Unfiltered takeaways: Trump's auto tariffs and their effect on the industry
- Long-term production planning within the automotive sector makes it challenging and expensive for car manufacturers to adapt swiftly to sudden changes, like tariffs.
- White House offers short-term discounts for domestic assembly using imported parts, which may not provide significant remedy due to minimal scale and brief duration.
- The recently restored pre-tariff trade conditions following the White House's deal with the UK will have minimal influence on the auto industry.
- Vehicle prices are projected to rise due to tariffs, with the specific timing being determined by factors like each manufacturer's inventory, vehicle models, and manufacturer decisions.
Auto manufacturers carefully strategize well ahead of time, leaving many wondering about the potential impact of tariffs on their industry strategy.
Sean Tucker, lead editor at Kelley Blue Book, expresses his doubts about the effectiveness of the Trump administration's tariffs, stating:
The introduced tariffs by the Trump administration in March were designed to stimulate local manufacturing. However, Tucker raises concerns about their applicability for an industry that usually operates on a decade-long timeline.
The slow evolution of the auto industry
Contrary to appearances, the automobiles introduced today may not reach dealerships until 2035. The process, as per research from Car and Driver, takes an average of about six years and consists of market research, design and engineering, manufacturing, and product launch.
Developing a new vehicle involves establishing supply lines, forming multi-billion-dollar contracts, retooling factories, and retraining workers. Changing these plans is difficult and pricey once put into motion.
Ford is an example of an established automaker that has contracted future production of the F-150 through 2028, meaning few adjustments can be made in the next four years to accommodate changes like tariffs.
Automakers already situated in the US, such as Ford and Kia, are in a more advantageous position to weather tariffs. However, they'll face high tariffs on imported parts unless they can find cheaper alternatives. As of now, they're swallowing the extra costs by offering customers employee pricing and substantial cash-back deals.
Some car manufacturers are increasing domestic production, but this process will take time. For instance, General Motors recently announced a $888-million investment in a NY assembly plant, which will take two years to be retooled for the production of next-generation V8 engines.
Consumers and the timing of price hikes
Although most experts agree that higher auto prices are inevitable due to tariffs, the specific moment these increases will be visible on lots remains unclear. The timing will vary by manufacturer, inventory, and vehicle. For example, Toyota, with a smaller stock in the US, may need to import new vehicles sooner, potentially leading to an earlier rise in their prices.
While tariffs are applied uniformly, Tucker highlights that the price increase won't necessarily equate to a simple 25% hike on every vehicle.
One example of this strategy is Ford's decision to increase the price of the Silverado by a small margin to help offset the cost of Trax, which is more expensive due to tariffs and may become unappealing to buyers if increased by 25%. By distributing the increased cost across models, auto manufacturers can soften the blow for consumers. Stable auto loan rates since the start of the year may help counterbalance the price hikes, although it might make it more difficult for some to qualify for a loan.
Insufficient relief from rebates
In April, the White House announced a rebate for auto manufacturers that utilize imported parts but assemble vehicles domestically. However, Tucker notes that the rebate is quite small, around 3.25% in the first year and 2.5% in the second year, and disappears after that. Moreover, the rebate doesn't address the root problem of planning timelines, being largely irrelevant for manufacturers who focus on 7-10 year horizons.
Tariff rebates are intended to provide short-term relief, while the long-term adaptation will take several years. Until then, automakers may continue building and retooling factories gradually to relocate production to the US.
The U.K. deal brings minimal change
The May agreement between the White House and the UK reduces import taxes on up to 100,000 British vehicles annually, decreasing from 27.5% to 10%. In addition, a 25% tariff on a specified quantity of British steel and aluminum has been removed. However, the details are still being finalized, including clarifying the import quota for steel and aluminum, and whether steel derivative products will be included in that quota.
This deal, the first of its kind by the Trump administration, aims to provide the US with new trade opportunities for agricultural, chemical, and mechanical products worth $5 billion, along with a less expensive source of steel and aluminum.
While the deal's impact on the auto industry is deemed "minimal" by Tucker, he emphasizes that this exception covers the number of cars the US typically imports from the UK over an extended period. Furthermore, it primarily applies to luxury or ultra-expensive vehicles, which are generally out of reach for the average consumer.
A single Honda factory in Greensburg, Indiana produces 250,000 cars annually, accounting for a vastly larger volume compared to the 100,000 car quota in the recent U.K. agreement.
As for steel and aluminum, the US imported minimal amounts from the UK before the tariffs were implemented. According to U.K. Steel, the US imported only 180,000 pounds of British steel in 2024, representing a negligible fraction of the steel imported into the US. Similarly, World Population Review data shows that the US imported around 32,300 kilograms of aluminum from the UK in 2023, compared to 985 billion kilograms from Canada.
Closing thoughts
Tariffs introduced by the Trump administration are aimed at revitalizing domestic manufacturing, but the limited timeframe conflicts with the long-term planning strategies within the automotive industry. Although short-term discounts and trade agreements like the one with the UK may provide some relief, the primary consequence for consumers is higher vehicle prices.
If you're planning a car purchase in the near future, you might find it beneficial to refinance your auto loan now or get preapproved for a car loan to better understand your budget's constraints regardless of tariff impacts.
- In the automotive industry, long-term production planning results in challenges and expenses when adapting swiftly to changes like tariffs.
- Sean Tucker, lead editor at Kelley Blue Book, believes that the Trump administration's tariffs might not be effective due to the slower pace of the finance sector compared to politics.
- The automobiles introduced today may not reach dealerships until 2035, with an average timeframe of six years from market research to product launch.
- Developing a new vehicle involves establishing supply lines, forming multi-billion-dollar contracts, retooling factories, and retraining workers, making changes relatively difficult and expensive.
- Ford's production of the F-150 is contracted through 2028, limiting adjustments to accommodate changes like tariffs in the next four years.
- Domestic manufacturers, such as Ford and Kia, are in a better position to cope with tariffs but still face high tariffs on imported parts.
- To attract customers, these manufacturers offer employee pricing and substantial cash-back deals to offset increased costs associated with tariffs.
- Some car manufacturers are increasing domestic production, but the process will take time, as seen with General Motors' two-year plan to retool a NY assembly plant.
- The specific moment price hikes will be visible on lots remains unclear, varying by manufacturer, inventory, and vehicle.
- Although tariffs are applied uniformly, auto manufacturers may use strategies to soften the blow for consumers by distributing increased costs across models.
- In April, the White House announced a rebate for auto manufacturers using imported parts for domestic assembly, but the rebate is small and temporary, and doesn't address the long-term adaptation timelines.
- The U.K. deal's impact on the auto industry is deemed minimal by Tucker, primarily benefiting luxury or ultra-expensive vehicles, which are generally out of reach for the average consumer.
- The Trump administration's deal with the UK provides new trade opportunities for agricultural, chemical, and mechanical products, along with a less expensive source of steel and aluminum.
- When planning a car purchase, it's advantageous to consider refinancing your auto loan or getting preapproved for a car loan to understand budget constraints regardless of tariff impacts.
