Donald Trump announced a 25% tariff on imported cars and light trucks, effective April 3. This decision has already caused a significant dip in the stock prices of major automakers, from Frankfurt to Seoul, and has raised concerns about the future of global trade.
As European markets opened, Volkswagen, Europe's leading car manufacturer, saw its shares drop by 3.4% on Wednesday. Luxury brands BMW and Mercedes-Benz experienced even steeper declines, with shares falling 4%. The impact was similarly felt in Asia, where Toyota's shares fell by 2.7%, Honda by 3%, and Nissan by 2.2%. South Korean giants Hyundai Motor and Kia each saw a 4% drop. The Dow Jones U.S. auto manufacturers index dropped 5%. Volkswagen is particularly vulnerable, with 43% of its U.S. sales coming from Mexico, according to S&P Global Mobility.
Hildegard Mueller, President of Germany's car industry association, described the tariffs as a "fatal signal" for global trade. She emphasized the risk of a trade conflict that could negatively impact the global economy, jobs, and consumer prices, urging for U.S.-EU talks to find a resolution.
Trump only see the upside…
Trump thinks his move is a stroke of genius. He announced at a press conference that we're about to see a boom in the construction of car factories. He's betting that his tariff policy will rev up American car production, which should drive prices lower for shoppers. He even hinted that the administration might sweeten the deal by letting buyers write off their car loan interest on their taxes, but only if the car's made stateside.
He's super bullish about the future of the American auto industry, saying, 'I think our car business is going to hit levels of success that we've never seen before.'
…but the pain will also be felt in America
The Alliance for Automotive Innovation, a trade group representing nearly all major automakers, warned that the new tariffs on imports from Canada and Mexico would lead to drastic price hikes.
"All automakers will be impacted by these tariffs on Canada and Mexico," said John Bozzella, head of the Alliance. Members include General Motors, Ford, Toyota, Volkswagen, Hyundai, and Stellantis. The tariffs will hit all imported vehicles and auto parts, with Mexico and Canada feeling the brunt. These countries are the U.S.'s largest automotive trading partners, and in 2024, most of their vehicle exports were headed to the U.S. The Associated Press notes that about 20% of the cars and trucks on U.S. streets were assembled in Canada or Mexico. In 2024, the U.S. imported $81 billion in parts from Mexico and $19 billion from Canada.
Source: Alliance for Automotive Innovation
Automakers now face a tight deadline to rethink their supply chains. The economic fallout could be significant. Vehicle prices are likely to climb. Wedbush analysts warned that these tariffs could act as a "hurricane-like headwind" for automakers, potentially increasing car prices by $5,000 to $10,000. This would not be good news for the economy, inflation and monetary policy.
The automotive industry, which employs 10 million Americans, might see layoffs from assembly lines to dealerships. For the U.S. steel industry, the picture is more mixed. They could boost demand for domestic steel and drive up prices, benefiting local producers. However, if auto sales decline, it could lead to reduced demand.
Source: Alliance for Automotive Innovation
A long road ahead
Reshaping a production network is a long game, taking years, not mere weeks. According to analyst Philippe Houchois from Jefferies, Tesla would be the least affected company since it assembles 100% of the vehicles sold in the United States domestically. Ford is at 78%, and General Motors at 67%. It gets tougher for Chrysler owner Stellantis, at 56%. "The impact would probably trigger both a shift to locally produced vehicles and higher prices given the weight of around 50% of imports in total U.S. demand, with price adjustments also supported by reduced availability," Houchois believes.
Volkswagen and BMW are already strategizing on how to handle the tariffs, with Volkswagen exploring backup plans and BMW preparing to absorb the costs. Meanwhile, BYD, a leading Chinese automaker, saw its shares rise by 2.3%, buoyed by its global expansion plans that don't include the U.S., but mainly Europe. Investors are now eagerly awaiting further details on the broader range of tariffs Trump plans to announce next week.
