Cars are seen at a Toyota dealership in Houston, Texas, on March 27. Automakers were battered on March 27 as stock markets fell on both sides of the Atlantic after Trump announced significant tariffs on imported vehicles and parts.RONALDO SCHEMIDT/AFP/Getty Images
Donald Trump rode a wave of anger about inflation back to the White House in November. Since returning to office, however, he’s pursued an aggressive trade agenda that risks pushing up prices for Americans and inflaming the cost-of-living concerns that got him re-elected.
The U.S. President’s decision to impose 25-per-cent tariffs on all imports of vehicle and auto parts will have a direct impact on auto prices in the U.S., and could feed through into prices for used vehicles, repairs and insurance, analysts warn.
Estimates vary about the size of the sticker shock. But analysts think the price tag on a new vehicle could jump by several thousand dollars, depending on the model and how much car manufacturers and dealers are willing to absorb the increased costs across the supply chain in their profit margins.
“A lot of the estimates I’ve seen are anywhere from $3000 to $10,000,” Erik Johnson, a senior economist at Bank of Montreal who covers the auto industry, said in an interview. “It does have the risk of making new vehicles into even more of a luxury item. Not a lot of households are going to be able to finance new vehicles at current interest rates and these elevated price points potentially.”
Major automakers can deal with President Donald Trump's tariffs on U.S. auto imports in a number of ways, but all of them lead to higher prices, fewer choices of models or limits on features for consumers, industry experts said.
Reuters
Economists have warned for months that Mr. Trump’s protectionist agenda will cost U.S. consumers dearly. As the tariffs come into force – steel and aluminum tariffs were imposed on March 12 and the auto tariffs begin on April 3 – these academic debates will start to become tactile.
Ivan Drury, director of insights at the auto intelligence company Edmunds, said it will take several months for the tariff costs to work their way through the auto supply chain and into inventory sitting on car lots. But dealerships will likely begin raising their prices sooner in anticipation.
“We’re talking about 15, 16 million people buying brand new cars [each year], and there’s roughly 37 to 38 million used vehicles changing hands. It’s not everybody, but it’s like one in six people that might potentially have a new vehicle in the driveway, new or used,” Mr. Drury said in an interview.
“Once [higher prices] start permeating throughout not just the industry, but on to consumers, then we can truly get a gauge as to what’s the level of receptivity towards these tariffs,” he said.
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The U.S. imports roughly half of the 16 million new vehicles purchased every year. Domestic manufacturers might be able to increase production a bit, but certainly not enough to replace the eight million vehicles coming into the country that will be subject to the tariffs. (Finished cars from Canada and Mexico are getting a partial exemption under the United States-Mexico-Canada Agreement (USMCA); they won’t face a tariff on the portion of a car that is made from U.S. components. Auto parts from Canada and Mexico will continue to trade tariff free for the time being but may face duties in the future).
Previous trade wars have shown that U.S. companies take the opportunity to raise prices on domestically produced vehicles when foreign competitors face increased trade barriers.
Car prices have already risen a lot in the U.S. in recent years. The average manufacturer’s suggested retail price (MSRP) was US$49,350 in February, up from US$39,216 in 2019 – although some of this change has to do with shifting consumer preferences. “If you’ve got a seven, eight-year-old vehicle and you come back to the market today, the landscape’s completely different. It’s almost unfathomable,” Mr. Drury said.
Economists say that auto tariffs alone won’t reignite headline inflation across the U.S. economy, but they certainly won’t help. Analysis by Capital Economics estimates that the rise in the effective tariff rate from the auto duties would add 0.2 per cent to Personal Consumption Expenditures Index (PCE) inflation. But once you include the knock-on effects, such as increased demand for used vehicles and repair shops, and higher insurance costs, PCE inflation could rise 0.4 per cent – a non-trivial amount from the perspective of the U.S. Federal Reserve.
Unifor president Lana Payne calls for job protections for auto workers in the wake of U.S. President Donald Trump's latest tariff announcement, which imposes 25 per cent tariffs on auto imports. Payne said any company that wants to sell vehicles in Canada should have a footprint in the country or face another set of rules.
The Canadian Press
Auto tariffs are only one piece of the protectionist puzzle. The President is promising to impose “reciprocal” tariffs on all trading partners on April 2, although it remains unclear what rate would be imposed on Canada. He has also put 25-per-cent tariffs on steel and aluminum, and 25-per-cent tariffs on imports from Canada and Mexico that don’t comply with the USMCA, with a lower 10-per-cent tariff for energy, critical minerals and potash.
Taken together, this could have a meaningful influence on inflation and make it less likely that the Fed will cut interest rates again this year.
“The Fed is already a little bit worried just with where inflation’s been going more broadly of late. And so this is just going to add to the kind of patience and caution they’re showing in wanting to get back to rate normalization,” said Mr. Johnson of BMO.
Higher car prices and stubbornly high interest rates make for a one-two punch for people in the market for a new vehicle, said Adam Bernard, who runs the consulting firm AutoPerspectives.
“People who are turning in a leased vehicle now are discovering that the cost to lease that same vehicle is significantly more than it was three or four years ago, and they’re discovering the same thing when they go to finance the vehicle too,” he said. “So you’re probably going to see some other approaches to financing that will help reduce the monthly payment.”
Canadians are likely in for a jump in car prices as well. Prime Minister Mark Carney has vowed to retaliate against U.S. auto tariffs, which would raise the price of U.S. car imports coming into Canada. A potential further depreciation of the Canadian dollar and spiralling costs as car companies rejig their supply chains will also feed through into higher costs for Canadian buyers, Mr. Johnson said.
The price jump won’t be as high as in the U.S. if Canada leaves car parts off the tariff list, Mr. Johnson said. But it could be “a number that isn’t going to be comfortable for Canadian households to absorb.”