of tariffs, with some likely to take effect as soon as next Wednesday.
The reprieve, CNBC reports, came after Trump “spoke with the heads of General Motors, Ford Motors, and Stellantis.”
25% Tariffs on Canadian, Mexican Goods
A tariff is a tax on goods imported into a country. The company doing the importing must pay the tariff. Historically, most pass that cost on to consumers by raising prices accordingly — almost no industry can profit after a 25% overnight cost increase.
Tuesday night, the White House enacted a 25% tariff on all goods entering the U.S. from Canada or Mexico, along with a 20% tariff on Chinese goods. The move affects many industries, but was expected to hit car prices harder than most other goods.
Automakers import many cars from Canada and Mexico to the U.S. However, even those cars assembled in the U.S. use parts from Canada, Mexico, and China.
The supply chain for car parts spreads across North America, with parts often crossing borders more than once before ending up in a finished car. Under the tariff plan, parts would see their prices increased each time they crossed over.
Some analysts predicted that the White House plan could increase the cost of the average midsize SUV by as much as $9,000.
It could also inflate the cost of repairs, as many car parts come from Canada or Mexico. Car insurance analysts expect to see policy costs rise as repair costs rise.
White House Backs Down (Partially)
After less than 24 hours, Press Secretary Karoline Leavitt announced, “At the request of the companies associated with USMCA, the president is giving them an exemption for one month so they are not at an economic disadvantage.”
The USMCA is an existing trade agreement between the United States, Canada, and Mexico that President Trump negotiated during his first term in office. It encouraged automakers to contract with suppliers in Canada and Mexico, believing that the three countries had a stable trade relationship.
It requires vehicles to meet certain conditions. Its rules, Reuters explains, “require 40% of a passenger car’s content to be manufactured in the United States or Canada, based on a list of ‘core parts‘” including engines, transmissions, body panels, and chassis components. The threshold for pickup trucks is 45%.”
The White House has not granted exemptions to other industries. So, products from groceries to electronics are still subject to the 25% levy.
The Dow Jones Industrial Average plunged more than 1,500 points on tariff news. However, the AP reports that the pause “fueled a rebound in the stock market on Wednesday,” with the index recovering nearly half its losses on the news.
CNN explains, “For as often as Trump talks about tariffs, he is often talked out of imposing them – especially if the pressure is coming from titans of industry or the market, a barometer that Trump carefully follows.”
Pause Likely Prevents Price Changes (For Now)
Car prices likely did not rise in response to the short-lived tariff.
Tariffs are applied as products enter the country. Automakers keep weeks’ worth of new cars in stock at any given time. So, the vehicles on dealership lots today were not subject to tariffs. Should the tariffs begin in a month, they will appear on window stickers gradually as automakers sell out of their existing stock and import more at post-tariff prices.
Questions Remain
Leavitt made her announcement in a press conference, but the White House has not yet released any legal guidance explaining the exemption. It’s unclear whether the move applies to parts or only fully assembled cars.
In addition, The New York Times reports, “It was unclear what the reprieve means for carmakers, such as BMW, that manufacture cars in Mexico but are not fully in compliance with the terms of the [USMCA] trade treaty.”
One Unconfirmed Report of Jobs Moving to U.S.
Trump’s stated justification for the tariffs has shifted over time. Among other things, he has said they were an attempt to get Mexico and Canada to stem the tide of immigrants crossing borders, to slow the illegal fentanyl trade, and to rebalance trade relationships.
Recently, Trump has focused on the notion that automakers should move production to the United States to avoid paying tariffs.
In a joint address to Congress on Tuesday night, Trump mentioned an unconfirmed report that Honda may shift some Civic production to Indiana in three years to avoid the tariffs. A Honda spokesperson says only, “Honda has made no such announcement and will not comment on this report.”
Reshoring Jobs Would Not Come Quickly
Moving production to the U.S. is complex, expensive, and slow.
Presidencies last four years, and Trump is already in his final term. Automotive production cycles typically last longer. That requires automakers to engage factories, suppliers, and labor unions so far out that they can’t move production during a presidency without incurring prohibitively expensive losses.
Automakers might attempt to placate Trump by promising to move future production to the U.S. But most of those promises would have to mature only after he leaves office.
Counterproductively, industry publication Automotive News reports, the tariffs could drive jobs further outside the U.S. AN explains, “Companies may source some components outside of the United States-Mexico-Canada Agreement region to places such as Honduras, Nicaragua, Singapore, Thailand, and the Middle East, in order to avoid higher prices from tariffs, said Mark Wakefield, global automotive market lead at AlixPartners.”
Trump could enact further tariffs on other countries to prevent that. However, uncertainty could cause the automotive industry to delay big decisions, not make them in America’s favor. Ford recently told suppliers it may delay the next generation of America’s best-selling vehicle, the Ford F-150, to wait for market certainty before signing any contracts.
Other Tariffs Could Come Quickly
In the meantime, other tariffs affecting the automotive industry could start while the 25% levies on Canada and Mexico are paused.
Trump has also promised new levies on steel and aluminum, the principal materials for car parts, beginning March 12.
Tariffs specific to the auto industry could begin on April 2, while “reciprocal tariffs” against countries that tariff American cars could begin at any time.
