Car-mageddon

Tariffs are about to make your new car a lot more expensive. They could also hobble the U.S. auto-making industry, which relies heavily on producing lower-value car parts abroad while building higher-end components (and assembling the vehicle) stateside.

The parts to make an e-axle -- a component used in the Ford F-150 hybrid pickup truck -- are made by suppliers in the U.S., Canada, and Mexico, which are then shipped to Canada for subassembly. The finished parts are then sent to Ford's plant in Detroit. 

The Trump administration wants to change that in pursuit of the All-American car. President Donald Trump has proposed a 25% penalty on imported cars and parts, on top of reciprocal tariffs and existing levies on steel and aluminum. The auto industry could handle the 25% tariff rate if it were only imposed on completed vehicles, but the duties on car parts would cause "far more damage," my colleague Al Root writes.

Ultimately, the full load would raise car prices by as much as 15%, cause U.S. competitiveness to fade, and create enough chaos that foreign auto makers could ultimately decide it’s easier to pay the levies than build factories in America. The end result? Car-mageddon. U.S. vehicle sales could plunge by as much as 20%—unless the administration chooses other mechanisms to reach its goals.

The levies on car parts could also dent manufacturer profits. In 2024, General Motors made a profit of $14.5 billion selling cars in North America. The proposed tariffs would increase costs by $25 billion -- wiping out any earnings. 

Following lobbying efforts, Trump gave the industry two years to shift supply chains to the U.S. and delayed reciprocal tariffs. Even that may not be enough time. A new factory can take up to five years to start producing, and the on-again/off-again nature of tariff implementation already has automakers nervous about committing to capital-intensive plans. 

The long-term effects on the industry could be "devastating," Al writes:

The fact that Trump plans to penalize all parts coming into the country forces new costs on U.S. auto makers that others don’t bear, making U.S.-made cars too expensive for foreign markets, killing GM, Stellantis, and Ford’s ability to export cars. Take steel, which isn’t specific to just autos. The 50% penalty “hurts,” says John Pfeifer, CEO of fire engine maker Oshkosh. “They increase the input costs we all have as [U.S.] manufacturers…. Steel and aluminum are cheaper in Europe and Asia.”

More expensive materials, with a lack of low-cost parts, manufacturing scale, and specialization, could easily raise the cost to make a 100% U.S. vehicle by $10,000, or more, dangerously close to offsetting any penalty from importing whole cars.

A decade from now, the current policy regime, with tariffs on parts and imported vehicles, would make the U.S. car industry landlocked, less profitable, and smaller relative to the global industry. “Tariffs lower long-run productivity by both raising input costs, reducing investment, and distancing U.S. firms from competition,” says Ernie Tedeschi, head of the Budget Lab at Yale University. “By extension, they lower long-run real wages too.”

There are better ways to incentive U.S. car manufacturing, Al adds, including tax breaks and credits that will make the U.S. a low-cost place to assemble cars. Export credits could also offset some of the costs.

Read this week's cover story here for more insights on how to invest through the turmoil. 

The Calendar

The U.S. Bureau of Economic Analysis releases the personal consumption expenditures price index for May tomorrow. Economists forecast a 2.3% year-over-year increase, two-tenths of a percentage point more than in April. The core PCE price index, which excludes food and energy prices, is expected to rise 2.6%, compared with 2.5% previously. The annual change in the core PCE, the Federal Reserve’s favored inflation gauge, is at its lowest level since March 2021.

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