Companies are now faced with a challenging decision: absorb the cost of importing auto vehicles, pass the additional expense onto consumers, or invest in establishing U.S. factories to assemble vehicles domestically.
On Wednesday evening, the Trump administration announced a 25% tariff on all cars not manufactured in the U.S. and specific automotive parts. Notably, some parts were excluded from the levies.
The tariffs are set to take effect on April 3, just one day after the administration is scheduled to unveil a broader reciprocal tariff plan. According to a White House press release, the new duties will apply to passenger vehicles and select auto parts, including engines, transmissions, powertrain components, and electrical systems. The statement also noted that the administration may expand the list of targeted parts if necessary.
However, parts that comply with the U.S.-Mexico-Canada trade agreement (USMCA) will initially be exempt from tariffs. The administration will later establish a procedure to impose tariffs on the non-U.S. content of those parts.
For the auto industry, these tariffs are expected to create significant challenges. Companies must weigh whether to bear the cost of imports, increase vehicle prices for consumers, or invest heavily in building U.S.-based factories and supply chains.
Factory relocations are no small feat, emphasized Sam Fiorani, vice president of global vehicle forecasting at AutoForecast Solutions. In a recent interview with MarketWatch, Fiorani pointed out that most vehicles imported from Mexico are lower-cost, entry-level models, while high-margin SUVs and trucks are typically produced in the U.S. due to an existing 25% tariff on imported SUVs and trucks that has been in place for six decades.
“Relocating vehicle production requires significant investment and time. It’s not a quick process,” Fiorani explained.
Frank DuBois, a professor at American University’s Kogod School of Business, echoed these concerns. He noted that carmakers cannot swiftly build new factories in the U.S. or establish reliable supply chains, especially given the uncertainty about whether tariffs will remain in effect long-term.
Despite these concerns, Trump remained optimistic.
“You’re going to see a lot of construction jobs and many more automobile jobs. This is exciting,” Trump said during a press conference. When asked about automakers’ reactions, he added, “If they have factories here, they’re thrilled. If not, they’ll need to get started building them or pay the tax.”
Some support for the tariffs has emerged. Scott Paul, president of the Alliance for American Manufacturing, voiced approval, stating on social media that while tariffs aren’t the only way to boost U.S. auto manufacturing, they are necessary.
However, the market reaction was largely negative. On Wednesday, shares of major automakers fell. General Motors Co. (GM) declined by 3%, Stellantis (STLA) by nearly 4%, and Ford Motor Co. (F) saw slight gains of 0.1% after paring losses. European automakers were also impacted, with BMW (BMW), Mercedes-Benz Group (MBG), and Volkswagen (VOW) losing around 2-4%.
The broader stock market also responded negatively. All three major U.S. indexes ended lower, with the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite snapping a three-session winning streak. Futures initially dipped following the announcement but showed signs of recovery overnight.
